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Green may well be 'in' but carriers are still governed principally by financial concerns.
August 11, 2008
Money Talks When Going Green
Green may well be ‘in’ but carriers are still governed principally by financial concerns.
As environmental issues weigh on the public conscience and pocketbooks, telcos and their suppliers are debating their proper role. Going green must serve the overriding goal of making money for their shareholders. As such, three realities should drive action. First, energy – electricity, mainly – has significant direct costs for telcos, and these costs are rising, in some cases dramatically. Second, environmental and energy cost concerns give rise to a number of sizable business opportunities to service providers. Third, green is “in”: credible, sustained commitments by corporations to environmentally friendly practices can pay off with public goodwill.
The ITU claims that, in 2007, ICTs contributed 2-2.5 per cent of global greenhouse gas (GHG) emissions. This figure is now cited as gospel by organisations such as the ITU and EICTA (the European Information & Communications Technology Industry Association), but it is just one estimate. More importantly, it is a global average, and the figure is much higher in some developed countries.
In Japan, NTT’s published CO2 emissions in 2006 were 3.8 million tons, or around three per cent of the country total, according to the US Energy Information Administration. Adding in KDDI, Softbank, and the rest of Japan’s telecom industry probably pushes this figure to between five and seven per cent. A Telstra-commissioned report, “Towards a High-Bandwidth, Low-Carbon Future”, claims that Australia’s total ICT sector accounts for 1.4 per cent of national GHG emissions, and that Telstra is responsible for 15 per cent of this total. This is on the low side among publicly available estimates.
Looking at emerging markets – where most growth is in wireless – the telecom sector’s share of total emissions varies widely. Its share depends on such factors as network penetration rates (high rates are linked to GDP growth and per capita wealth but also – all else equal – higher GHG emissions), the price and mix of fuels used in local power genera- tion (the less coal, the better), and population density. The latter point is relevant because, for instance, scattered populations imply more gasoline consumption to install and maintain networks. Further, remote off-net base stations sometimes rely on high emission diesel generators, even if biofuel or solar alternatives are also now used when economically viable.
Based upon data from Japan, Australia, the US, and a few emerging markets, the telecom sector alone seems to be responsible for about one per cent of global greenhouse gas emissions. By contrast, telecom service provider revenues account for roughly three per cent of global GDP, making telecom among the less energy-intensive sectors in the global economy. The joint WWF-ETNO (European Telecommunications Network Operators Association) report, “Saving the climate @ the speed of light,” summarises the telecoms industry’s capacity to mitigate climate change as falling into three categories:
Directly: Reduction of internal energy consumption through next generation networks (NGNs), office consolidation, less internal waste, better data centre designs, low-power radio transmitters, etc.
Indirectly: The use of telecom services to accomplish tasks otherwise requiring more energy. Video-conferencing, audioconferencing, desktop web conferencing, and telecommuting/flexi-work are by far the most significant factors here. Telecommuting reduces both travel costs and, over time, reduces total demand for office space, which costs energy to produce and maintain (presumably more than the home office alternative, otherwise this only reduces transportation-related emissions). The shift of all sorts of transactions online, including customer billing, is another factor.
Systematically: New habits, social structures, and consumption patterns arise through the use of telecom networks. For instance, the use of mobile phones, traffic webcams can reduce commute times and hence carbon emissions. The ETNO report’s goals for 2010 focused on the low hanging fruit, given the short time frame to reduce Europe’s CO2 emissions by 50 million tons by 2010, it set the following targets:
Virtual meetings: Reduce emissions by 24 million tons. This is achievable, ETNO states, if half of the EU-25 employees replace one in-person meeting with one audio-conference call each year (2.13 million tons); and if 20 per cent of business travel in EU-25 countries is replaced with videoconferencing.
Telecommuting: A reduction of 22 million tons per year could be made if ten per cent of EU-25 employees migrate to flexiworking; working at home part-time, for example.
Dematerialisation: Four million tons year could be saved through online billing, virtual answering machines, web-based taxation, e-government – essentially, moving physical transactions to the online world. When put in context, this 50-million-ton impact spread across 25 EU countries is tiny. The figure is just a bit more, to illustrate, than the total 2006 emissions output of Ireland, which has a population of less than five million. Meeting the ETNO targets seem fairly easy, though, and may foreshadow a large number of additional emissions reductions to come, both in Europe and beyond. However, the ETNO report – along with a surprising number of other climate change reports – ignores the costs of meeting targets. Instead it implicitly assumes the net reduction is worth doing.
The economist Geoffrey Heal argues that, while the science and reality of global warming are accepted now, there remain uncertainties about the level of warming, its rapidity, its impact on social and economic activity, and reasonable discount rates (to adjust future costs and benefits to current values). Global warming’s complexity doesn’t argue for doing nothing, but reasonable people do differ on policy solutions. To arrive at any consensus for climate change mitigation moves, whether in the public arena or within a corporation, the costs and benefits of competing alternatives must be clearly laid out, error bars must be estimated, and the unquantifiable issues also should be addressed. This at least ensures that decisions are made with eyes open.
Many of the industry’s climate change studies fail to consider climate change mitigation measures in any systematic way. For a tangible risk of such thinking, consider the recent, dramatic increases in the price of such food commodities as corn and rice. One cause of this rise is the increased use of biofuels, in particular corn for ethanol production. Regarding the ETNO’s three mitigation targets, though, there is good news. For service providers, the three targets lack much downside: the first reduces your energy bill, the second links you more tightly to your customer, and the third increases your role in the broader economy. The start-up costs of all three are relatively modest, even if the cultural changes required for a smooth transition are substantial.
The individual firms that form the telecom sector have responsibilities to their shareholders as well as to the environment, however. And with this in mind carriers need to have a commercial approach to these issues. They need to work out how they can reduce their power bills or slow their rates of growth, how they can leverage their customers’ need to reduce energy bills and demonstrate their own environmental concerns in order to grow revenues and how they can leverage public concern with the environment to improve their brand image.
Network operators generate the vast majority of their emissions through powering the network. Ovum estimates that power currently accounts for between two and three per cent of total telecom opex globally, and is trending upwards. This range is rough but is supported by a number of datapoints. For context, the midpoint of this range (2.5 per cent) would equate to around $8bn of opex in EMEA for 2007, or $6bn in Asia-Pacific. Compared to fixed players, wireless carriers have relatively high electricity costs and they will place power consumption as a key criterion in evaluating radio access network infrastructure. For operators in emerging markets, power’s contribution to opex is likely to be above average.
Though, power is often relatively cheaper in emerging markets than in Western Europe, Japan, and the US. As an example, Argentina’s average industrial electric price was 3.3 US cents in 2004 (most recent year available from the US EIA), versus 6.1 US cents for the richer Australia. Lighter regulation, fewer taxes, and the occasional subsidy support this sort of price gap. Hence, the idea that power costs would be a bigger burden in emerging markets is counterintuitive, and requires some explanation. What’s important is that the gap in power prices between, say, India and Japan, is far smaller than the difference in such input costs as labour and land. Unit power costs may be half the price, but labour costs may be one-tenth. What explains this? The cost of producing power is determined only minimally by inputs whose costs vary much from country to country. The main cost elements are firstly the generation technology, the cost of which is determined largely by world markets, and secondly the fuel.
The cost of input fuel varies by country, but not dramatically so for those fuel types that are easily tradable and transportable on world markets (coal, in particular). Further, for fossil fuel-generated power (coal, oil, natural gas), almost all of power’s marginal cost is fuel related. Only a very small portion stems from operations and maintenance items, which do vary significantly by country. The impact, again, is that emerging market carriers often spend more (as a percentage of opex) on power than their developed market counterparts. The exception is in those unusual locations with large supplies of un-tradable (or hard to trade) fuel (wind, thermal, hydroelectric, for example). That emerging markets have not yet addressed power costs is due to a mix of government ownership (of both telcos and power companies, often), and more rapid growth obscuring the need for cost control.
Furthermore, much of the growth in emerging markets is happening in rural or semi-urban regions, where kWh rates are sometimes higher, especially when power is self-generated. Wireless growth in such regions is dominant. Anecdotally, power is a much bigger issue at the margin in mobile networks than fixed. Nokia-Siemens estimates that, for a rural base station in an emerging country, 30 per cent of the site’s total cost of operations (TCO) is for power usage (opex), and an additional five per cent of TCO is for capex on power equipment. Base stations do make up a large part of a wireless carriers’ TCO, so this 30 per cent figure is significant.
There are likely some countries where power is upwards of ten per cent of a telco’s opex. On average globally, the figure is lower – but the power issue will be harder to manage as rural wireless penetration rises. Power costs are also at risk of rising dramatically if major technological advances in routing/switching technology fail to appear. So, while power opex appears small now, it deserves serious attention or it will hamper profit growth as traffic and subscribers grow in the coming years. Nearly all evidence points to power’s share of opex trending significantly upwards in the absence of major carrier initiatives to reduce these costs.
If improvements in efficiency help to bring down costs, they can also be used in carriers’ branding and image management. CSR (corporate social responsibility) is a popular buzzword nowadays, and companies – especially those that sell directly to consumers – are actively marketing their CSR credentials. This involves activities such as CSR self-appraisals in annual/quarterly reports; lobbying for CSR awards given out by magazines and industry associations; speaking at industry events about their CSR policies; and issuing press releases calling attention to such things as charitable donations. Increasingly, a corporation’s environmental policies are playing a big role in CSR evaluations, and more broadly in the public’s image of the company, and hence the value of its brand.
But this is not just a feel-good issue. A recent Ipsos-conducted global survey of environmental attitudes revealed the following:
More than 50 per cent of consumers are more likely to buy from companies with good environmental reputations.
80 per cent prefer working for such an organisation.
21 per cent of respondents see travel reduction policies as the most effective means of reducing their company’s carbon footprint.
18 per cent believe telecommuting programs are a good environmental initiative.
In most developed countries, environmentalism has become a key public policy issue, and emissions-driven climate change has become a real public concern. These no longer seem like controversial assertions. Of course, even within political parties in a specific country, there is little consensus about what specifically must be done. However, corporate action that seems driven at lowering GHG emissions – even if the impact is small-is popular with the public. Inaction or lack of concern for the issue, on the other hand, can hurt a company when it becomes common knowledge. Given all this, what should a carrier do?
Become a global leader: BT, NTT, and a small number of other carriers have been in the forefront globally on energy and environmental discussions. They address climate change in conferences, investor reports, and participate in public and private groups aimed at furthering discussion and finding solutions. NTT Labs’ Hiromichi Shinohara, for example, and KDDI’s Yutaka Yasuda both presented detailed overviews of their GHGreduction programs at a recent ITU event in Kyoto. Swisscom and Vodafone publish detailed self-assessments of their environmental efforts in investor reports. This sort of activity brings proponents positive exposure, of course, but it also stimulates competitors and other industry peers to do the same. In the US, coincident with 2008 Earth Day, Verizon Wireless announced that it had installed 1E WakeUp software on 63,000 PCs company-wide, resulting in a (claimed) $1.3 million lower energy bill. Verizon Wireless also announced the use of a thin client solution at 17 of its call centres which further reduces power consumption.
Elsewhere, China Mobile recently announced a goal to reduce energy consumption per unit of traffic by 40 per cent between 2005 and 2010. To do this, China Mobile spelled out seven tactics: (1) standardising buildings, equipment, and site design to optimise land, material and energy usage; (2) upgrading existing 2G infrastructure to more efficient 3G and IP; (3) establishing green packaging standards; (4) working with equipment providers to improve energy efficiency; (5) implementing energy-saving initiatives for auxillary equipment; (6) promoting the use of electronic services by its suppliers; and (7) promoting better waste management and the use of renewable energy. All these measures are small and aimed at reducing opex, not saving the world, but they help.
Minimise truck rolls: Roll out your networks, and keep them up and running, with an eye towards energy efficiency in transport. Telco vehicles are high profile and can contribute to public perceptions of your “greenness.” Using low-emissions vehicles to do necessary truck rolls may be worthwhile; NTT, for one, does this widely. Even if they cost more, they represent good marketing sense and may be worth the premium.
Pursue online billing, advertising, and other dematerialization efforts: Moving those aspects of a telco’s business that historically were physical to the virtual world is another plus. Online billing is an example, as is advertising. In general, telcos are already leaders in this space, but they can always do more.
Publish carbon impact:Measuring the net GHG emissions of a large corporation is complex and the results uncertain. For a telco that may be global in scope, and relies at least somewhat on outsourcing for part of its operations, the complexity rises. Yet, making an effort to estimate on a quarterly or annual basis shows commitment to climate change mitigation, as does publishing targets in advance.
Facilitate telecommuting and remote working: In the previous section, we addressed a number of revenue opportunities in this area. As large employers, telcos should also “walk the walk” on this point and encourage their own employees to work remotely.
Most telcso rely heavily on engineers for work operations and planning. Why not bring in some unconventional design principles into the mix? Few telcos are doing much large-scale new building construction. However, improving the efficiency and “sustainability” of existing network and operational facilities could be enhanced by new thinking. As one example, William McDonough’s “Cradle to Cradle” philosophy has been incorporated into the design of a number of high-profile commercial buildings (the Gap, Nike), the re-engineering of existing commercial buildings, and even a major revamp of a heavily polluting Ford plant. Living roofs, eco-friendly fabrics, water-based paints, self-heating/cooling buildings, and other elements of his projects could be attractive. This kind of approach could bring telcos positive visibility and credibility.
Based in Asia since 2001, Matt Walker is a senior analyst in Ovum’s Network Infrastructure practice.
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