How to create small changes that make a big difference

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If we want to change our behaviour or influence the behaviour of a group of people around us for the better, what should we do?

In Inside The Nudge Unit, David Halpern describes how the Behavioural Insights Team in the UK government showed that designing policy using behavioural insights dramatically improves results and outcomes.

If we’re trying to do something – for example encourage more people to use public transport or corporations to invest in energy efficiency – we can use a simple framework developed by the Nudge unit to design a programme.

The framework can be remembered with a mnemonic – EAST – which stands for easy, attract, social and timely.

We need to start by making things Easy.

Just as water flows downhill, people are more likely to do something if it’s simple or the default option.

Anything that adds friction reduces performance – so we can remove friction to make things easier, or add it to make things harder.

For example, supermarkets now keep healthy snacks closer to checkout and sweets further away so that buyers find it easier to choose a healthy option rather than an unhealthy one.

Asking people to turn off the lights or the tap when they leave requires an action from them.

Making it the default through a sensor and switch or taps that open for a preset amount of time makes this easier.

Then we need to get their attention – attract them.

We can do this if we personalise information, make key points obvious, use trusted, authoritative or well-known people to publicise information and create incentives for them to act.

The key thing is getting people to have an emotional connection with the idea.

We are also more likely to do things if we see other people doing them – we are social creatures.

We look around us for guidance and confirmation that what we are doing is the right thing to do.

In many organisations, recycling is now the norm with segregated bins for different kinds of waste.

We need to make use of networks to reach out and use social recognition – awards, committments, promises – as ways to engage and enthuse people.

For example, people are much more likely to recycle when they see other people also doing it. Conversely, if they see others littering, they are more likely to do that too.

Finally, interventions work best when they are timely.

For example, the best time to work with organisations to improve energy efficiency is to engage with them at the point they are making new purchases.

That is when they can compare the purchase costs of different pieces of kit to the lifetime costs of owning and operating the kit.

If they can see that they save money over the long term at that point, then the are more likely to go for the better, more expensive option, rather than going for a cheap thing now that is more expensive and wasteful over the long term.

When we’re planning a change, whether at an individual or organisational level, we need to look at our plans and see how things might work out.

We are much more likely to be successful if we can tick off the four elements of the EAST framework.

The secret to making money

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Every real businessperson I have met thinks about money in a certain way.

They break things down into what they cost on a daily or weekly basis and then see how much they need to make every day or week to be in profit.

For example, let’s say we wanted to start a taxi service and bought a car for £10,000 that will be run for 3 years – and it’s going to be worth £3,000 at the end.

A business person will think of that as £7,000 of capital spread over three years to make decisions.

The taxi might be in service 5 days a week, 48 weeks of the year for 3 years – that’s 720 days of operation.

So we need to make at least £10 a day to pay for the car. The stuff on top is profit.

It’s as simple as that – once we are making a profit, however, lots of people will want a bite of it – from the government to helpers.

But the basic principle is still just that simple.

Sometimes the more complex financial calculations that we do – from paybacks to internal rate of return – simply confuse the issue.

Especially when it comes to serious projects that have lots of moving parts.

For example, battery storage plus solar is all the rage now.

Around a year ago I made some notes from a podcast by Barry Cinnamon, who uses exactly this method to evaluate the economics of an battery storage plus solar installation.

It’s from 2016, and prices may have changed, but principles don’t.

We are currently going through an infrastructure upgrade process in the UK that staggering in its scope and scale.

We have ageing networks of wires, pipes, sewers, roads and railways, all of which are being upgraded or replaced.

And there are a myriad projects being chased by developers.

For projects in the energy business – it’s once again pretty simple.

There is a price per kWh of energy – and if we can buy it for less or sell it for more than that we can make a profit.

The problem is when we have very complex financial models that help us buy it for more or sell it for less.

As Theresa May (now probably wishing she hadn’t) said, there is no magic money tree.

But there are many, very real, money pits.

Should we go for the easy option?

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Warren Buffett wrote that after many years he and his partner, Charlie Munger, had not learned to solve business problems.

What they had learned to do was to avoid them, by looking for one-foot hurdles they could step over rather than seven-foot ones they needed to clear.

But how can this approach be applied day to day?

Take the emerging field of product management.

Is it better to create a new product and then try and sell it to potential users or to first try and understand the needs of potential users and then try and design an offering around those?

One school of thought argues that customers don’t know what they need before they see the product – if you had asked people what they wanted before the car was invented, they might have said a faster horse.

If the business we’re in is more humdrum – more exposed to competition – what approach can we take?

Let’s say we owned a food business – what advantages would help us beat the competition? Would it be better ingredients, better signage, widespread advertising or more delivery options?

The late Gary Halbert used this example and said people could choose any combination of advantages they wanted and he would still beat them if he had a single advantage – A starving crowd.

The test for any product is not how good it is or how glowing the reviews are – it’s how well it’s doing on gaining market share.

The energy efficiency business, for example, should really be an easy one to operate in.

Who wouldn’t want to cut their energy costs – after all savings go straight to the bottom line and how much product would a company need to sell to get the same result?

But many projects fail to go ahead because they don’t meet a 2-year payback?

But, if project developers thought like product managers, they might think about what the CEO and FD of the company really want to achieve.

If they are like most CEOs and FDs, their focus is on earnings growth and increasing shareholder value.

Payback to them is less important than what the project will contribute to EBITDA during its lifetime.

A McKinsey article shows how a modern approach to a portfolio of projects might evaulate them all, rank them on a risk/reward basis and select the ones close to the efficient frontier – essentially the best ones.

Cherry-picking makes it more likely that investments will return value in the long term.

We are often programmed to believe that anything worth doing must be hard – taking effort and sacrifice.

By going after the easy things, however, we may actually make a difference and create value.

What would it look like if ESOS were easy?

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ESOS is the Energy Savings Opportunity Scheme run by the Environment Agency to comply with the EU’s Energy Efficiency Directive.

It applies to businesses, charities and non-public sector organisations that are large enough to qualify.

Organisations qualify if, on the 31st of December 2018 (or the financial year just ended), they meet the ESOS definition of a large organisation – i.e, they employ more than 250 people or have a turnover of more than €50 million or a balance sheet of more €43 million during the year.

In a group company, if one part qualifies, then the whole qualifies and the highest UK parent company needs to be responsible for compliance – unless the responsibility is transferred to another group company.

The UK parts of overseas companies need to take part if any part of their group activities qualify in the UK.

So, the quick way to ESOS compliance is:

1. Work out your total energy consumption

This is simple if there are already systems in place that collect and process invoice data. If not, there is some data collection to carry out.

Most organisations will have quite good electricity and gas information. Other fuels and transport records are sometimes harder to find.

2. Identify areas of significant energy consumption

You need to identify at least 90% of usage and then figure out what existing assessments already cover these such as ISO 50001, DECs or GDAs.

The rest need to be covered with ESOS compliant audits.

The scope of the audits are decided by the lead auditor but the Association of Energy Engineers (AEE), for example, suggests than an ASHRAE Level 2 Audit which includes some measurement is appropriate.

Other schemes may have different requirements but they all will include a review of data, analysis of consumption and efficiency, identification of opportunities, site visits and a completed evidence pack that sets out the organisation’s approach to compliance.

3. Appoint a lead assessor

A lead assessor needs to do and oversee or review energy audits and overall assessment.

They (or their team) can either do the work, or work with you to review existing work – although they will be responsible for signing it off as compliant.

All lead assessors will be listed on their professional body registers.

4. Notify the Environment Agency

The Environment Agency must be notified using an online form by the 5th of December 2019.

5. Keep records

You need to keep an evidence pack of how you have carried out ESOS.

Then what?

Many ESOS reports the last time round were done and then left on a shelf to gather dust.

A significant issue is that many organisations are already quite energy efficient, especially when it comes to the large process tasks and pieces of kit that use the majority of industrial energy.

These pieces of kit can’t be quickly replaced and will have a upgrade and replacement cycle of their own.

As a result, a good ESOS assessment isn’t just an external audit at a point in time but a move towards an ongoing system of energy management and continuous improvement in energy efficiency.

Eventually, the activities being done could be formalised in an energy management system such as ISO50001.

Ideally – the output from the ESOS assessment will do two things:

  1. Come up with an action plan: Identify and rank projects that are doable – technically feasible – and have a payback that works for the company.
  2. Create a tender: Package up the rest of the projects for an Energy Services Company – so that the organisation can benefit from the savings while someone else takes on responsibility for implementation and financing.

Although the notification deadline is still some time away many of the activities can be carried out over the entire four-year period between deadlines, for example, the audits can be carried out on different parts of the portfolio during different years.

So… the place to start is with the data – and please do get in touch if you have any questions.

How to connect management, measurement and focus

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There are three questions that many businesses will need to address in 2018:

  1. How can we create business operations that have fewer emissions while creating more value?
  2. How can we protect the value we create – the intellectual capital – from pirates?
  3. How are we going to ethically use personal data?

These three questions are important because there are regulations and rules that need to be looked at now.

The Energy Savings Opportunities Scheme or ESOS requires large companies to audit their energy and transport use and look for savings.

The Cyber Essentials programme, run by the UK’s National Cyber Security Centre, aims to help all businesses and consumers become more secure.

And the General Data Protection Regulation or GDPR tells us how to manage personal data and keep it private.

So, what are the links between management, measurement and focus?

First, the standard approach to complying with requirements like these is to put in place a management system.

Most management systems, especially those that follow an ISO type standard, are based on the Deming Cycle – named after the engineer who helped transform Japanese manufacturing after the war into a lean powerhouse of quality.

The essential elements of the Deming Cycle are based on the principles of scientific enquiry and are:

  • Plan: Look at the situation and come up with an approach to manage it.
  • Do: Do the things in the plan
  • Study: Study what has happened and learn how to improve things. Some people use check instead of study – but Deming thought study was better as check is more about inspection, while study is about learning.
  • Act: Change the plan based on what has been learned and go through the cycle again.

This approach works well for tangible things such as reducing process waste or figuring out which items of kit to replace to reduce energy use.

But… things can get messy.

All too often a management system becomes an exercise in paperwork rather than a real effort to improve something – we do it to comply or pass the audit rather than actually becoming a better organisation.

And that’s because the technical element is only one part of an organisational system.

The intangible elements are just as important to get right.

The Balanced Scorecard is a method created by Robert Kaplan and David Norton that tries to look at the organisation as a whole.

Clearly, the way in which success is measured by an organisation is in the financial returns that come from doing a project.

Customers, on the other hand, focus on what they get out of the partnership.

In order to keep customers happy, the organisation needs to have the right internal capability to do the right things.

And that only comes when the people in the organisation are given the right learning and growth opportunities.

So, once again, how does all of this connect to management, measurement and focus?

It’s because it all starts with culture.

If the people in an organisation know and get with the vision and strategy – whether it’s becoming cleaner and greener, more secure or more ethical – then we’re starting with a firm base.

We can create a strategy using the Balanced Scorecard approach that works out what people need to know and helps them learn, puts the internal processes in place that are required, shows customers how this makes us better service providers and also gives us the financial returns needed to keep shareholders happy.

Our of the Balanced Scorecard comes a set of objectives, measures, targets and initiatives.

Otherwise called a plan.

We can implement the plan using the Deming Cycle and continuously improve our organisation – and that’s where quality comes from.

That’s sort of management and measurement covered, but where does focus come in?

Well, with all these kinds of things, there are two approaches we tend to take.

Either we look for the lowest cost compliance approach – because really none of these things are really that important and the existing financial pressures and priorities don’t leave any time for the hard work of business transformation.

Or we believe that we need to change to survive – and so the work involved in really becoming cleaner, safer and more ethical is worth doing.

And the results we will get in the next year will depend on which approach we focus on.

What does the UK’s clean growth strategy focus on?

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The UK’s clean growth strategy, published in October 2017, sets out how the UK can grow while cutting greenhouse gas emissions.

The economic opportunity in clean business is huge.

Countries and companies need to invest around $13.5 trillion in the energy sector alone if we are to meet the Paris committments to keep the rise in global temperature below 2 degrees.

At the same time the UK wants to keep bills low – so the reduction in emissions needs to come from the cheapest technologies, processes and systems.

The UK plans to invest £2.5 billion from 2015 to 2021 in low carbon innovation.

33% of this will go into transport, with petrol and diesel cars killed off by 2040, a shift to electric and ultra low emission vehicles (ULEVs), more cycling and walking and improved logistics.

25% will be spent on power with a focus on smart systems, nuclear, price controls and ongoing work in renewables.

4% will go towards land use and waste, with new support mechanisms after the UK leaves the EU, planting new forests, having zero avoidable waste by 2050 and investing in agri-tech, land use, greenhouse gas removal technology.

10% is targeted at smart systems including storage, demand response, nuclear and offshore wind.

Homes will get around 7% to upgrade home energy efficiency measures, smart meters, a roll out of low carbon heating and new requirements for control systems.

Business and industry will get 7% spent on them to develop a package of measures to support them in increasing “energy productivity” by 20% by 2030.

This includes minimum standards on energy efficiency, helping businesses identify where they can cut bills and industrial schemes to help large companies install energy efficiency measures and support heat recycling.

Innovation will also be supported through the ongoing Energy Entrepreneurs Fund.

The purpose of this document is to set out a framework for action.

It’s then time for businesses, investors and innovators to go after the economic opportunities out there…

What are the trends to watch in 2018?

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Forecasts are usually a waste of time

At the start of the year, a number of predictions are made about what may disrupt life and business in the year ahead.

If we start, instead, by taking a look back, some of the biggest stories of 2017 came as a surprise.

Was anyone surprised by Trump’s policies?

The policies of the Trump administration are perhaps more of a series of road bumps to be endured rather than a revolution in how things are done.

Despite the US withdrawal from the Paris accord, it remains a leader in electric car technology and its technology companies still dominate global markets.

Attempts to support old industries will probably result in the money going to executives at large oil, gas and coal firms rather than actually helping people and communities with cleaner energy and new opportunities.

And the effect of the policies may well be to hand the Chinese a leadership position in the actual manufacturing of clean energy technology as well as increasing dominance over emerging markets.

The Brexit process was triggered

The UK will leave the European Union.

How and when and how much it will cost and who will win and lose are still being discussed.

The UK is not in a strong position.

It faces a juggernaut which is its main export and import partner and takes a long time to decide anything.

The EU can take its time – the UK needs decisions to be made soon.

And that pressure means the UK may have to settle for less than it hopes for.

Cyber-security and hacking are making headline news

2017 was full of news about Russian involvement in the US election and the extent to which foreign nations are carrying out cyber-warfare.

At the same time, criminals are targeting individuals and businesses.

Government and business are increasingly conscious of the risk of being hacked – but are still working out what to do in response.

The Grenfell fire caused 71 deaths and will result in changes to building regulations and fire safety

As more of us begin to live in cities and high-rises, the Grenfell Tower Fire has to spur action to improve safety in such buildings.

Better, more energy-effient infrastructure is needed to both prevent electrical fires from starting in the first place and stopping them quickly when something fails.

Electric cars may have reached a tipping point

Electric cars sales are still low, but their public perception as a viable alternative to petrol and diesel cars may have reached a crucial point.

Falling battery prices and increasing government support, including long-term targets to make electric cars the norm are helping the industry.

Bitcoin – bubble or not?

It’s probably one…

So, what could happen in 2018?

Security should be on our minds.

Recent news about hardware and software vulnerabilities should not be a surprise.

There are always bugs in systems.

The weakest point, however, is usually people.

Many organisations still need to really get to grips with digitisation and what it could do for them.

It’s not just doing things with computers the way they are done on paper.

And it’s not simply moving to the cloud – that is a particular type of solution – the point is what type of solution actually works for us in a particular situation.

Digitisation and security go hand in hand – we should use computers to do more, and we should be able to keep what we do on those computers confidential and secure from competitors and hackers.

The increasing complexity of everything, however, means that specialisation is now normal.

Advanced economies look at Everything as a Service, where we can find organisations and people to help with specific tasks.

It’s more about the specific solution OR the specific person that does something.

And, as no one wants to take the risk of paying up front for something they don’t understand and can’t use, paying to try things out and then use them if they work seems to be the model for the majority of products.

Unless you’re Apple, in which case you can deliberately slow down your old stuff to make people buy your new stuff…

So, for all those services, we really need to start looking at global/local partnerships.

For example, what’s stopping us from working with admin assistants in the Philippines, sysadmins in Brazil or developers in India?

Well, in 2017, nothing did…

The fact that countries are increasingly nationalistic and making it harder for people to cross boundaries, partly as a result of global terrorism, makes less and less difference in a world where everyone is connected by the Internet.

We should be looking for partners and services wherever they are – and select them based on what they do and how much they charge – and how much value we get.

Then there is the mail…

Many of us probably do the majority of our shopping online.

Vans are the fastest growing automotive segment because of all the deliveries being made.

We can order stuff from China or Taiwan on Ebay and have it here in a few weeks. If we pay more, we can have it tomorrow from the UK in the mail.

The mail order business is simply going to grow – shops are turning into places where we go and browse, like catalogs.

And then there will be all the things that no one predicted

As Donald Rumsfeld said in 2002:

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.

In 2018 – the unknown unknowns will be the ones that get the biggest headlines.

How to do technical analysis in energy markets

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Most of us shouldn’t be doing any technical analysis.

If you are an end-user – someone who actually needs a commodity and uses it in real life, then the maths of markets shouldn’t be the main thing you think about.

Instead, like in any other business, the closer your purchase price is to the cost of production, the better the deal you’re getting.

In a commodity market, like the electricity and gas markets in the UK and Europe, the best strategy is to first work out that number.

Then wait.

When the market price is close to your number – buy.

If you buy too early and the price goes doen – then buy some more and average down.

But – these opportunities only come along once in a while. In the last 15 years, there have been perhaps four occasions when the price was right and it made sense to fill your boots.

So… what do we do if we have missed those opportunities?

At that point, many people fall back on market timing – trying to get a better position by making a call on the whether the market will go up or down from where we are now.

And the tool we use is technical analysis.

The idea is that a combination of indicators can help us come to a view on where the market is headed.

The indicator to start with is the Moving Average. This is the average of a number of days and smooths out the daily variations in prices.

When a 9-day moving average crosses the 20-day moving average, it can be a signal that the market is going to change direction.

Between these, the smoother curves help us form an opinion on the trend.

In commodity markets, the Relative Strength Indicator or RSI is a popular measure.

The RSI is created by adding the number of days the market went up and dividing it by the number of days the market went down and turning it into an index from 0-100.

When the line crosses above 30, it’s a bullish signal and when it crosses below 70 it’s bearish.

Volumes traded in the market also provide an advance signal of changes.

If more people buy, it might push the price up, and as less people engage, the price might go down.

A change in volume levels can be an early sign that the market is changing its mind.

Bollinger Bands are a more complex technical indicator.

We work them out by calculating two standard deviations from a central line, usually the 20-day moving average. The theory is that prices should be within this range most of the time.

If they break out of the bands that could be a signal to buy or sell.

The challenge in energy markets is that as the number of options increases we have more of them to track and take positions on.

There are obviously many more indicators, some fiendishly complicated.

The point is that markets may be closely correlated – but that doesn’t mean just looking at one measure, like an annual contract, is enough these days to pick out a price that is undervalued.

In an ideal world, we would buy at cost-price and not need to do any technical analysis at all.

But – when we do, it’s useful to know how it’s done.

The rules on energy reporting for large companies

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The government consultation on a streamlined energy and carbon reporting system is open until 4th January 2018.

Many companies still don’t save as much energy, carbon and cost as they can.

This is partly because decision makers are just not aware of the opportunities that exist across businesses.

Take a large business that operates in a competitive industry. Let’s say that it has a turnover of £40 million and it’s EBITDA margin is around 20%, giving it £8 million in earnings.

The costs of energy might only be around 5% for such a business – at around £2 million.

If it could save 10% through low-cost energy efficiency investments, that would add £200,000 to EBITDA, an increase of 2.5%.

The business would need to increase sales by £1 million to have the same impact on profits as cutting energy costs by 200,000.

And, especially for listed companies, that increase in earnings can directly increase shareholder value through valuation multiples.

But there are problems.

There are too many reporting systems, the obligations are fragmented and the benefits are unclear.

Most companies see it is as just another obligation that needs to be met at the lowest cost rather than a source of opportunities.

The consultation aims to change that.

Under its proposals, existing reporting mechanisms will be streamlined into a simpler reporting framework that will make energy and emissions information more standardised and transparent, increasing awareness among shareholders and senior managers.

It will apply to large companies, whether defined by energy usage, financial strength or company structure. Between 4,000 and 10,000 organisations will need to comply with these proposals.

The reporting will cover energy and transport and potentially also cover other forms of energy such as biofuels – drawing more emissions into the reporting framework.

It is meant to be UK specific, although listed companies will report on global operations.

In addition, there may be a requirement to report against progress on energy efficiency opportunities.

Following the consultation and the governments response, the new rules are likely to be introduced by 2019.

Companies will need to report this information on their annual reports filed with Companies House, and there may be a separate data portal set up to hold and provide this information as well.

So, what should you do now?

Whatever conclusion the government comes to, it’s likely to involve some form of reporting.

So, start collecting your energy data now.

How to pitch your idea

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The author Dan Pink writes that we are all in the business of moving others now in his book To Sell is Human.

Whether it’s persuading others to back an idea or strategy to what people think of as traditional sales, all of us are increasingly required to pitch our ideas and get support in order to do anything.

The test for whether an idea was clear was the elevator pitch. Could you succinctly sum it up in 30 seconds or less as you went up an elevator with someone important.

But… we rarely share lifts with important people any more. What do you do when you don’t have an elevator available and you want to get their attention and spark interest?

Dan Pink describes six successors to the elevator pitch. It might help to remember them as you look at the symbols on your keyboard that match the ones in the picture.

1. ! The one word pitch

Can you describe your idea in one word?

Pink suggests starting with a short description, say 50 words. Cut it down to 25. Cut again to 10. One of those that is left is the one word that describes what you do.

For example, the website of Patek Philippe, the luxury watch brand, has the word Aesthetic scrolling on its homepage.

In an interesting twist, they have the one word that they feel describes the beauty of their product in several languages.

2. ? The question pitch

If you are sure of your facts and logic, then asking a question is a powerful way to get started.

WaterAid, a charity that helps bring clean water and toilets to people who lack basic sanitary provisons around the world, simply asks Are you ready? on their website.

Then they explain their goals and how you can get involved.

3. = The rhyme pitch

A rhyme sticks in your mind.

Pink says that if you are in competition with others, coming up with a rhyme that summarises what you do will help people remember your firm and potentially give you an advantage.

4. @ The tweet

Can you summarise what you do in less than 140 characters?

Apple is a company that mastered this approach with short, snappy lines under Steve Jobs.

“1,000 songs in your pocket” and “The world’s thinnest notebook” still probably bring to mind the iPod and the Mac Air.

5. _ The subject line

Email is still where most of us live, and where we get the most junk.

To stand out, your email must do at least one of two things, and preferably both, according to Pink.

It must have utility – a clear statement of whats in it for the reader.

It must spark curiosity – a desire to learn more.

6. ” “ The story pitch

The story pitch, also called the Pixar pitch, says that every Pixar pitch has the same formula:

  • Once upon a time…
  • Evey day…
  • One day …
  • Because of that, …
  • Because of that, …
  • Until finally, …

Pink’s site has a few videos that also explain these in more detail – and the book is a pretty good read as well.

The next time you’re stuck for a way to craft your pitch, just look down at your keyboard and remember the six new options you now have.

!?=@_” “