Rising Energy Costs: Taking Control through Energy Efficiency

By Christopher Russell
Christopher Russell is the principal of Energy Pathfinder Management Consulting LLC in Baltimore. Visit www.energypathfinder.com for more information.

One of industry’s biggest – and most misunderstood – business opportunities is the recovery of income lost to energy waste. Energy market turmoil through 2006 makes the benefits of energy efficiency more valuable than ever as a way to control energy costs. However, many people in industry dismiss “energy efficiency” without fully understanding the concept and its impacts. Additional confusion surrounds the variety of activities that provide energy efficiency. The lack of a clear management mandate and accountabilities for taking action allow organizational energy waste to continue. Unfortunately, energy waste is an inexorable drain on earnings. This waste does not wait for people to figure out how to defeat it.

Industry’s best options for reducing energy costs were summarized in a study sponsored by the U.S. Department of Energy. In total, these energy-saving opportunities represent 5.2 quadrillion BTUs – 21 percent of primary energy consumed by the manufacturing sector. These savings equate to almost $19 billion for manufacturers, based on 2004 energy prices and consumption volumes.

Perception versus reality
Misconceptionsurround not only the concept of energy efficiency, but also its anticipated impact on daily job functions. Many corporate leaders genuinely believe that their facilities are already fully efficient. This conclusion is often based on bad information, including different understandings of what constitutes “efficiency.” Some common misinterpretations include:

• installing a backup generator
• participation in a municipal recycling program
• switching fuels
• purchasing energy at the lowest available price or tariff
• purchasing energy through a non-utility marketer
• cutting back production or services to reduce energy consumption
• adopting renewable fuel sources, such as solar or wind power
• installing dual-fuel capabilities on boilers and other large energy-consuming assets

With misunderstanding comes resistance. Some plant personnel may believe that admitting the need for energy improvements is evidence of their ineffective job performance. Meanwhile, the larger and more complex an organization is, the easier it is for individuals to distort measures of their performance and to hide certain inefficiencies.

The implementation of industrial energy efficiency encounters some large hurdles. To a certain extent, industrial energy consumption reflects the operation of large, fixed assets that operate for years or even decades at a time. This includes equipment such as boilers, furnaces and air compressors. In addition to these assets, most facilities operate complex production systems that employ a wide variety of smaller equipment such as pumps, fans and motors. Compared with the larger assets, these smaller components are more easily replaced. However, the design of the overall system in which they were installed is not as easy to change. Industries typically conduct multi-year planning cycles to organize major facility upgrades and system changes. Planning cycles allow facility managers to avoid frequent disruptions to their production schedules. These cycles take years to conduct and involve a number of considerations, including energy efficiency. This partially explains why many manufacturers do not respond immediately to proposed energy improvements, even if incentives are involved.

It is common for a facility manager to assign energy cost control to one department, such as engineering or maintenance. Engineering departments tend to implement large projects to improve plant performance. A maintenance department may control energy costs by ensuring the reliable operation of existing plant equipment. But in either case, each department works with the resources available to it and within the bounds of its authority. Unfortunately, the engineering “project” approach fails to capture efficiencies derived from behaviors and procedures practiced by facility staff. At the same time, the maintenance approach does not address major equipment changes. Departmental “silos” of authority often limit the influence that engineers or maintenance directors may have over the energy consumption choices made by staff in other departments. This limits the effectiveness of facility-wide energy cost control.

Many business leaders believe that low fuel prices are the solution to energy expenses. Organizations that purchase energy in competitive markets often see energy costs as an issue for their procurement director, who is charged with securing fuel and power at the lowest prices possible. This focus ignores energy consumption decisions related to procedural changes, behavioral changes, and upgrades to more efficient and productive equipment.

Human nature also plays a role in energy waste. “That’s the way we’ve always done it” is the justification for long-entrenched work habits that become default procedures. Certain habits that save time and effort may be at the expense of excess energy consumption. These practices had little consequence when energy was cheap. However, the trade-offs between time and money change as energy prices escalate. Attempts to change these work habits can cause friction among staff. A manufacturer’s decision to make energy improvements must compete with other priorities. Procurement officers are often compelled to make equipment purchases based on the lowest cost of acquisition, not the total cost of ownership. Production deadlines may force operations personnel to make emergency repairs using whatever equipment is available, as opposed to what is optimal from a total-cost-of-ownership perspective. Energy performance considerations are usually secondary to a plant manager’s need to meet production targets.

Successful energy expense control
Large manufacturing organizations often require the coordination of many people across several departments to effectively implement energy improvements. Energy efficiency – the concept, the strategies for its implementation and its impact on business performance – must be understood throughout any industrial organization that seeks to successfully control its energy costs.

To understand how energy efficiency responds to industry needs, it is first necessary to review the methods that industry employs to manage energy consumption. A sampling of industrial energy management experience is captured in a series of case studies developed by the Alliance to Save Energy. That research reveals five basic strategies for attaining industrial energy efficiency, and every company adopts at least one of these:

Do nothing. Ignore opportunities to use energy more efficiently. Just pay the utility bill on time to avoid late fees, or press for any legislative measures that lead to more energy supplies and (hopefully) lower prices. Meanwhile, remain fully exposed to operational risks resulting from volatile energy markets, changing technology, evolving emissions regulations and lapses in the mechanical integrity of energy-consuming equipment.

Switch fuels or fuel suppliers. Shop for lower-priced fuels where possible. This strategy prevails when energy expenditures are perceived strictly as a price-driven issue. Efficiency and waste are ignored. While price shopping is a valuable pursuit, it does nothing to address energy waste and exposure to the operating risks described above.

Easy, low-tech projects. These are often referred to as “low-hanging fruit.” Little or no capital funds are needed. These tasks may involve cleaning, adjustment or repairs that correct the consequences of constantly operating equipment. Results are temporary, as continuous operations ensure that the same inefficiencies will recur. This approach is often used when time, skill and budgets are limited. If these remedies are achieved without replication or disciplined routine, the results will not be durable.

Advanced technology capital projects. This involves investments in capital assets chosen for their potential to greatly improve a facility’s productivity. These usually involve new or advanced technologies which may demand more technical competence from staff. This is the approach typically favored by organizations with a strong engineering culture, where “hardware” is valued over behavioral or procedural changes that are often perceived as “soft” or otherwise ineffective. Consulting engineers, hired to address specific problems in a limited amount of time, will usually take the “project” approach. The payback on capital projects can be compromised if the new assets are operated with poor work habits (lack of maintenance, left running when not needed, etc.).

Continuous energy improvement. This strategy combines all energy-related decisions into a daily management discipline. Energy procurement, maintenance procedures, operational behaviors and technology selection are orchestrated in a facility-wide management plan. This plan establishes energy as a cost center, subject to goals for improvement, performance measurements and staff accountabilities. The time and effort required to perform energy management are paid for through durable energy savings and enhanced productivity. Facilities have a choice between developing these competencies among in-house staff and securing an energy services company to absorb the responsibility (and risk) of energy management – either for a fee or for a percentage of the energy value saved. The results of an energy management plan are vulnerable especially to a change in facility leadership. Without realizing the full impact of such efforts, incoming managers may choose to cancel energy management as a way to save short-term costs.

The companies featured in the Alliance case studies show surprisingly varied strategies and motives for pursuing energy management. Perhaps the most obvious reason is to “control energy expenditures,” although this is far from being the only objective. Several companies sought to boost the productivity of their existing assets. Some companies put a premium on resource stewardship, both for public relations and risk management purposes. Energy benchmarking and monitoring allow companies to sustain and replicate operational improvements that would otherwise be lost over time due to staff changes. In so doing, they avoid “reinventing the wheel.”

How does energy efficiency contribute to industry needs?
The activities and technologies that provide energy efficiency also greatly contribute to the reliability of operations. Plant reliability leads to predictable fuel consumption. Greater certainty of energy needs, plus operational records that track energy consumption over time, provide an advantage to the plant manager, who can procure energy from competitive suppliers. A loss of plant reliability incurs extra costs in a number of ways. For one, the plant manager may be forced to pay overtime labor to compensate for downtime. To run these shifts, the plant manager may need to procure additional fuel on short notice. Customers tend to pay a premium for any short-notice purchase, and industrial plant managers are no exception. Energy efficiency can therefore help to reduce the average price of fuel consumed as well as the amount of fuel required.

Energy efficiency’s impacts are, in sum, consistent with the growth and preservation of shareholder wealth. In this regard, energy management bears a striking resemblance to financial planning. Decision makers must:

• identify goals
• select the investments needed to reach the goals
• establish a blueprint and strategy for goal attainment
• start early, if only with small efforts
• maintain regular contributions over time
• keep track of earnings
• defeat risk through reinvestment and diversification of earnings

Here, “diversification” means expanding beyond one-time energy projects to make energy management part of standard operating procedures throughout the organization. The financial and energy planning analogies share the same result: the growth and preservation of wealth.