By Carolyn Newsham, Siemens Financing Partner, Siemens Financial Services
With the latest UN climate change report calling on countries to intensify their climate action plans and activity,[i] the UK manufacturing sector should expect growing pressure from government, regulators and consumers to decarbonise.
There is certainly a strong decarbonisation intent evident across the sector, with a Make UK study showing that almost half (46%) of UK manufacturers had implemented decarbonisation plans.[ii] Hastening their transition to more efficient and sustainable energy technologies are rising energy prices and raw material costs.
Investor and shareholder sentiment is also driving change. Many investors are concerned that energy costs, network costs and poor energy purchasing decisions could impact their returns, while shareholder groups are threatening to de-invest in companies that do not meet environmental, social and governance (ESG) standards.[iii]
Dismantling decarbonisation barriers
While the pressures to decarbonise are unlikely to abate, businesses’ decarbonisation journeys are often stalled by the barriers they encounter on the way. In particular, lack of expertise and lack of capital (or at least a hesitance to risk capital on what they or their shareholders may deem a non-core investment priority).
To address these barriers, they may need to look beyond traditional capital investment approaches towards new energy finance solutions such as the Energy-as-a Service (EaaS) approach. These can power up businesses to adopt energy-efficient technologies without putting pressure on capital resources.
Also known as energy performance contracting, EaaS models enable manufacturers to partner up with specialist providers to fund their decarbonisation journey through future cost savings, rather than deploying their own capital. The EaaS provider covers all aspects of migration to a clean tech leasing solution, including its installation, operation, maintenance and performance management, for which the manufacturer pays a monthly fee against the delivered cost savings. Using this model can remove both the expertise and the funding barriers.
The expertise issue addressed
Operationally, when decarbonising and optimising their energy strategy, manufacturers should take a holistic approach, simultaneously addressing energy demand and energy supply across their sites. Done successfully, this will tackle energy costs, ensure security of energy supply, and deliver on sustainability goals at the same time – known as value stacking.
However, the expertise to do this is unlikely to exist in-house. Even if they have a good asset-level understanding of energy consumption, they may not have sufficient expertise in energy optimisation analytics and technology to identify and deploy an integrated long-term energy solution. After all, there’s a wide universe of technology solutions available that could involve decentralised power generation, renewables technologies, energy-efficient plant and buildings technologies, digital analytics tools – or a site-appropriate combination of these.
In the EaaS model, an expert energy solutions provider designs and implements the best combination of technology for each manufacturer’s sites, needs and strategic plan.
Smart results from smart finance
The second barrier that can be dismantled by EaaS clean technology finance solutions is access to capital or aversion to capital risk. As explained above, rather than using their own capital upfront to fund their transition to cleaner energy, manufacturers use their future energy cost savings to partly or wholly fund it. In all cases, these savings should support the monthly fee to the EaaS provider, making the decarbonisation journey affordable or cost-neutral. In some cases, there will be a net operational benefit to the manufacturer.
The bigger picture: UK energy targets
Siemens Financial Services (SFS) has recently used modelling based on real-world examples to estimate the level of energy savings that could be achieved in the UK, through the implementation of EaaS structures.[iv] This model suggests that EaaS could help Britain deliver efficiency savings of over 3.5 million tonnes (18,000 GWh) of electricity and gas a year. This would be enough to deliver a reduction in manufacturing electricity and gas usage of around two-thirds of the UK’s official 2030 climate targets, taking into account existing levels of energy efficiency in UK manufacturing, and assuming that all remaining manufacturers implement energy saving initiatives.[v]
Renewable energy finance solutions like EaaS can be transformational for individual companies in easing their clean energy transition and reducing operating costs and energy usage. When stacked up industry-wide, these reductions can make an important contribution to the UK’s wider manufacturing decarbonisation plans.
[i] https://unfccc.int/news/new-un-climate-change-report-shows-national-climate-plans-fall-miles-short-of-what-s-needed#:~:text=The%20Intergovernmental%20Panel%20on%20Climate,60%25%20compared%20to%202019%20levels.
[ii] https://www.makeuk.org/insights/reports/2022/07/08/decarbonising-manufacturing-challenges-and-opportunities
[iii] For instance: Allianz, ESG move into the mainstream (and the boardroom), 24 Mar 2021; Money Marketing, Aviva to shun companies that ignore net zero, 21 Mat 2021; Ernst Young, More investors turn to sustainable investment funds, 9 Jul 2021; https://www.reuters.com/business/sustainable-business/unilever-says-majority-shareholders-voted-favour-climate-action-plan-2021-05-05/
[iv] The Siemens Financial Services methodology takes the lowest level of energy optimisation savings experienced in its research base of real-life examples, even though these can be as high as 50%+ in high energy consumption sectors. In addition, the methodology only scales the volumes of energy savings across 50% of the available manufacturing estate. This helps manufacturing CFOs be confident that the estimates in this paper are a reliable starting point for their business cases regarding the level of benefit to be gained, and that real-life savings are likely to be considerably higher. Estimates of energy optimisation savings across a typical financing period of 5 years are noted in the table – covering both the manufacturing sector as a whole, along with a range of higher energy consumption subsectors. In each case, Standard Industry Classification (SIC) codes are used, so that readers can define precisely the subsectors of manufacturing industry covered. These financial volumes effectively represent the scale of self-funding finance for energy optimisation conversions which smart financiers and solutions providers can help manufacturing industry deploy.
[v] The Siemens Financial Services model assumes that energy saving initiatives have already achieved a penetration level of around 30% of available potential in UK manufacturing. It also positions typical energy savings for a UK manufacturer being around 20% of current consumption.
