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.
•
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outdated and strained.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.
