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Energy and the quarter-inch hole

Harvard Business School professor, Theodore Levitt, used to tell his students, “people don’t want to buy a quarter-inch drill. They want a quarter-inch hole.” That’s why buying ‘Energy as a Service’ means customers can access the benefits of energy investments…without having to buy a drill.

It’s a tough world out there for industrial energy users.

Shareholders are pressuring manufacturing companies to realise energy savings. Regulatory pressures are growing on manufacturers to reduce their carbon emissions and energy demand, and levies on energy prices are increasing sharply. Manufacturing Chief Financial Officers see lower energy costs as a key lever to significantly reduce operating costs.

However, businesses with local energy generation technologies on their sites can access lower carbon electricity and heat, secure lower prices, lower carbon risk and improved energy resiliency. A new report published today by Siemens, Future Savings – Current Gain, finds that industrial manufacturers’ energy costs can be reduced by 25 to 40% through the right mix of flexible, decentralised and renewable energy generation.

But do industrial manufacturers actually want to generate energy on their sites?

The fact is that investing in energy generation assets makes a manufacturer’s life more complicated. There’s new capital equipment to purchase, increased investment and delivery risk, plus ongoing operation and maintenance challenges.

Add in a lack of free capital and a Finance Director’s risk concerns, and it means a substantial number of industrial energy users miss out on the deliverable operational cost reductions that can be gained.

And so we return to the opening quote; customers want the hole, but they don’t want the drill. Industrial manufacturers don’t want to buy energy generation assets – they want to buy the outcomes these assets provide – reliable supply of electricity and process heat, allowing them to produce quality, cost-competitive products.

What if industrial sites could purchase energy just like they do today – buying power and heat – while gaining the benefits of a site-wide energy optimisation and on-site energy solutions? In other words, get the benefit of the quarter-inch hole, but without having to buy the drill?

New Energy as a Service arrangements can enable it. Manufacturers can secure the benefits of decentralised energy and energy efficiency investments, ensuring expected savings are realised, without requiring the manufacturer to purchase the asset, allowing them to focus on their core competencies.

But to stretch the metaphor a little further, do manufacturers today all want to buy the same quarter-inch hole? What about a half-inch hole?

Each manufacturer is unique, and has specific commercial goals and priorities. Some are more worried about their long-term exposure to rising carbon costs. Others want triple redundancy to ensure they never go an hour without energy.

Under the old energy system, manufacturers would buy homogeneous electricity and gas supply, focused only on who had the best price.

Energy as a Service, however, can enable manufacturers to now buy specific outcomes, based on their strategic interests. So rather than purchasing kilowatt hours, they can instead purchase a set amount of cost savings, or carbon reductions, for a fixed monthly fee.

But when it comes to Energy as a Service, finding the right partner is so important. Going with a supplier with only one drill bit in their toolbox will mean you can only get one size of hole, not a bespoke outcome that’s designed around your business needs and goals.

That is why manufacturers should partner with vendors who are focused on delivering outcomes – lower energy costs, carbon savings, improved resiliency – using whatever technologies are most effective to do so, and which have the necessary expertise and experience to effectively deliver those technologies.

So what does Energy as a Service mean for manufacturers? It means securing the benefit of the hole, at your desired specification, without having to buy, learn to operate or maintain the drill.

If you want to learn more, click here to read a new research paper from Siemens Financial Services (SFS), titled ‘Future Savings – Current Gain: Energy-as-a-Service – How finance can help UK manufacturers harness
energy savings to make them more competitive’.