The year-long rise in the price of energy appears to have peaked, at least for the time being. The conventional short-term prognosis is for lower prices. While substantial price swings in energy markets, such as those now experienced, often conceal long-term trends, energy costs are headed higher over time on, both on a relative and absolute basis. Controlling costs is a key factor in most successful small-business operations. That means small-business owners must address their energy consumption and find means to reduce energy use on a per unit of output basis. This issue of the National Small Business Poll, therefore, addresses small business Energy Consumption.
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Energy as a Cost
Energy is a major cost in a substantial share of small businesses. One in 10 (10%) small-business owners claim that energy is their single greatest cost, greater than wages and salaries, materials and supplies, etc. (Q#1). Another 25 percent claim energy is one of the two or three largest business costs they have. While current energy prices may focus more attention on energy costs than normal thereby leading to exaggeration of their importance, it is obvious that energy is a significant cost of doing business in many small enterprises. Exceptions are the 8 percent who pay no energy costs directly and the 23 percent who say that energy costs are not in the top five of all business expenses. The owners of these firms have modest incentive to lower their energy consumption.
Energy costs in small businesses are typically linked to operating vehicles or heating and cooling. Thirty eight (38) percent report their primary energy costs are attributable to vehicles while another third (33%) attribute theirs to heating and cooling (Q#2). Thus, over 70 percent associate their greatest energy costs with transportation and/or buildings. Twenty-one (21) percent report theirs are tied to operating equipment and/or processes. In other words, just one in five cite production as the source of their primary energy costs. Five percent consider lighting theirs.
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About 84 percent of all small businesses have at least one vehicle (Q#3). The number of vehicles in a business is tied to firm size. For example, the median number of vehicles in businesses employing less than 10 people is about two and one-half while the median number of those employing more than 20 is almost five. In fact, over one in four (28%) of the largest have 11 or more vehicles in their fleets.
The current price of gasoline and diesel is having an effect on small-business owner decision-making. But owners cannot simply discard the investment they have in their current fleets regardless of their fuel efficiency. The situation is different when it comes time to replace them. Energy efficiency will be a very important influence in the decisions of 47 percent of all small-business owners when they replace their current vehicles (Q#3b). That totals to 88 percent who claim that energy efficiency will influence their decision in purchasing/leasing a replacement vehicle.
Small-business owners purchase/lease vehicles to perform a function(s). That means it is important that more energy-efficient vehicles are able to perform substantially the same tasks as the current vehicles. Are such vehicles available? The answer to that question is important because it encourages owners to search (or not search) for them at the appropriate time for replacement, and even to accelerate the process. Small-business owners have mixed views on the question. Thirty-two (32) percent strongly believe that vehicles exist on the market today that can perform substantially the same business tasks as their current vehicles, yet consume notably less energy (Q#3a). Meanwhile, 37 percent strongly disagree and believe that they do not exist. Even those who have less strong beliefs on the question are split. Thus, while many small employers would like to substitute more energy-efficient vehicles when their old ones wear out, they are not sure such vehicles can be found. The survey did not explore the reasons for owner views on this question, or the degree to which they have searched the market for energy- and economically efficient alternatives.
Reducing vehicle energy costs is not confined to purchasing/leasing new vehicles. Operational changes can be instituted that may be even more effective. Given the recent run-up in energy prices, one assumes that many owners have changed operations to reduce their costs. But that assumption would not be totally accurate. Forty-nine (49) percent of small-business owners with business vehicles have changed little or nothing in the last year to compensate for the higher gasoline and diesel prices (Q#3c). Still, 18 percent rescheduled or changed routing. Another 16 percent used fewer vehicles or used them less frequently. And, 11 percent purchased more energy efficient vehicles. Thus, roughly equivalent numbers took steps to cut consumption of vehicle fuel (on a per unit of output basis ) in the last year while roughly half did not.
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About 31 percent of all small employers have businesses housed in a residence or an associated building such as a garage or barn (Q#4). (This number is about 5 percentage points higher than when the question refers to a home rather than a residence.) Still, a residence houses a significant number of small employers, particularly those employing fewer than 10 people.
Thirty-one (31) percent of all employing small businesses are also housed in low-rise buildings (excluding residences), those typically three to four stories high. Most (80%) of those low-rise buildings are free standing or detached while the remainder are attached to another (Q#4a). The next most common type facility used by small business is an industrial building. Eighteen (18) percent operate out of that type of a structure. A warehouse/hangar type facility houses another 9 percent followed by 6 percent in a mall. While the number of cases is too few to report figures, it appears the number of small businesses in strip malls significantly exceeds the number in enclosed malls. Finally, few small businesses inhabit high rises (3%). High rises apparently are the domain of larger firms.
Most small businesses are located in commercial areas. Forty-six (46) percent of small employers report their businesses in them (Q#4b). The numbers of businesses are far fewer in other settings. However, the large number of home-based businesses suggests a considerable presence in residential areas. Twenty-six (26) percent are located among residences, suggesting a few business owners still live above the store. Isolated/rural is the third most frequent type of area in which small businesses are located. Owners report in 15 percent of cases that their firms can be found in such places. Relatively few say that their enterprises operate in an industrial area (6%) or an industrial park (6%).
The typical small business (44%) occupies 1,000 to 4,999 square feet of space (Q#4c). That approximates the floor space of residences (small to large). While 21 percent occupy less than 1,000 square feet, another 15 percent occupy between 5,000 and 9,999 square feet and 11 percent between 10,000 and 24,999. Three percent occupy more. For comparative purposes, the size of a football field is about 54,000 square feet.
About half (52%) occupy their building exclusively (Q#4d). The remainder share the space with other occupants. The age of buildings occupied by small businesses varies enormously. In fact, the distribution of small businesses by the age of the building in which they occupy space is virtually constant by decade. Thirteen (13) percent occupy construction built in this century, 14 percent in the 1990s, 16 percent in the 1980s, 16 percent in the 1970s, and 12 percent in the 1960s (Q#4e).
The percentage appears to start declining with structures built in the 1960s, but the survey truncates the data in the 1940s and so reveals little about buildings prior to that time. The relevance of these data to energy consumption, of course, is that older construction is more likely to consume relatively greater amounts of energy and therefore has greater potential for savings by retrofitting, or even demolition than construction of new space.
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a. Paying Energy Costs for Space
Economic incentives usually stimulate action. Small businessmen and women who rent rather than own their space are less likely to directly pay energy costs. That means they are also less likely to invest in energy conservation measures. Fifty-seven (57) percent of small employers own the building in which their business currently resides (Q#4f). Forty-two (42) percent do not. Of those who lease or rent however, 71 percent pay their heating and/or cooling bill directly (Q#4g). Twenty-eight (28) percent have their heating and/or cooling costs rolled into the rent. As a result, 85 to 90 percent of all small-business owners have a direct incentive to reduce their heating and/or cooling consumption.
Of those who directly pay their heating and/or cooling bills, 20 percent have remodeled their building or large portions of it in the last three years in a way that cuts their heating and/or cooling costs (Q#4g1). A non-mutually exclusive 21 percent plan to make changes in their building over the next two to three years to accomplish the same objective (Q#4g2). The 20 percent who have made changes in the last three years and the 21 percent who plan to do so in the near future are not mutually exclusive. There is overlap - about 5 percentage points. Thus about 35 percent have changed their structure in the last three years thereby cutting energy costs (energy consumption) or plan to do so in the next two to three years.
A computer-controlled environment is one significant way to reduce energy consumption in buildings. Interior climate changes are conducted automatically and do not rely on people remembering to turn down (up) the thermostat when they go home, among other things. Twenty-one (21) percent of small-business owners have such a system now in place (Q#4g3).
Again, one assumes that those who own the building pay the light bill directly. Seventy-one (71) percent of those who lease also pay it (Q#4h). The percentage of renters who pay the lighting bill directly is therefore virtually the same number as renters who directly pay the heating and/or cooling bill. That means for all intents and purposes, the small-business owners directly paying their light bill are the same people as those directly paying their heating/cooling bill.
Almost two-thirds (65%) of all small businesses now light their premises with energy-conserving fluorescent lights (Q#4h1). Another 8 percent use the corollary compact fluorescent bulbs. Twelve (12) percent still use the traditional incandescent light while 6 percent use halogen lighting.
About two-thirds of all small businesses use outdoor lighting. The most common purpose for outdoor lighting is security and/or safety. Eighty-two (82) percent of those with outdoor lighting cite safety and/or security as the reason for their use of outdoor lighting (Q#4h2). Another 12 percent with outdoor lighting use it primarily for advertising and/or awareness. Few (5%) use it to conduct business after dark, e.g., a minor league baseball stadium.
Eleven (11) percent have a computer-controlled lighting system that adjusts lighting levels to outdoor brightness and similar factors (Q#4h3). About 10 percent who have either computer-controlled heating and/or cooling or computer-controlled lighting have both.
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b. Auxiliary Space
A limited number of small businesses occupy space other than at their primary place of business. A limited number also lease some of their business space to other businesses. However, the issue for present purposes is who directly pays for the energy consumed in that space. In other words, who has the incentive to reduce energy consumption.
Eleven (11) percent of small businesses occupy space other than at their primary location (Q#8). That number rises to 29 percent among those that employ 20 or more people. (Temporary facilities, such as might be found at a construction site, do not apply.) A majority (56%) of those occupy just one other location (Q#8a). But a substantial percentage (43%) of those owning the largest indicate that they occupy four or more other structures.
About half (51%) who occupy more than one building own it (those with more than two report on their second most important location) (Q#8b). The other half (47%) lease it. Of those leasing, 24 percent pay their heating and/or cooling bills on those facilities directly (Q#8b1), while 29 percent pay the lighting bill (Q#8b2). That means the occupant of secondary locations directly pays associated energy costs in 85 to 90 percent of cases. The situation for tertiary and additional locations is not known, though it is reasonable to assume that the circumstances are similar to secondary locations.
Ten (10) percent of small businesses lease space to other businesses or people (Q#9). In just over half (53%) of cases, the tenant directly pays the energy bills (Q#9a). In just over half (51%) of cases, the small-business owner/landlord rolls the energy cost into the rent.
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The operation of certain business equipment and processes is highly energy intensive. The businesses that employ them, therefore, count energy among the key inputs required to function. In these instances, energy costs typically constitute a substantial share of the business’s cost structure.
Twenty-six (26) percent of small-business owners use equipment and/or processes requiring large amounts of energy (Q#4i). However, when defining large amount as a cost greater than the cost of heating/cooling and lighting combined, just 57 percent of the 26 percent respond in the affirmative (Q#4i1). That translates into about 15 percent of the small-business population who use considerable amounts of energy to produce what they sell.
Given the importance of energy to these businesses and their output and sales, it is often difficult for them to control energy costs. Investment in new, energy efficient machinery is one way they can. However, investment often entails considerable cost that many small-business owners cannot afford. Assuming resources are available, one potentially productive investment is a system that can recycle the heat or cold generated and put it to other uses. Twelve (12) percent of those who say they are heavy users have such recycling equipment in use (Q#4i2).
One of the means that heavy users of electricity can often employ to reduce costs, though not necessarily consumption, is to contract with the local utility to trade lower unit costs for the suspension of electric power during certain peak-use periods. For the arrangement to be useful to the business, the firm must be a heavy consumer of energy and must be able to truncate work on days (or part of days) when total electricity consumption is very high. Comparatively few small businesses fit that profile. As a result, just 5 percent of small businesses have such a contract (Q#5).
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Forty-three (43) percent of small, employing businesses have implemented energy cost reduction steps in the last three years (Q#6). Curiously, owners of the smallest were almost as likely as those of the largest to do so. The steps that small-business owners took over the last three years were varied, but not frequent. Seventy-two (72) percent of the 43 percent who have taken at least one step, could identify just a single action (Q#6a). That means only about 12 percent of all small employers took more than one action to reduce energy costs in the last three years.
The most frequent steps taken to reduce energy consumption include: changing to more efficient lighting (21%), changing the thermostat (18%), purchasing new, more energy efficient equipment (15%), adding insulation (15%), and switching off the lights or equipment when not in use (10%). These steps are notable in that four of the six are process in nature. They require no investment, other than training employees to remember to take a few simple actions.
The owner charges himself or herself in the overwhelming majority of cases with the firm’s use of energy. The owner was responsible for selecting and implementing the above noted actions in 87 percent of cases (Q#6b). Employees (9%) and consultants (4%) did the job much less frequently. Little by way of actions to reduce energy consumption in small businesses, therefore, occurs without the immediate attention of the owner(s).
The price of energy has risen notably over the last year. And, while the price may fluctuate over weeks and months, there is little doubt that the real cost will rise over time. The only question is – how much over what period of time? As prices rise, additional energy conservation steps become economically feasible. The survey postulated an additional 25 percent increase in energy costs, a substantial hike, and asked respondents if they knew additional steps to cut energy costs in that eventuality. Forty-seven (47) percent answered in the affirmative (Q#7). These owners believe that should costs rise 25 percent there are steps they currently are aware of that can be taken to reduce energy consumption. But we do not know how many would be aware of such steps if the energy cost increases were 10 percent, for example.
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A large portion of small employers, though certainly not all, have strong incentives to reduce energy consumption (on a per unit of output basis). Energy costs are following a long-term trajectory upward; they already put a significant dent in many small-business budgets; and small-business owners typically pay their energy costs directly, meaning any consumption reduction actions they take, or do not take, fall directly to the bottom line. Given these conditions, the issues in reducing energy consumption become the attention owners devote to energy costs, their knowledge of potential economically efficient reduction measures, and the alternative investments, energy and non, owners can make with the resources available.
There is no single, best-fit small-business plan or solution to reduce its energy consumption. Even if costs warrant action, some enterprises consume primarily to heat, cool, and light the building spaces they occupy; others consume most of their energy on the nation’s roads and highways; and, still others consume most of theirs in the production process. This mixture implies the likelihood of many different effective tacks. The data also show that most of the actions taken recently have been process-oriented, rather than investment-oriented. However, there has been replacement (updating) of machinery and vehicles that have made them more energy efficient. Many have also remodeled or relocated in newer, more energy efficient space. But, the survey does not contain data that provide insight into specific additional energy consumption reduction investments that would yield favorable rates-of-return.