The problem with renewable energy

The pending climate legislation in both the United States and Europe will be challenging. The United States plans to reduce carbon emissions to 80% below 2005 levels by 2050. Europe’s reduction will be as much as 30% below 1990 levels by 2020. China’s commitment is uncertain, but there is evidence that they will propose standards to curtail the growth of emissions. Efficiency must play a huge role and remain the priority focus, but renewable sources of heat and electricity will be crucial to hit these targets.

Why does it seem to be so difficult to incorporate renewable energy into manufacturing? With notable exceptions (such as Wal-Mart, whose goal is 100% renewables), few companies have clear renewable targets. Even fewer use renewables for a significant portion of their energy. Many have a token solar array on a factory roof or a windmill on the site. These make for good promotional material but are basically irrelevant to the economics of the business. This is changing, but exploring the potential of renewable energy often raises more questions than answers.

It’s impossible to ignore energy pricing structures. Today, a main rationale for renewables is reducing carbon footprints by avoiding high-carbon electricity or fossil-based fuels. This fends off future economic and compliance risks. So far so good, except that in the United States, energy prices have no cost for carbon, hence no economic benefit to reduce it. Reality is even more perverse: areas with carbon-intensive electricity such as Indiana frequently have lower costs than areas with less carbon intensity like Oregon or California.

So the first barrier is how to value the carbon reduction of using a renewable source. Some use benchmark pricing from the EU’s cap-and-trade market, the ETS, in various risk and performance scenarios. Others make carbon reduction a non-negotiable operating target, in effect making an internal compliance regime. Some dilute the investment hurdle based on estimates of future carbon pricing, either as a cost of purchased energy or as a tradable credit from renewable sources. There’s no right answer, but one thing is certain: if the financial or career value attached to carbon reduction is zero, then most projects will fall at the first fence.

At both state and federal levels, you’ll find a jumble of incentives for closing the carbon value gap through tax and grant subsidies. Most are at the state level, with differing definitions of “renewable” and with capped programs that discourage long-term planning. All are vulnerable to abrupt policy changes.

Europe struggled with a similar patchwork, but recently homed in on the “Feed-in Tariff” (FIT) approach, which guarantees a long-term, predictable tariff structure for renewable electricity supplied to the grid. Incidentally the German solar FIT is filling many U.S. panel factories.

These FITs are real money that can be used for investment calculation. The simplicity and effectiveness of this approach is attracting attention in North America, with Ontario being one of the first to incorporate it in the new Green Energy Act. Companies should consider their lobbying positions relative to FITs, and in the meantime, try to be as informed as possible on the current patchwork of incentives. FITs deal well with the mismatch between the factory’s actual demand and the availability of renewable energy by season or time of day.

It’s important to think about market structure. For decades, companies let others deal with the investment risks, politics, environmental issues and complexity of supplying energy. They bought what was needed at the boundary fence, and didn’t worry too much about it as long as the price was right and it was always available. In reality, it was never this way. Factory sites have boilers, furnaces, emergency generators, compressors and distribution networks for electricity, heat, cooling, steam, gas and compressed air; in fact, a complex multi-utility.

A few companies recognized this and became expert in multi-utility management where optimization of cost, reliability and environment was a way of life. The “Verbund” of BASF and the “ECO-Factory” of Toyota are examples of this practice. These are exceptions to the general rule whereby investments in energy systems are treated as standalone projects rather parts of the ongoing optimization of a multi-utility.

Companies with this integrated view of their energy systems have less difficulty introducing efficiency, new operating approaches and cleaner or renewable energy. Each investment is a contribution to a portfolio that collectively produces a high-performance energy system built on continuous improvement. The bottom line is this: if there’s no long-term integrated energy planning, it will be harder to integrate renewables.

These are some of the reason why it’s hard to deploy renewables. Next month we’ll explore how to make it easy.

Peter Garforth is principal of Garforth International LLC, Toledo, Ohio. He can be reached at [email protected].