Supply Chain’s Role in Balancing the Energy Cost, Security and Decarbonization Equation

By Sarah Watt | April 19, 2022 | 0 Comments

Supply ChainPower of the ProfessionSupply Chain Strategy, Leadership and Governance

Earth Day in 2022 is focused on how to Invest In Our Planet1. I find myself often speaking with clients about climate change, circular economy and how to use technology to enable an enterprise sustainability strategy. But as I reflect, (usually when walking my dogs), as to where we are right now — there is one topic that is top of mind — energy.

All supply chains rely on energy, for the extraction, manufacture and movement of goods — or simply to keep our laptops whirling and the lights on. Energy impacts costs and inflation. Unfortunately, energy systems across the globe are under significant stress, for multiple reasons:

Costs: Energy costs have skyrocketed. This is, in part, due to the global economic recovery, a cold winter in Europe and weaker-than-expected increases in supply, according to the IEA (see Figure 1). These energy costs not only affect raw material and transportation costs, but there is also a very human dimension, with citizens struggling to heat their homes. Some of these citizens are our employees.

Evolution of energy prices, 2020-2021
IEA analysis based on Bloomberg, ICIS (2021), ICIS LNG Edge.

 

Security: The Russian invasion of Ukraine, sanctions and political desire for energy security is fundamentally changing national energy policy. EU countries such as Czechia, Bulgaria, Romania, Italy and Germany have all spoken about increasing use of coal to reduce reliance on natural gas2, which will delay decarbonization.

Decarbonization: In April, the International Panel on Climate Change (IPCC) stated that it was now or never to decarbonize economies or face climate change risks. We are likely to exceed 1.5 degrees Celsius warming, which has impact on lives and livelihoods.3 Decarbonization is a supply chain problem — the CDP shows that there are 11.4 times more emissions in upstream supply chains than in direct operations.4

Balancing the Equation is a Supply Chain Problem

Energy management is a supply chain problem since leaders are responsible for energy and raw materials costs. Herein lies a tension. In the long term we need to balance all three risks of security, cost and decarbonization, but in the short term we may need to prioritize one topic — such as security — over the others.

As leaders, we are also coming under significant internal pressure. CEOs rank the environment in their top 10 priorities for 2022 and 2023.5 However, CEOs expect that CSCOs will prioritize supply chain optimization and cost optimization.6 But are these expectations realistic? We need to recalibrate how we think about energy, and as supply chain leaders we have a crucial role to play.

What actions can we take today to balance the equation?

Manage expectations: Manage CEO and executive expectations by demonstrating options to balance cost, security and decarbonization. Be clear on what is reasonable and highlight that decarbonization to the point of net zero cannot be achieved without long term strategic investment.

Costs: Manage demand to reduce costs. This means investing in, and putting in place, energy savings projects in operations. Figure 27 provides an example of a manufacturing energy opportunities assessment. It is also prudent to review energy purchasing strategies as part of an overall hedging strategy. Additionally, assess how energy costs can be used in different markets as a precursor for raw material cost increases. Share best practices for energy and carbon savings with suppliers.

Decarbonization: Stakeholders from investors to customers expect decarbonization commitments to be met. When speaking with a client recently, he said: “We recognize that renewable energy alone will not get us to net zero, which is why we are building a comprehensively-funded plan — to show the path.” Supply chain leaders need to collect data, forecast pathways to decarbonization and outline the investment needed.

Security: Look for options where energy supply can be democratized. This can be through direct or indirect investment (PPA) in renewable energy. For natural gas, look for opportunities to apply new technology. For example, Unilever, Pilkington and Essar are part of a demonstrator project sponsored by the UK government, using hydrogen fuel as a low-carbon alternative to natural gas.8 There are opportunities to balance the equation, reduce emissions and create energy security, but this will come only with investment and partnerships.

Supply chain leaders need to be conscious not only of physical security, but also cybersecurity, especially for operations. A ransomware attack on an energy management and operations system can cause significant financial and reputational damage.

Want to learn more?

There are three opportunities to learn more about how enterprises are not only addressing the energy equation, but also making progress against their sustainability goals:

Access our Research: My colleagues, Lauren Wheatley, Keith Harrison and Rich McAvey, wrote an excellent research note on why companies and supply chains need to reassess their energy strategy now. See: Quick Answer: Why You Need to Reassess Your Energy Strategy Now

Supply Chain Strategy to Action: This thought-provoking event to mark Earth Day will consist of lessons from leaders and analyst conversation on how complex sustainability challenges are being navigated and overcome. Register here.

Join our Symposium Event: At our symposium both in London and Orlando, join our session on Strategies to Balance the Energy Cost Security and Decarbonization Equation. Links are here (London / Orlando).

 

Sarah Watt
VP Analyst
Gartner Supply Chain
Sarah.Watt@gartner.com


1 https://www.earthday.org/earth-day-2022/
2 https://www.climatechangenews.com/2022/03/15/some-eu-members-turn-back-to-coal-to-cut-reliance-on-russian-gas/
3 https://www.theguardian.com/environment/2022/apr/04/final-warning-what-does-the-ipcc-third-report-instalment-say
4 https://cdn.cdp.net/cdp-production/cms/reports/documents/000/006/106/original/CDP_SC_Report_2021.pdf?1644513297
5 2022 Gartner CEO and Senior Business Executive Survey
6 As above
7 https://www.gartner.com/document/4012666
8 https://www.unilever.com/news/news-search/2020/could-hydrogen-fuel-replace-natural-gas-on-an-industrial-scale/

Listen to the latest Gartner Supply Chain Podcast: Exploring Sustainability Trends on Earth Day With Sarah Watt available on Gartner.com, Apple Podcasts, Spotify and Google Podcasts.

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