Reasons why SMEs are missing out on £2.63 billion energy efficiency savings

Reasons why SMEs in the UK are missing out on up to £2.63 billion in energy efficiency savings are the centrepiece of a new government report.

The report published by the Department of Energy and Climate Change reveals an understandably complex picture of why the country’s SMEs are not making a rapid transition to the low-carbon economy – and massive savings.

This timely report echoes our experience of working with SMEs, and indeed any organisation. We have found that there is a range of resistance that is fed by the anxiety over costs but that also takes in many “soft” barriers that are not easily dismantled.

Our approach, which seems to work well, is to be crystal clear about how the savings will be achieved, the timescales for payback, how to manage disruption and how to minimise strain on internal resources.

Research by the University of Salford, engaged by environmental business company ENWORKS underlines that the companies surveyed could save between £5,800 and £12,200 a year – 18-25% of their annual energy costs – through energy efficiencies. Payback time would be around 1.5 years.

The DECC report advises that if this level of saving were to be replicated in SMEs throughout the UK, the total annual cost savings of between £1.26 billion and £2.63 billion could be made. The capital requirement to achieve these savings is estimated to be £1.88 – £4.1 billion. These savings would also ensure carbon emission (CO2e) savings of 8.7-17.6 million tonnes a year.

Capital costs

The research indicates wide range of motivations and barriers cited by businesses but shows there are no simple explanations around take up of energy efficiency. For example, capital costs were cited as a major barrier but the study found that actual take up rates of energy efficiency measures remained low even when costs were zero or very low.

The government is committed to engaging with and encouraging SMEs to make the necessary changes in business practice that would be a big step in the low carbon economy strategy.

The country’s 5.2 million small to medium sized enterprises, defined by the EU as those that employ fewer than 250 people with annual turnover not exceeding EUR 50 million, are a keystone in the economy, so crucial in the campaign to cut energy consumption.

The DECC report, “Research to Assess the Barriers and Drivers to Energy Efficiency in Small and Medium Sized Enterprises” also focuses on ‘later stage barriers’, after a company is apprised of available energy efficiency improvement actions, including the potential cost savings and wider benefits.

Measurement and monitoring

Not surprisingly, measures with quick payback times would be more likely to be implemented but even so, low take up rates in this cases show that other factors are at play. Implementation rates of just 25% for energy saving opportunities of more than £10,000 a year were identified by the research.

At the same time, the perceived need for capital loomed large but confusingly, companies were not swayed by the amount of investment needed, equally willing to invest in high-cost improvements as they were for low-cost options. Even when no capital investment was required, implementation rates remained at 20%.

Significantly, one barrier could be that many smaller firms are less likely to measure and keep performance records owing to constrained technical and financial resources or less operational capacity, so the need for cost-effective measurement and monitoring appears to be crucial for wider energy efficiency adoption. Difficulties in quantifying and understanding financial savings were also a factor.

Sector differences are also apparent – cost savings and payback period are significant drivers for energy efficiency in manufacturing firms while non-manufacturing businesses point to less tangible factors like ambience and customer service, so less easily identified and shaped.

Manufacturing companies had a greater tendency to implement improvements – 29% compared to 18%.

Payback times

The qualitative and quantitative research revealed differences in attitudes to the return on investment. In the qualitative study, most SMEs advised that they would most likely implement energy efficiency improvements with a payback period of less than two years, if finance was available.

In contrast, the wider survey showed that the implementation rate for a similar payback period was just 13% with little difference to longer payback times.

The report says: “This supports the contention that businesses operate within bounded rationality and did not follow simple ‘calculation – decision – implementation’ models; that is, they are influenced by wider business considerations and are subject to multiple limiting factors beyond financial measures.”

Other barriers identified are the preference for SMEs to take shorter leases to maximise flexibility and so be less willing to make significant energy saving measures, particularly where payback periods went beyond the lease term, as well as technical constraints that limit the take-up of proposed measures.

The report advises that support for landlords could help to redress the “misaligned incentives” and increase the uptake of energy efficiency improvements in business premises.

During this month and February, DECC will host workshops with SMEs to find out more views on what is needed to help them become more energy efficient. More detail is available on DECC’s Linkedin page.

The inertia revealed in the report is a concern as the success of government strategies to cut energy consumption depend to a great extent on SMEs buying into the need for action on efficiencies. We have found in our work that strong examples of successful implementation play a big role in removing the barriers.

These case studies strengthen resolve and confidence, provided that they are underscored with clear figures on savings, comprehensive planning, accurate surveys and the means to monitor and report.