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For most start-up businesses, energy is generally not a first-order concern. It accounts for a relatively small share of their expenses, especially when compared with salaries and materials. But, for successful businesses, that can and must change.
The costs of electricity, natural gas and petrol were already rising last year, as supply failed to keep up with post-pandemic demand. Prices then briefly surged to record levels, supercharged by Russia’s attack on Ukraine.
While most EU countries and the UK have acted to soften the blow of higher prices for residential customers, far fewer are protecting businesses.
Even before the war, Bank of America analysts were predicting that European businesses would see their electricity costs rise by as much as 70 per cent in 2022, and gas prices would double.
That kind of cost increase should get management’s attention. Relatively new and fast-growing companies are used to making adjustments to their business models every day, and finding better energy choices must now rise up the agenda.
“Companies don’t think about their energy as much as they should, and it can be really volatile,” says Andrew Winston, sustainability consultant and co-author of Net Positive: How Courageous Companies Thrive by Giving More Than They Take. “If it is a low-margin business, energy goes straight to the bottom line.”
The first step should be to cut costs. Vicky Parker, who heads PwC’s UK power and utilities practice, says: “Many businesses that contract on a fixed-term basis will be faced with recontracting this year on materially higher energy prices; it’s vital they focus on reviewing the structure and timing of their existing energy contracting strategy sooner rather than later and start to consider any mitigating actions.”
However, there are better and worse ways to address these issues. Now is not the time to invest in a coal-fired power plant because it looks cheap.
Unlike more established companies, start-ups have a chance to put good practices in place as they grow, rather than having to retrofit. They can insist on proper insulation, efficient lighting and renewable energy for their facilities and invest in electric vehicles for transportation.
“Perhaps that also means becoming more productive — can they do what they do with less?” suggests Brian Walsh, head of Wind Ventures, which invests in start-ups with a particular focus on energy, retail and mobility.
Done right, cutting energy costs will also allow managers to address the demand for decarbonisation. As investors and customers come under pressure to reduce their carbon footprint, companies that can show they have taken steps to cut emissions will gain multiple advantages.
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The rise of flexible working has also given new and growing businesses more flexibility around energy costs than they would have had before the pandemic. Rather than paying for a move to a larger office, which will also cost more to heat and cool, executives can encourage more employees to work from home. Similarly, they can help employees cut their commuting costs by asking them to travel less frequently.
“As the future of work changes, it insulates start-ups to some degree on how and when they pay for people’s transportation,” says Alex Lazarow, a venture capitalist with Cathay Innovation. “Remote work gives you more flexibility to manage the burden.”
And PwC’s Parker argues that companies now have more practice at coping with uncertainty. “Over the past two years, many businesses have become more agile in their response to challenges — from supply chain issues and changes to working patterns during Covid, to a greater focus from investors, consumers and employees on environmental, social and governance issues,” she says.
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While high oil and electricity prices are an obstacle for most businesses, they also create new opportunities. Green energy companies were already profiting from the surging enthusiasm for environmental, social and governance-driven investing, and today’s higher energy prices will make it easier for them to turn a profit.
There is also a huge need for analytics firms that use data and artificial intelligence to help companies figure out where they are wasting energy and how to stop it.
Don’t be surprised when both groups show up in large numbers in the next big ranking of the fastest-growing companies.