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How Energy Factors Into The Location Decision

While nearly every business sector has an eye on energy availability, it isn't the top consideration for location choices.

David V. Brandon, Senior Vice President, Site Selection Group, LLC (Apr/May 10)

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Representatives surveyed for Area Development's 24th Annual Corporate Survey last year ranked energy availability and costs as the fourth most influential location driver - up from the fifth spot in 2008 - with a combined score of 88.0. In the companion 6th Annual Consultants Survey, site selection consultants ranked the factor as the seventh most important - a drop of three places from 2008 - with a combined score of 89.7.

Corporate managers appeared only slightly more concerned with energy availability and costs in 2009 than they were in 2008. The 2009 score is only 0.1 percent and one position higher than in 2008, a year when energy costs spiked and supplies came into question. Consultants showed similar concerns, with the factor's score shifting only 1 percent, although that contributed to a drop of three positions.

Other Considerations
Corporate respondents viewed labor costs, highway accessibility, and tax exemptions as more important than energy considerations. But site selection consultants ranked highway accessibility, labor costs, occupancy or construction costs, availability of skilled labor, state and local incentives, and availability of land above the availability and cost of energy in making location decisions. In both instances, the combined scores showed little change over the years, while shifts in other factors contributed to the rankings of energy availability and costs in 2009. Notably, occupancy or construction costs dropped from the third to seventh spot, and corporate tax rate rose from the eighth to fifth spot in the Corporate Survey, while labor costs moved from the tenth to second spot with the ascent of real estate factors in the Consultants Survey.

Cost of Consumption
In 1999, the average spot market price of a barrel of crude was $16.56. By 2004, that price had more than doubled to $37.66 in 2004 dollars, and $43.17 adjusted for inflation. The price continued rise to an average of $91.48 in 2008 before a drop to $53.48 in 2009, and currently $69.85 at press time. Geopolitics and China's thirst for crude have magnified this market disruption.

Natural gas, too, has fluctuated substantially. Since 2007, average natural gas prices rose from a spot price of $7.18/mm BTUs to a high of $9.12 in 2008. Prices then receded to an average of $4.06 in 2009 and $4.57 at press time. Next year's price forecasts fall in the $5.49 to $5.50 range. These averages have varied dramatically across the country and for end users of the fuel. Considered together, these experiences have focused greater corporate attention on the availability and cost of energy in location decisions. With the pressures for renewable energy availability, costs climb, reflecting new layers of infrastructural, regulatory, and technological impacts.

Given the price volatility (as evidenced by the significant escalation) that has occurred over the last 10 years, corporate site selectors are predictably cautious when they consider energy factors in the context of their projects, hence their emphasis on energy availability and costs.

In virtually every corner, expectations foreshadow future increases in energy prices. The world's continuing demand for energy amplifies concern over availability and costs. Accordingly, continued sensitivity to energy issues will guide many future corporate investment decisions, which will come more frequently as the recession winds down. The more energy intensive the investment, the more that investment decision will be predicated on the availability, reliability, and cost of energy supplies.

Alternative Energies
The likelihood that renewable energy sources will skew the current balance of relationships among popular fossil fuel options in the near future is unlikely. Nor will the regional persistence of hydropower or nuclear generation give way to alternatives to an extent that will shift consumption patterns toward non-traditional generation technology. The cost differentials remain too high.

Over the next 25 years - as political and social pressures mount in favor of wind, biomass, solar, and hydrogen - energy economics will achieve an equilibrium whereby alternatives will constitute some 25 percent to 30 percent of total generation capacity in the United States, experts believe. This shift will occur in the context of greater fossil fuel extraction throughout the country. Whether natural gas from the Marcellus Shale or crude oil from the Outer Continental Shelf, technology will contribute to greater energy supply certainty along with business' drive for energy efficiency and price rationalization.

Companies are always looking for new ways to increase efficiency. The search for efficiency is especially vital in the face of intensifying global competition as companies strive to establish and sustain a competitive advantage in the marketplace. Take the recent announcement of the BMW and SGL carbon fibers manufacturing facility in Moses Lake, Washington. This German joint venture cited a cutting-edge technology manufacturing operation that is highly energy intensive, but with a twist: it favors sustainable energy. The Moses Lake site satisfied both the sustainability factor in a cost-effective way, and the manufacturing and supply chain imperatives of the project. Energy availability and cost were critical for making decisions on this project, as they are for most manufacturing, data center, and automated logistics operations. Additionally, generation mix, reliability, cleanliness, redundancy, and stability of supply are all common concerns. So these factors add to availability and cost to raise awareness of energy's role and relevance in the investment decision process. Higher energy costs will soon lead to new product innovations, particularly in the transportation equipment and medical industries. Engineered materials, once the sole province of the aerospace sector, are finding their ways into many other applications. The Center of Innovation for Biomaterials in Orthopaedic Research (CIBOR) in Wichita, Kansas, adapts aerospace materials to the design, engineering, and manufacture of orthopedic implants. Such implants extend the serviceable life of these replacement devices, increase device manufacturing flexibility, and ultimately reduce production costs. In the "Air Capital of the World," CIBOR is adapting an aerospace process to a medical demand to improve efficiency, longevity, and system costs.

The Future of Fuel
Similarly, energy-driven innovation is affecting building materials, construction techniques, design standards, electronics, logistics services, and more to reduce costs and enhance efficiencies. Products like plastics no longer stem solely from petrochemical feedstocks. Soy and its derivatives have given rise to a new generation of substitute materials intended to reduce our dependence on crude oil and extend the availability of conventional energy supplies.

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About the Author

David V. Brandon, Senior Vice President, Site Selection Group, LLC
David Brandon has more than 30 years of site selection experience. He has worked on more than 500 economic development advisory projects, and more than 300 corporate site selection assignments for clients including Boeing Electronics, Lockheed Martin, and UPS. He holds bachelor’s degrees from Wilkes University and the University of Pennsylvania, and a master’s degree from the University of Delaware.

More articles by David V. Brandon

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