Energy expenses can affect company policy

Plant Services' Energy Expert Peter Garforth explains how different companies view what is included in their energy expenses and how that affects company policy.

By Peter Garforth

In designing corporate energy productivity programs, the early decisions over what will be measured and reported are some of the most important. They can often make the difference between success and failure of the entire program. Two watchwords should be kept in mind: measurements should be appropriate and understandable at each level of the organization, starting with the CEO and the immediate management team.

Let’s just remind ourselves what energy productivity means. As with materials and labor, you need to manage the overall cost of every aspect of energy. The goal of breakthrough energy management is to ensure these costs are always significantly and consistently less than the competition’s. Thus, the first challenge is to establish both a baseline for energy costs and a method to systematically capture it going forward.

The crucial first decision is what is, or is not, included in energy costs. At first sight, this seems a no-brainer. Surely, energy costs are simply the total of the invoices for electricity, natural gas and fuel oil? This is the obvious starting point, but on closer examination, these are much less than the true cost of energy to the business. For example, at major glassmakers like Owens Corning, a large amount of oxygen is used in the melting process. Many industrial combustion processes use nitrogen, helium, oxygen and other combustion gases. A decision to include these or not is needed.

Should water and wastewater costs be included? To a first approximation, more than 70% of the cost of potable water and substantial portion of the cost of wastewater service can be attributed to energy. From a management perspective, managing “water productivity” requires similar approaches to managing energy productivity. Many companies decide to include water and wastewater costs within the scope of energy management.

Depending on where the company operates, opportunities exist for obtaining public-interest credits for increasing energy efficiency, reducing greenhouse gas and other energy-related emissions, and for using more energy from renewable or cogenerated sources. These can be outright grants or various forms of “green” certificates that can be traded in some way. Should the costs to obtain these credits, and the value of the credits, be included on the overall energy costs?

Another energy cost too often isn’t even on the radar screen, yet has enormous potential for productivity gains. Purchased raw material costs include the cost of the energy used to make them. The same can be said of services like transportation. Market-leading companies like Toyota, BASF and others are becoming aware of the size of this indirect energy cost, often referred to as embedded energy. They’re taking steps to quantify it and work with suppliers to reduce it. Should this be included in designing an energy management process?

In a similar way, if the company is selling material to customers that process it further, the customers’ energy costs can have a direct impact on profitability. If the customer’s process is energy-intensive and inefficient, rising energy costs will increase the pressure put on suppliers to deepen discounts.

These aren’t easy costs to include in an energy program, and it’s a major shift in thinking for most companies. But companies that recognize embedded energy will team with suppliers and customers to optimize energy productivity in the entire value chain. This enhances supplier and customer intimacy and understanding, bringing benefits beyond energy. Under intense pressure from rising energy costs, global competition and overcapacity, the automobile industry is already attempting to manage energy costs up and down the value chain.

Each company makes its own decisions as to what is, and is not, included in the cost of energy. As an example, I’m currently advising a major manufacturing company that has a high-level team developing a global energy productivity program. They’ve decided that, for the initial three to five years, “energy” includes natural gas, electricity, combustion gases, gasoline, water, wastewater, green energy certificates and public interest grants. The opportunity from embedded energy will be tackled in a second, future phase.

The overall corporate goal for energy productivity will typically be expressed as a percentage of total energy cost relative to both total sales and total cost-of-goods-sold. This will initially be established against a baseline year, and updated year-on-year as a part of the normal planning processes. This is the crucial first-headline energy productivity goal that the CEO will own, communicate, track and reward. In a future column, I’ll explore how this goal gets translated into concrete goals, measurements and actions throughout the company.

Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at garforth@cs.com.
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