Rising energy costs will present UK businesses with critical challenges in the next four or five years.
Several influential studies published since 2010 have warned that UK road fuel prices could surge to record levels. At the moment it would seem that this trend has been reversed but my feeling is that this will only be a temporary blip. The long term will see rises again and when they do this will severely affect fleet operators – whose leeway for dealing with structurally higher fuel prices is already rapidly dwindling.
Businesses are no longer able to count on continual improvements in vehicle fuel efficiency to keep themselves ahead of rising fuel costs. That trend has now run its course.
Although cars’ fuel efficiency, as reflected by the average CO2 rating of fleet registrations, is still improving steadily,the cost of fuelling them will no longer continue to fall.
Carbon is the key element in this equation. Fuel prices, the tax regime and vehicle mileage all determine how much fleets pay for carbon. In turn, mileage levels influence other variable costs such as depreciation, wear and tear and accident damage. Cutting these ‘carbon costs’ does not require you to make expensive and uncertain investments in ultra-low-carbon cars. You can reduce them very effectively by controlling your fleet’s fuel and mileage bills.
Cutting CO2 by 5% per year for the next five years would save UK fleets £450 million at the pumps (despite the prediction that fuel prices will rise again), eliminate up to 13 million discretionary miles of car travel and prevent 4 billion tonnes of CO2 emissions.
The message is clear; businesses can no longer rely on more efficient cars alone to offset the rising cost of fuel. To avoid having to allocate substantially larger fleet fuel budgets in the next few years, organisations need to take action to reduce their fuel and mileage expenses.
If you set a business goal to reduce carbon emissions from vehicles, your organisation will have to find ways to consume less road fuel. If the volume you buy goes down faster than prices go up, your fleet’s overall fuel bill will get smaller.
The benefits of cutting CO2 emissions do not stop there. In order to emit less CO2 your drivers will have to drive more efficiently and avoid making unnecessary journeys. This calls for better driving standards and business decisions, which, in turn, reduce wear and tear on vehicles and lessen the risks of accidents.
On top of fuel and mileage savings, introducing an annual CO2 reduction target will also directly improve your fleet’s tax efficiency by encouraging user choosers to select more fuel-efficient cars. This will reduce their benefit-in-kind bills, since BIK is determined by CO2. More importantly from a business perspective, it also will cut your business’s Class 1A National Insurance contributions.
Savings don’t happen by themselves. Since 2005, the average CO2 rating of new cars registered by fleets and businesses has fallen by 2.7% per year while fuel prices have risen on average by 2.9% a year, allowing for inflation. As a result, most fleets have not seen their fuel costs go down.
Which is the more important measurement, the efficiency of your vehicles (expressed in miles per gallon or g/km of CO2) or the total volume of fuel they use? The answer depends on the amount of discretionary mileage the driver covers. If they have little scope to reduce their business mileage, then fuel efficiency is what matters because you want them to use as little as possible to cover each business mile. Where drivers have reasonable discretion over their total mileage, it’s the total volume of fuel that matters. Indeed, giving more efficient cars to such drivers often leads them to clock up more miles, because fuel no longer seems so expensive.
To save money and CO2, you want these drivers to use less fuel. Driving frugally and choosing efficient cars is a good start but the fastest way for them to hit their
target is to find ways to cut down on mileage.
CO2 reduction step-by-step
- Voluntary or compulsory?
Think carefully about whether to make the scheme voluntary or compulsory. Some company cultures favour the compulsory approach while others most certainly don’t. If you make participation voluntary, consider offering drivers an incentive to take part.
- Establish the baseline
To establish the scheme’s starting point, you need to know the total amount of CO2 emitted by each vehicle over the previous year. The figure is calculated from the volume of fuel used. The ESOS Reporting System available through TMC
Mileage Audit calculates each driver’s baseline emissions from historical fuel card data.
- Set the target
Most companies set a target of 3% to 5% per year. This is high enough to deliver significant savings relatively quickly – a 19% cut in annual fuel volume after five years – without overstretching drivers or adversely affecting service delivery.
- Communicate to drivers
Communication is the key to the success of the programme. Explain why the business has to cut CO2 emissions (to combat rising costs, maintain profitability, safeguard jobs and protect the environment). Offer tips on how drivers can go about cutting their CO2 emissions, including advice about fuel-efficient driving techniques; using alternatives to driving, such as teleconferencing or sharing lifts to
meetings, and the benefits of choosing low CO2 replacement cars when the time comes. For example, by ordering a 125g/km car instead of a 150g/km model, a driver would achieve three years-worth of 5% emissions reductions in one go and cut his or her company car tax by one third as well.
- The business mileage question
At this stage, you need to decide whether to apply the programme to all mileage or only to business mileage. To begin with, it is often best to work the total annual CO2 emissions from all journeys. It’s true that the primary financial interest of the business is in the cost of travel for work, because it pays for it, but counting private as well as work mileage – at least to start with – simplifies the process and gives drivers more room to make savings. CO2, of course, has the same impact on the atmosphere irrespective of why it was emitted.
- Run the programme
To help drivers manage their fuel use, TMC provides a quarterly report for each individual, telling them how much CO2 they emitted last year; their target in the current year and their emissions to date. TMC’s management reports enable the business to track the progress of the programme and produce their own updates on projected reductions in fuel costs and emissions.
- Refresh and review
Behavioural change needs to be encouraged and reinforced. Ensure that the scheme receives plenty of publicity within the company to keep it fresh in people’s minds. Highlight successful drivers and winners of incentives. Try to translate the value of CO2 savings into measurements that employees and managers will identify with – e.g. “it’s saved the company enough to pay for four full-time heads.” TMC can help with communications ideas and with producing supporting materials.
Keep the reduction target under review. A 5% target will achieve dramatic results at first but the resulting boost to your fleet’s efficiency will make future savings proportionally harder to deliver. Smaller annual reductions of 2% or 3% may be more realistic after the first few years.
Summary and conclusion
- Fuel costs will continue to challenge fleet budgets.
- Future pump price rises will outstrip improvements in fuel economy.
- Total CO2 emissions (calculated from mileage and fuel card data) are a precise measure of fleet activity and efficiency.
- Mileage is the primary driver of CO2 emissions, followed by vehicle fuel economy.
- Drivers have three options for reducing their annual CO2 emissions: Covering fewer miles; Driving more efficiently; Choosing low-CO2 cars. Each option will reduce fuel costs and help to protect the environment, with mileage reduction delivering the largest and most rapid benefit.
- CO2 reduction is neither difficult nor costly to implement, yet it offers fleet operators a highly effective as well as fully sustainable way to mitigate the effects of higher fuel prices in future.
TMC is Europe’s leading Mileage Audit and Fuel Management specialist. We provide online, automated systems that cut costs by ensuring company car and grey fleet drivers record their business and private mileages accurately. Our solutions also reduce administration costs, support compliance with Occupational Road Risk requirements and are recognised by HMRC.
TMC can help you cut your fleet mileage bill down to size. We deliver savings painlessly and quickly, with low impact on resources and infrastructure. We are flexible, nimble and willing to enhance our process and solutions to help you
achieve your goals. Discover the difference TMC could make to your company: call me on +44 (0) 843 222 6000 to find out more.
International Sales Director at The Miles Consultancy Limited