The Impact of Energy Costs on Startups

The Impact of Energy Costs on Startups cover

Energy costs have been rising for the better part of a year now with no sense of when they’ll peak. These rising costs strain the budgets of individuals and families, but businesses – especially startups – are struggling with these costs as well.

Why Energy Costs are Higher

There are many contributing factors to rising energy costs. One is the reduction of traditional carbon-based energy production to reduce carbon emissions. This transition will take many years and will see peaks and valleys on the way to predictable use and demand curves using renewables.

The second factor is the rise in demand. As economies bounced back after COVID-19, demand has increased accordingly. This demand in the form of growth has strained energy output, and renewable proliferation hasn’t been able to keep pace with rising demand coupled with reduced traditional production.

A third consideration is disruptions like regional conflicts, trade wars, and other events that stress existing energy supply lines. As these energy inputs are constrained, it causes ripple effects in consumer and business markets for the costs of electricity, fuel, gas, and more.

The Impact of Energy on Business

Some segments of the industrialized world were already bracing for rising costs before the Russia/Ukraine conflict. Some had predicted that geographic locations like Europe would see as high as a 70% increase in energy costs.

The impact of energy as a financial concern has been traditionally viewed through the lens of the business's products and services and the operation's size. And how energy costs affect each startup is different.

Many startups in a service-based industry require basic electricity to power computers, servers, and other electronic devices. At the same time, a tech service company may need to provide primary electrical service for an office and fuel for delivery or technician vehicle(s).

The same gap exists in manufacturing startups. Light industrial businesses may require manual assembly and only 120V service for hand tools alongside lights, AC, and heat. But heavier industrial startups must look at higher electricity costs in the form of 230V or 480V equipment, refrigeration, gas-fired processing machines, or steam generation to provide process heat.

Rising costs impact startups more adversely than mature, scaled traditional businesses that have managed energy requirements for decades. The type of energy needed will also play a role in determining the magnitude of the impact.

Addressing Rising Energy Costs

Even with prior business experience, the list of line items a founder must consider before starting a business is daunting, and this list includes energy.

Since energy availability and costs have been stable and highly commodified for decades, most tend to accept the status quo or turn the services on without further consideration. Nearly 40% of all businesses have never researched competitive quotes for energy costs.

For some startups, energy costs may be a small percentage of an operating budget, while it’s a significant cost center for others. As these costs rise, all companies should consider what they can do to address their energy costs:

  1. Shop Around – Often, initial services to new businesses will include annual automatic increases. Search out alternatives, as many regions, provinces, and states have multiple provider options.
  2. Location, Location, Location – Energy access, costs, and types are becoming more of a factor in determining the site of a new business. Access to multiple providers, alternative energy sources, and innovative suppliers such as microgrids and smart grids can help determine the optimal location for the lowest energy cost.
  3. Cut Costs with Technology – Entry-level costs for IoT and IIoT are much lower and more cost-effective today. Technology, advanced AI and ML platforms, and smart energy devices within a business can help lower energy usage.
  4. Take Advantage of Available Government Resources – There may be local, provincial, and federal resources available for startups who wish to source renewable energy for part or all of their energy needs. These incentives often take the form of grants, reimbursements, or tax breaks that can offset the higher costs of traditional energy.

Learning to Identify Energy Opportunities

While many startups are formed with the vision of a product or service that will change an industry, founders must also have the skills to understand and manage their startup's energy needs.

The Henry Bernick Entrepreneurship Centre at Georgian College provides training, networking, leadership, and other valuable resources at the academic and business outreach level. With a vibrant community of entrepreneurs and services, we can help you learn to navigate the changing energy environment for business alongside other skills required to make your venture a success.

Contact us to learn more.

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