Executive Survey: Businesses Expect Some Form Of Carbon Tax

More companies are setting formal energy cost-cutting goals and in the process making energy management a strategic discipline. That is one dimension of Deloitte’s second annual survey designed to help executives make energy-related investment and business decisions.

Conducted for Deloitte’s Center for Energy Solutions by the Harrison Group market research firm, the survey also found a growing number of companies anticipating more stringent environmental regulatory requirements; this despite the impact that Tea Party and ultra-conservative lawmakers are having in Congress and some state legislatures and the results from the victory of Republican Governor Scott Walker in Wisconsin in yesterday’s recall election.

“Businesses eventually believe that something is going to come around in terms of carbon. They think it is inevitable that it will happen,” said Marlene Motyka, the leader of Deloitte’s alternative energy practice (photo).

While 35% of companies say they generate some portion of their electricity from on-site renewables, co-generation or other methods — and another 17% are planning on doing so — renewable energy faces steeper uphill climbs as it struggles in many business sectors to compete with low natural gas prices (about $2.40 / MMBtus at this writing).

Marlene Motyka brings a chemical engineering background to Deloitte’s alternative energy consulting work. She is also a Principal in the firm’s valuation services practice. CREDIT: Deloitte

Regulating carbon emissions, be it with a carbon tax or cap and trade program, is a something many businesses expect to deal with, according to Motyka. To wit:

79% of business respondents believe that the cost of carbon should be factored into use of traditional electricity sources, up from 72% in 2011.
72% said their companies are, or will be, recognizing the cost of carbon as an important long-term balance sheet item. That’s compared to 58% the previous year. But here’s the rub….
80% said the cost of carbon is very difficult to measure with any confidence, up from 71% in 2011.

Deloitte conducted one-on-one interviews with executives across many industries along with more than 600 interviews with “business decision makers.”

The consumer portion of the survey, based on about 2,200 “demographically balanced” online interviews, may be a bit less reliable due to the potential drawbacks inherent of online surveys. Yet they produced an intriguing response (at least as it was interpreted by this writer):

About two-thirds of consumers indicated a willingness to pay a surcharge on their electricity bills to support investments in alternative energy intended to reduce pollution and add local American jobs. Deloitte said 66% of them were willing to pay a mandatory 2% surcharge; 49% indicated a willingness to pay a mandatory 4% surcharge; that’s right, a mandatory surcharge.

There’s more to this:

Unlike the 2011 survey, support among consumers for a surcharge declines to 59% and 44% respectively when the surcharge is voluntary, not mandatory. This suggests that as long as we ALL have to pay a surcharge, thus generating a significant source of capital for governments, it’s better than relying on a few willing to do so voluntarily.

Could this be a green / silver lining to helping finance renewables where such a mechanism does not already exist?

Back to the corporate side of the equation, despite capital funding challenges, businesses are steadfast in investing in energy efficiency:

61% have pay-off period requirements with an average of about four years
57% have an internal rate of return (IRR) requirement
Of those that do have an IRR mandate, the average IRR hurdle is 21%.

Motyka said low natural gas prices and falling power prices are putting pressure on renewable technologies and coal technologies. That, combined with more restrictive environmental regulations, could speed up the already quickening pace of coal plant retirements.

After speaking with many of the survey participants, Motyka said “the thought is gas prices will go up.” When, she would not venture a guess. Perhaps THAT is the biggest question facing utilities and corporate energy managers, not to mention developers of renewable sources of electricity.

“We did see from our study some loss of (consumer) enthusiasm for support of wind and solar in favor of natural gas development,” Motyka said. “But they are still very interested in looking at residential solar for their houses.”

What surprised Motyka about this year’s survey compared to last year’s? Consumers are becoming better at managing their energy costs as another way to save money. “The recession made us more efficient.”

Back on the business side, Motyka said clients continue to ask for help assessing which, if any, alternative energy strategies make sense to remain competitive either from a financial perspective, an image perspective , or both.

“Businesses are getting increasing pressure from their customers or their clients to offer more environmentally friendly alternatives,” she said. “That is pushing businesses to generate more electricity from alternative sources or to purchase electricity from alternative sources. And they want to advertise it to their customers.”

Now that many consumers and businesses have cut their energy costs by tackling the “low-hanging fruit,” the bar is higher to go beyond that. And that means significant capital costs and the time to decide how to spend that money wisely. Businesses in particular face staffing challenges to get the job done.

For both, the save more money going forward is expected to be a lot more difficult.

Image Credit: Alex Mit/Shutterstock