3 risks that determine energy costs

Peter Garforth asks are you looking forward or backward when managing energy risks.

By Peter Garforth

Most organizations are still using a rearview mirror to manage energy risks, when increasingly they should be reaching for the crystal ball. The true cost of energy in a plant comes from three main areas of risk. The first and most obvious risk is the energy operating cost, itself a combination of energy unit price and efficiency. The second is the cost of production disturbances through energy supply interruptions or poor supply quality. The third is the impact on operating costs to comply with energy-related environmental legislation, or even the actual cost to manage environmental impacts.

On costs, the backward-looking version assumes modest, predictable price increases, where any volatility is short-lived. This is the backdrop against which efficiency investments are judged, resulting in the majority failing the attractiveness test. On supply quality, the past experience of reliable, predictable supply with minimal interruptions is so much part of the decision making, that the possibility that this might change is rarely even considered, along with the possible investments that could mitigate supply disturbance.

Clearly, on environmental legislation, the possible game changer is around climate change, and in North America the rearward view assessment is that this will be forever stalled in lawmaking debate. Mitigating the actual risks from climate change itself in the form of more frequent and severe weather events, with possible disturbances to suppliers, customers and the site itself are rarely factored. Both these aspects of environmental risk are also highly colored by the views of decision makers around the validity of human-induced climate change.

The rearview mirror version results in energy management that incrementally, but modestly, improves efficiency, resists new technology that could create deep energy gains, and rarely has resilience to unexpected price, supply or legislative shocks.

If we now reach for the crystal ball, the future energy world now looks increasingly uncertain. The events of the past few months in North Africa, the Middle East and Japan have further clouded the picture.

The events in Japan at the Fukushima Dai-Ichi reactor are an interesting crossover between energy growth, cost and climate change. As much of the world saw a need for low-carbon energy at a time when China, India, Brazil and others were growing fast, nuclear power was in resurgence as the only viable approach. This is now being reconsidered, delayed or halted with the long-term outcome highly uncertain. A rethinking of the nuclear area will inevitably position natural gas as the next lower-carbon fuel of choice on the strategic list. Can any of us predict the impact of a strategic rethink like this on price and availability of both electricity and natural gas?

The backward-looking version assumes modest, predictable price increases, where volatility is short-lived.

The events in North Africa and the Middle East also are potential game changers, and, as is so often the case with energy, not unrelated. Much of the world’s proven reserves of natural gas are in these regions. If the world market shifts to natural gas as a fuel of choice for electricity, will these resources be available as a result of the social and political upheavals and even the physical damage to infrastructure.

The continuing concerns over climate change are somewhat muted in the United States at present, but still very loud on a worldwide basis. The speed and scale of installation of renewable sources is growing rapidly, driving down prices, increasing reliability and accelerating the development of grid technology to manage these sources. As they become mainstream, what does this do for their potential inclusion in a plant’s operating considerations? It doesn’t take a wizard to see this is a part of the puzzle on rethinking the role of nuclear power, as well.

Some customers increasingly demand evidence of good sustainability practices from their suppliers, many of which relate directly to energy management, another factor unknown from the rearview mirror. As covered in a recent column, the grid in North America is showing signs of stress in terms of power sags and unforced outages. Is this fully factored into possible energy-related risks? This may well change the view of investment in local generation or cogeneration options. Efficiency and demand management also are taking on a whole new value for grids, with higher willingness of both grid operators and public authorities to monetize these in various ways.

With even a minimal awareness of world events and energy, it’s easy to see that the crystal ball view is the more appropriate. Have we collectively moved our energy investment habits to take into account not only the incremental benefits of good energy housekeeping, but also the multiple backup plans needed as the future uncertainty plays out? It’s still the minority who are using the crystal ball, with most staring resolutely into the future using the rearview mirror.

Peter Garforth is principal of Garforth International, Toledo, Ohio. He can be reached at peter@garforthint.com.

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