Matthew Chester's Outpost

I read a paper at uni that was explaining how Ashby's law of requisite variety could be applied by car dealers when selling new cars. Stafford Beer also talked about how department stores could embrace Ashby's law to minimise the number of customers leaving empty handed. The explosion of web-based tech is providing another tool for retailers to ensure that they have requisite variety in their systems.

Requisite Variety in a Nutshell
Simply put, a system needs at least as many control states as it has true states for it to have requisite variety. Beer's example (in Designing Freedom, I think) eludes to a customer entering a department store to purchase an item. If the customer leaves without said item, then the store has lost a sale, potentially to a competitor - the system has failed in its objective of providing an outlet for items to customers.

Increasing Variety
In order to minimise the number of customers this affects, Beer describes several ways of increasing variety in the system, i.e. clearly labeled departments and signposting, directories on each floor, shop assistants wondering around helping customers to find what they are looking for, etc. (#Selfridge's in London at Christmas is a great example!).

Other stuff stores can do is to have information points where folks can go to make inquiries. Carrying a good inventory of stuff in the storeroom is also a good move, as is being able to order stuff into the store - "we are out of stock of that item, but will be getting some in next week so we can reserve one for you…". The whole point being to makes sure that a customer buys something when they are in store (window shoppers excluded).

Impact of Web-based Technology
I was in #Office today looking for shoes. Found the pair I wanted, but they were out of stock in store. The assistant checked the store's online warehouse (using a tablet) and found the shoes. I was able to order them for free next day delivery, to my house.

OK, so I went in for an item but didn't leave the store with it. But the store did not lose my custom, which a year or two ago they perhaps might of done. So by embracing latest technologies, this store has increased its variety.

Back in September last year I wrote a series of blogs about energy uncertainty. I used a relatively simple model to estimate domestic energy prices in the future - here I'm revisiting the model and adding data published by DECC to see how the model has performed. 

The graphs below show the model's performance for domestic gas prices and electricity prices. The data released by DECC in the quarterly energy statistics for the periods since I first blogged on the subject are shown in red. And as in my previous blog, the numbers shown are the price indices relative to 1987 (i.e. 1987=100) - the numbers in red show the 2Q 2013 price index and the number above it is the lower bound of the model.

The good news (with my modeller's hat on) is that the model is working pretty well, although it is tracking the lower confidence interval rather than the expected price. However, the majority of the data points in both graphs are tracking the lower interval. This suggests that the peaks in prices in 2007 and 2009 are 'carrying more weight' than perhaps they should and that the domestic prices are mean-reverting.

So should I discount some of the outliers and re-run the model? What if there is another hike in the prices next year so that the trend might be closer to the expected price in the current model? Re-running the model without the outliers could in the latter case under estimate future energy prices - stick or twist?

Stafford Beer and Ross Ashby maintain that a model's first virtue is that it must be useful. So sticking with the model or twisting really depends on what the model's purpose is. So from my perspective, I'm going to stick because I want to see how this relatively simple modelling approach (linear regression) fares over time.

If I was using this for budgeting purposes then I would most certainly stick too as there would be money left in the energy budget (which I would then use to invest in energy reduction measures). However, if I was using this approach for project appraisal then I might consider twisting and re-running the model without the outliers and with data  from 2010 onwards to compare the results. This would help to get a feel for what the risk might be to the project, particularly if you were using the expected price as an indicator of future prices and it was the savings associated with these future prices that was funding the project.

I'll revisit this model again at the end of the year to see how it has fared.

In this final part of the series I combine the uncertainty of gas prices and heating degree days discussed previously to give an indication of the magnitude of the risk associated with a ‘do nothing’ or ‘business as usual’ strategy. Again, I’m not scaremongering, I’m just asking if you can afford to delay in managing your energy in a comprehensive manner or that if you already have an energy management system, are you using it to its full effect?

I’ve taken the extremes from my previous two blogs and combined them to give four scenarios: mild year at lowest unit price increase (5%); harsh year at lowest unit price increase; mild year at highest unit price increase (65%); harsh year at highest unit price increase. I have assumed the cost of gas to be 4 pence per kWh this year and then inflated it in line with the upper and lower bounds of the model presented in part 1 of this series.

These four scenarios are shown in the table below and the values have been rounded to the nearest £1000. At 4 p/kWh the average of the previous two year’s consumption is £141,000. If this was your budget for 2013 and it turned out to be a mild year and the gas prices had only increased by 5% then you could be under budget by £30,000. But if it is a harsh winter and gas prices are at 6.5 p/kWh then your budget could be blown.

Conclusion
Gas prices are more dominant and they probably will increase and as for the weather, who knows? The simple fact is that doing nothing could be costly. Even if your energy consumption remains broadly constant then your energy spend could increase and interestingly, if the weather causes an increase in heating demand then energy spend will increase and so too will your CRC liability (which at £12/ tn CO2e is equivalent to 0.22 p/kWh of gas consumed). 

With an energy management system in place and being used appropriately the risks discussed in this series of blogs could present opportunities to reduce energy costs and if prices increase then so too will the magnitude of the savings – can you afford not to be using an energy management system? 

In my last blog I discussed the impact that domestic gas prices could have on future energy budgets. Another key factor in determining energy usage, particularly for space heating, is the weather or more specifically, the outside temperature. Heating (and cooling) degree days are published and readily available on the internet and can be used to estimate future heating requirements. If the forthcoming year is mild then the heating load could be lower than the previous year, but conversely if there is a long, harsh winter then the heating load could be higher than the previous year. How much higher or lower will be difficult to predict accurately, but analysing previous year’s data will give an indication. 

The pertinent question is whether or not your energy budget is flexible enough to cope with the uncertainty. To illustrate how flexible your budget might need to be, i.e. quantify the risk, I have used some gas consumption data from the Carbon Trust’s guide on degree days and used degree day data for Gatwick, downloaded from www.degreedays.net from August 2009.

I used linear regression to estimate the gas consumption in 2013 based on the average monthly degree days from 2009 and then compared this to the sum of the minimum monthly values and maximum monthly values for the same period. These values are presented in the Figure along with the Carbon Trust data: the model suggests that we should budget for around 3,500 MWh of gas next year. However, the swing attributed to extremes, e.g. a mild year or a harsh winter, is approximately ±20%.

Am I scaremongering here too? Again, not intentionally. My message is concerned about being prepared: a ±20% swing in energy spend might be an acceptable risk when compared to the cost of implementing an energy management system, but on the other hand it might not. You could get more degree day data and go further back to see if there is a downward trend and thus help to narrow the swing interval.

Nevertheless, there will always be some uncertainty – it’s the weather – and that introduces financial risk to the energy budget. If it is to be mitigated then it needs to be managed and that means it needs to be measured, to paraphrase Lord Kelvin. Can you afford not to be measuring and monitoring your gas consumption?

This series of blogs that I have written for Carbon Credentials aims to illustrate how taking stock of your energy consumption and understanding the risk associated with a ‘business as usual’ approach presents a real opportunity to reduce costs; this first post discusses gas prices, the second discusses degree days, and the third combines both to attempt to show the cumulative impact.  

The cost of energy is increasing. So even if your consumption is flat over the next year your energy bill will increase – but by how much? Government releases fuel price data quarterly and analysing the past trends can offer some insight into the future. The key is not to try and forecast too far. I have used regression analysis to estimate what the gas prices might be at the end of 2013. The Figure shows the relative change in domestic gas prices from 2002 until 2012 – prices are based on 1987 data, i.e. 1987 =100, which means that the relative cost of gas was cheaper in 2002 than it was in 1987.

The line labelled Expected Price is the ‘line of best’ for the data which has been forecast forward to the end of 2013 and shows an increasing trend (the index increases from 224 to 291) equivalent to an uplift of 30% inclusive of inflation. The other two curves represent the upper and lower limits of the model and can be interpreted in the following way: we can be 95% sure that the gas price index will be between 235 (a 5% uplift) and 361 (a 65% uplift). The interval is wide for two reasons, firstly that the gas price is volatile (shown by the peaks and troughs) and secondly, because the model, i.e. the line of best fit, is an exponential.

So am I just scaremongering? Not intentionally. My message is to look at the trend rather than the predicted values themselves and the trend for the last 10 years has been an increase in the price of gas. The index almost doubled from Q1 2002 to Q1 2008 and if it continues we could expect see it double again by Q1 2014.

Using an energy management system to get all your energy data into one place and facilitate benchmarking typically reduces the energy spend by around 5%, coupled with proactive engagement and measuring and monitoring strategies this could get to 10%. If the cost of energy is following an exponential trend then so too will the savings. Now I might be wrong about the trend, but can you afford to wait to see if I’m right?

This is an article that I have written for Carbon Credentials and is also published on its website.

 
TUI Travel Plc (First Choice, Thompson, etc.) launched their 3-year sustainability strategy last week and it makes for an interesting read, and indeed was the catalyst for this article. According to the strategy, travel and tourism is the main source of foreign exchange in a third of developing countries but is responsible for only 5% of global CO2e emissions.

Tourism in some way helps redistribute wealth from richer nations to poorer ones and the aviation industry acts as a conduit in the process. Revenue received from tourists helps (hopefully) to improve the economy of the nation being visited and should eventually improve social elements such as education, healthcare, etc.

However, these benefits come at a price: environmental pollution caused by the tourists. The most significant probably being carbon emissions from aviation, which presents a dilemma. On the one hand tourism should be actively encouraged and promoted to help improve the economies of poorer states and nations, but on the other hand it should be discouraged to combat climate change.

The mantra of the Bruntland Report, which has been embraced by the TUI Travel Plc strategy, is central to managing this dilemma: do more with less. And from January this year, that is precisely what the aviation industry will have to do as a result of its inclusion in the European Union Emissions Trading Scheme (EU-ETS). The industry’s recent growth rate has considerably increased its carbon footprint and its projected growth has been cited as one of the reasons for its inclusion.  For example, Government’s perhaps rather ambitious expectation is that the industry’s contribution to total UK emissions will rise from 9% in 2005 to 29% in 2050.

The cost of the EU-ETS to passengers is estimated to be negligible in comparison to the total ticket price (circa €9 or £8) but is likely to increase as the scheme progresses[1] – this cost arises from airlines having to purchase allowances for the carbon they emit throughout the year. But if airline companies adopt the same strategy as TUI Travel Plc and seek to reduce their aviation emissions by 6% over the next 3 years then this cost should be stabilised if not reduced.

Despite the objections of some non-EU based firms, it appears that including the aviation industry in the EU-ETS could help drive sustainable tourism. But it will require more firms like TUI Travel Plc to tackle the dilemma head-on by embedding sustainability into their corporate DNA and moving beyond compliance.



[1] EU ETS and Aviation, SN05533, House of Commons Library, www.parliament.uk/briefing-papers/SN05533.pdf

In Senge’s book “The Necessary Revolution”, the road to sustainability is presented as a transformation of business ethos, embracing a proactive approach and moving beyond compliance on a journey that will increase stakeholder value, brand reputation and market share. But to move beyond compliance requires a firm to be compliant in the first place – and this is where CRC could kick-start a firm’s journey.

CRC has mandated many UK firms to report energy consumption and purchase allowances based on that consumption. The huge additional cost associated with energy emissions means that emissions must be measured and reported accurately – hence good data management processes and systems are paramount. But the real benefit comes from stepping beyond compliance and using data to inform decision making and drive strategy.

Simply complying with CRC will not save firms money but it will reduce the risk of being fined by the Environment Agency. In fact, compliance will end up costing a firm through annual subsistence fees and independent audits, not to mention the internal costs associated with managing compliance. However, using energy data intelligently will enable consumption profiles to be measured, monitored, and reduced - resulting in the double benefit from reducing energy spend and CRC liability.

And once the benefits of managing energy are realised then the systems and processes in place can be expanded to include the wider carbon agenda, resources, waste, etc. all the while becoming easier to demonstrate commitment and leadership in sustainability. For large corporations this can add value directly because it becomes easier to participate in schemes such as the Carbon Disclosure Project and the Dow Jones Sustainability Index and demonstrate a firm’s green credentials.

Year on year this will begin to snowball, in a positive way as good data informs good decision making and target setting that in turn leads to further progress and achievements - providing a narrative that can be included in corporate annual reports, and environmental and CSR reports. And evidence from M&S, Co-op, Coca-cola Enterprises, and O2 (to name a few) suggests that this brings with it a sustainable future with increased stakeholder value and a fortified brand. Complying with CRC is just the first step.

A quintessentially sustainable business is cognizant of its social, environmental, economic and technological impacts. The Madikwe Game Reserve, South Africa is no exception. Formed out of necessity to improve local economic prospects as the traditional farming economy was not providing enough opportunity or wealth for the local community, the reserve provides employment opportunities for guides, drivers, caterers, security, maintenance, management, etc. Yet its economic stability is not wholly reliant upon tourism.

By ensuring and maintaining the health of the reserve’s flora and fauna, many species of animals are exported to other reserves and parks at a premium because there is a high demand for tuberculosis-free livestock. However, there are no breeding programmes at the reserve – each species is monitored to ensure that it does not exceed the carrying capacity of the reserve and thus create an imbalance to ecosystem. This is a necessary step as the reserve is fenced, creating a permanent boundary that prevents many species migrating into or out of the reserve. Therefore, to maintain ecological sustainability predation has to be carefully monitored and controlled to prevent any species beginning to dominate. Of course, maintaining this balance in the reserve also ensures that tourist numbers are up and keeps the cash flow healthy.

Mosetlha Bush Camp located on the reserve extends this vision of sustainability by offering guests the chance to stay at an eco-camp where there is no running water, no electricity or gas, and the primary source of fuel comes from locally sourced wood. Local conditions make this easier to comprehend as energy is only required to cook, heat water, and provide minimal levels of lighting. Central heating is not necessary as even in winter the temperature can be in the thirties. But, wood provides warmth in the cool of the evenings in the form of a camp fire and the embers are used to cook the evening’s meal with. Wood also provides the hot water too, which is heated in a simple donkey boiler that can be decanted into buckets and used for showering – choosing to shower during the day when the ambient temperature is warm makes the process a prosaic one.

However, the camp is not carbon neutral, yet. It uses two fossil fuels: diesel to power its Land Rovers and paraffin to fuel the lamps in the evening. There is certainly an appetite for the camp to shift to solar powered lighting solutions and possibly showers too in the future as both are proving successful in the staff’s quarters and will reduce the camp’s emissions. Increasing solar power capacity will also provide improvements to the camp’s communication systems which are currently compromised by the lack of electricity. Tackling the diesel emissions may not be as easy.

Nevertheless, the camp (and probably the reserve as a whole) has the hallmarks of a sustainable business: an understanding of its environmental impact and responsibility, the need to generate and maintain wealth locally, and a recognition of the role that green technology can have on improving business. My experience also highlighted how a small behavioural change and local factors can combine to reduce the burden on the environment from anthropogenic activity.