Energy as a Competitive Advantage
Energy as a Competitive Advantage
As the demand for and cost of energy is slated to only increase with future population growth and industrialization, executives, especially in the manufacturing sector, are perceptive of the impact of a nation’s energy policy on their business. The availability and cost of energy impact the way a company makes decisions regarding facility location, R&D investments, operational efficiency targets, and supply chain and logistics strategies. Many executives that were interviewed, regardless of their country of origin, believed that countries with the ability to provide access to clean and renewable energy at competitive costs will have an advantage over their competitors and therefore will be more attractive locations to conduct business. Executives in the discussions also indicated that the level of investment in energy infrastructure, as well as the comprehensiveness and efficiency of energy policy, also contributes significantly to a nation’s competitiveness.
Evolution of Energy Policy
While expressed policies may cite “green” actions and intentions, the dominant theme in recent decades is national security and domestic economic development through reduction of reliance on foreign sources. Currently, there is a tendency towards policies that favour self-sufficiency. Countries are seeking to avoid economic risk associated with energy market volatility, political instability in key regions, and limited global supply. To create their own stable sources of energy, emerging economy nations are reprising in a hyper-compressed form over the past two decades (and especially in the new century) the 150-year history of the most developed nations in developing massive capacity, then dealing with reliability, transmission and other consequences. Developed nations and emerging economies alike are now driving towards policies that allow greater control over the supply and cost of energy for their citizens and the businesses located there.
Despite strongly expressed “green” policies – particularly following the Kyoto Protocol (1997) – basic economics dominate energy policies. The 1973-1974 oil embargo initiated policies of protecting national energy security by minimizing reliance on external sources. Most countries were provoked by the crisis to create or enhance an existing “strategic petroleum reserve” for which a standard fill is at least 90 days. International rules allow the presence of domestic production to substitute for a physical reserve volume. The self-sufficiency trend accelerated after 2000 as major and growing economies sought control over supply chains. Countries range from possible self-sufficiency to being almost fully dependent on world markets. Nations with the least reserves tend to have the highest focus on energy efficiencies in order to move as close as possible to energy self-sufficiency.
The legacy systems of the massive energy developments of early national growth periods, as well as the presence of accessible large-scale domestic reserves, also have significant determining effects on current policies. While much legacy is coal or other hydrocarbons from crude oil, hydropower (especially in Brazil) is also a determining legacy system. Existing national transmission grids (whether for fuels or electricity) hugely impact current energy decisions: nations weigh the need for energy reliability and the cost of improving or expanding current infrastructure as they review the attractiveness of new sources of energy. It is also noteworthy that many nations’ intentions to subsidize green policies are potentially inhibited by their limited government budgets, especially due to the financial crisis in many regions.
Despite clean air concerns, the legacy presence of coal in facilities and existing technologies, as well as its relative cost advantage and abundance in many regions, means that coal remains a dominant source of energy, especially for electricity and major energy-dependent industries. Technology has driven oil and natural gas reserves radically upward, while rising demand drives production. Certain environmentally and politically driven decisions, such as closing a nuclear plant, can also increase reliance on traditional fuels. Oil and natural gas remain the primary sources of energy in a majority of regions and have an expanding role in the manufacturing sector.
Overall, high-level programmatic pronouncements can be a misleading representation of actual policies; concrete regulations by effective authorities have a more immediate and practical effect, though they are less visible in international forums. Given the very real impact of these regulations, the overall mix of fuels is becoming somewhat “greener” and energy efficiencies are increasing.
Technology Drivers of Energy Policy
The development of electric transmission system reliability and market access is a driving force in investments, developing access for renewables and increasing national energy efficiency. Across the six focus countries for this report, most have electric transmission systems with open access, which allows for renewable connection and/or enable wholesale markets, though only the US and Germany have connected national grids. An electrical grid is an interconnected network for delivering electricity from suppliers to consumers comprising three main components: power stations that produce electricity from combustible or non-combustible fuels; transmission lines that carry electricity to consumers; and transformers to reduce voltage for final delivery. As demand for electric energy grows, it becomes increasingly important for a country to have a connected grid that covers most or all of its regions.
Technological advances that lower energy costs or increase efficiency are continuously expanding reserves, not only for green investment policy (wind or solar photovoltaics, for example), but especially in hydrocarbons such as natural gas fracking. The growing hydrocarbon reserve, through increased knowledge of geology and technology to manage and explore, has driven energy policy for decades and is frequently underestimated in prospective impact. The term “reserve” refers only to the producible fraction of oil – the oil that can be brought to the surface – in an oil reservoir. The ratio of producible oil to the total amount is known as recovery factor. A recovery factor can vary vastly across different locations and can change over time based on operating history and technological or economic changes. For example, a recovery factor might rise over time if enhanced recovery techniques are used, such as gas injection, surfactants injection, water-flooding, or microbial enhanced oil recovery.28 While new technologies have increased the accuracy of these techniques, significant uncertainties still remain. In general, most early estimates of the reserves of an oil field are conservative and tend to grow with time.29 As technological advances in traditional and developing sources of energy production evolve and grow, so will the overarching energy policy of a given nation evolve to help ensure the industrial base has sufficient and affordable energy resources.
Economic Incentives as Energy Policy Tools
Governments sometimes use their policy and taxation schemes to influence the national focus and attention on specific energy aspects. Tax incentives strongly affect the rate of growth of energy technologies. For example, in the US, ethanol tax preferences, selected accelerated depreciation and the treatment of exploration and development (E&D) cost as capital that can be depreciated through amortization allowances encouraged increased national focus on ethanol.30
Tax policies and incentives are extremely diverse across countries, and in most cases, politically and economically effective in shaping the direction of the nation’s energy use. In addition to influencing the rate of technological growth, many governments use tax policies to incentivize selected energy producers by reducing otherwise effective taxes. In other cases, governments place special taxes on energy as a disincentive for consumers, or simply for revenues. In contrast, in some emerging nations, energy prices are set below costs, and major government subsidies still exist in many countries. The IMF estimated that in 2010, US$ 250 billion was spent as subsidies to consumption of selected (mainly traditional) fuels.31
As discussed above, across the focus countries, most national markets are at least nominally opened for all fuels, including “alternative fuels”. When it comes to encouraging the connection of new renewables to the existing grid, feed-in tariffs have become an almost universal device. A primary exception is Brazil, which is already highly dependent on hydropower for capacity and energy. Large-scale hydropower is typically used for economic reasons in a nation where suitable sites exist, and may be used secondarily for climate reasons. Even in open sectors, due to the size and resources involved, there often was and continues to be heavy direct government involvement in the design and implementation of nuclear, wind and solar, and in the development and operation of larger-scale hydro. Regarding solar and wind power, in the more open markets, there is a tendency for both to approach market levels for cost of capacity and to increase market share for energy. However, many nations have not fully managed the effects of new wind and solar sources on grid stability.
Other Key Mechanisms to Shape Energy Use
Source: Deloitte Touche Tohmatsu Limited and US Council on Competitiveness, 2013 Global Manufacturing Competitiveness Index
Creating energy policies that properly incentivize businesses and send clear market signals could also drive investments that ease dependence on fossil fuels in favour of clean energy sources, and lower the cost of energy when domestic resources become scarce.
And while executives support policies that provide environmental protection, many said results would be mixed unless such policies were applied equally on a global basis. Certainly, developing global energy policies is a complex undertaking, given the significant differences in viewpoints worldwide. However, any approach to developing such treaties should include input from both developed and emerging markets, crafted to reduce dependence on fossil fuels in an equitable manner.
Executives also said carbon regulation is necessary to encourage change, though no consensus existed on the particulars of the regulatory process.
In the end, executives broadly believed a long-term, realistic, competitive energy policy would spur innovation on a massive scale and encourage prudent capital investments into their business operations.
What Do These Trends Mean for the Manufacturing Sector?
Energy Timeline: Ranich Rebecca, Ballonoff Paul, Energy policy fact sheet, Deloitte Energy Working Series, 2013.
Source: Deloitte Consulting LLP (Ranich Rebecca, Ballonoff Paul), (US analysis conducted in conjunction with The National Association of Manufacturers), © 2013
The bottom line for manufacturers is an energy solution that yields a competitive advantage in the marketplace. For example, there are mandatory automotive fleet sales efficiency standards used in the United States, the European Union, China and Japan, but the key international tool for encouraging fuel-efficient vehicles seems to be market prices and high taxation on vehicle fuels (or often in Europe, taxes on engine sizes). Also, the role of energy infrastructure is crucial to a nation’s overall vitality. Supplemental research reveals that ongoing investments in infrastructure drive innovation and in turn boost job creation, fostering a growth cycle within a country.33 A recent estimate by the US Congressional Budget Office suggests that every dollar of infrastructure spending generates an additional 60 cents in economic activity (for a total increase of GDP to US$ 1.60).34
The role of policy decisions cannot be underestimated – the infrastructure for energy transmission to companies and consumers, as well as the greater focus on national independence and self-sufficiency, continues to require heavy government involvement. Equally important to ensuring a competitive business cost structure and further ensuring an uninterrupted supply of energy is setting long-term, realistic and competitive energy prices. Due, at least in part, to the sheer size and scale of energy infrastructure, production and transmission, as well as their ability to spur innovation and job creation, energy is one area in which most agree that government involvement is necessary – and vital. Chief executives from both developed and emerging countries emphasized the need for their nation to invest in energy infrastructure that would allow a reliable, sustainable and cost-effective supply of energy to help develop and retain a strong, competitive position in the global manufacturing marketplace.