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Critical Site Selection Factor #10: Energy Availability and Costs Losing Currency

Rising supply and falling prices are easing this factor’s importance.

Q4 2014
This series examines the top-10 site selection factors as decided by the respondents to AD's Q1 Corporate Executive Survey. Labor costs, skills, and highway access are top of mind; construction and occupancy costs are key; and availability of ICT infrastructure is getting closer scrutiny. Find out what else your company should consider when making its next location/expansion decision…

The cost and availability of energy has been dropping in importance as a site selection factor, ranking #10 in the 2013 Area Development Corporate Survey, down from its #6 position a year earlier. The drop seems to reflect a persistent weakness in natural gas prices as well as a steady rise in alternative-energy capabilities across the country.

A more relaxed attitude about energy costs and availability has taken hold in the corporate community, and a huge reason for that is the boom in U.S. hydrocarbon exploration and production, thanks to the revolution enabled by horizontal drilling and hydraulic fracturing. A resulting, nascent sense of national “energy security” has promoted everything from a plummeting in natural-gas prices, to a lack of consumer panic about oil supplies despite geopolitical turmoil abroad, to a mini-boom in the sale of large SUVs that not so long ago were considered dinosaurs. a lot of corporate decision-makers are now viewing America’s position from an energy perspective as much better than in a long time Larry Gigerich, managing director at Ginovus

When it comes to site selection, too, “a lot of corporate decision-makers are now viewing America’s position from an energy perspective as much better than in a long time,” says Larry Gigerich, managing director at Ginovus. “There’s more comfort about supply, at least setting aside coal-fired plants in certain parts of the country. In fact, from a natural-resources standpoint, the growing concern isn’t energy but water.”

Adds John Morris, leader of Industrial Services for the Americas for Cushman & Wakefield, “There is a general declining concern over energy costs in this country right now.” Still, Morris notes, energy availability and costs “should remain a big concern” in the business, and “many people have sort of gone to sleep on that idea.” There remain many reasons that corporate decision-makers continue to take a close look at the issue. Manufacturing plants and data centers are huge energy-users — so for that reason alone, energy remains a top-10 factor, says Eric Stavriotis, senior vice president at CBRE. Manufacturing plants and data centers are huge energy-users — so for that reason alone, energy remains a top-10 factor Eric Stavriotis, senior vice president at CBRE

What’s more, such energy-intensive projects will continue to keep the cost of electricity and the reliability of the grid in competing locations at the forefront of siting decisions. A large, capital-intensive dairy-manufacturing company, for example, recently was choosing from sites across six states in the Midwest and West with assistance from Dean Uminski, a consultant for Crowe Horwath. “They still had some concerns about the grid being outdated in some areas,” he explains. “And they were seeing wider variations in electricity costs than in site and labor costs.”

Recent Data
The most recent data from the U.S. Energy Information Administration underscores this caution. Average commercial electricity rates rose by only 4 percent in July 2014 for the year to date over a year earlier, to 10.69 cents/kwh from 10.25 cents/kwh. But rates in the contiguous 48 states were as high as 14.63 cents/kwh in the New England States and as low as 8.25 cents/kwh in the West South Central States of Arkansas, Louisiana, Oklahoma, and Texas — where economies also tend to be relatively healthy.

A rising interest of corporate decision-makers is the availability and cost of “green” energy such as solar power, wind power, and other renewables. Renewables already increased their share of global power production to 22.7 percent in 2012 from 18.7 percent in 2000, according to the Worldwatch Institute.

“Many of our clients want to be fully green or have a high profile of green,” notes Dick Sheehy, director of Advanced Planning and Site Selection for CH2M Hill. “By definition, it’s difficult for them to go to areas that have low energy costs because they’re not green. But most companies are planning on cap-and-trade or some sort of carbon tax that will make hydrocarbons more expensive, so renewables will become relatively less expensive.”
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