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Inward Investment Guides
Factoring Energy into a Location Decision
The current economic slowdown presents an opportunity for companies to assess energy costs and reliability at their present location.
Darin Buelow, Principal, Strategy & Operations, Deloitte and Jovana Trkulja, Senior Consultant, Deloitte (Apr/May 09)
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Factors Companies Should Examine
Companies seeking to establish new or expand existing operations should examine how the following energy factors may affect their site selection decisions:

• Rising demand in electricity - Certain locations may not have as robust generation or transmission sources to meet the rising electrical demands from residential and industrial consumers. These factors can cause reliability challenges and rising costs.
Electric rates rose by less than 5 percent in 2008, a comparatively low increase considering the fact that crude oil increased by 40 percent, as illustrated by the charts based on information from the EIA. Click above to see the chart.
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Electric rates rose by less than 5 percent in 2008, a comparatively low increase considering the fact that crude oil increased by 40 percent, as illustrated by the charts based on information from the EIA. Click above to see the chart.


• Increasing costs of generation fuels - As prices of natural gas and coal continue to increase, their cost differentials will need to be passed on to the end consumer in the form of higher electrical rates. When conducting site due diligence, companies should analyze the generation sources of the utility providers to determine how well hedged they are against rising fuel prices. In addition, they should consider rate differentials among potential locations, as they can be significant between geographies.

• Generation portfolios of local utilities - Generation sources may experience upward cost risks due to fuel and carbon tax exposure.

• Quality of the transmission network - Transmission networks in certain areas of the country are becoming outdated and strained. This may cause reliability issues and rising costs.

• Timelines for infrastructure upgrades and costs - In certain locations, utility providers may require significant lead times for permitting, line extensions, and procurement of transformers.

• Role of renewable generation sources - Renewable sources are becoming more common in many domestic generation portfolios. Utilities are being required to meet minimum renewable generation standards, while manufacturers are encouraged to reduce their carbon footprint. The advocacy for green power sources is increasing; some companies may be willing to pay a premium for green generation sources as a component of a sustainable manufacturing campaign. Again, it is important to review the generation portfolios of the local utilities and the associated electrical rates.

What ED Groups Should Do
Economic development (ED) groups working to attract and expand industrial operations should focus on the following factors - from an energy availability and cost perspective - in order to improve their competitive positioning:

• Develop strong rapport with local utility providers. ED groups should closely monitor the most recent developments at their utility providers, including generation sources, planned or on-going infrastructure upgrades, electrical rate schedules, and potential rate increases.

• Offer sites with little need for infrastructure improvements. For projects that have an aggressive timeline, it is vital to offer sites that will require little lead time in providing the necessary infrastructure for development. Infrastructure improvements can be timely and costly.

• Demonstrate the ability to offer a reliable energy (electricity, natural gas) supply. A disruption in manufacturing operations, especially those that are heavily dependent on automation and computer controls, can result in significant productivity losses. As a result, it is imperative that local ED groups are able to demonstrate reliable infrastructure (e.g., by providing historical electricity disruption data).

Looking Ahead
In summary, macroeconomic factors may have caused the importance of energy availability and costs to be subordinated by fixed operating expenses in last year's survey. As the U.S. economy recovers, however, the critical importance of energy factors in the site selection process is likely to be restored for more manufacturers. Companies with sizable energy demands will become more sensitive to these variations in the upcoming years due to rising costs of fuel, impact of proposed carbon taxes, and greater push toward "green" operating practices. As the role of energy in site selection evolves, the current economic slowdown may be a singular opportunity for economic development groups to focus on developing their energy infrastructure (e.g., leveraging economic stimulus and recovery assistance) and for companies to carefully analyze the advantages they may gain in a location that can offer more favorable energy costs and reliability.    

Darin Buelow and Jovana Trkulja are location strategists with Deloitte Consulting's Global Expansion Optimization practice.

Note: Data for this article was obtained from the Energy Information Administration (EIA.doe.gov).

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