As we enter the second month of 2012, it seems appropriate to take a look in the energy rearview mirror, as well as a look forward, through the eyes of the energy manager. As I’ve often said, good industrial energy management addresses the short-term effects and the long-term risks of three major aspects of energy use — supply reliability and quality; cost;, and environmental impact.
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The picture is mixed on supply reliability. From the primary fossil fuel side, global discoveries of natural gas reserves have eased supply concerns. Economic slowdown is taking the pressure off of oil reserves, and coal remains plentiful. However, 2011 closed with ongoing uncertainty about major oil exporting countries in the Middle East, and specifically with Iran over closing the Straits of Hormuz.
Policy and technology are changing the face of renewable energy supply on a global level. Concerns over political risk, nuclear generation, and climate change made 2011 a bumper year for installations of wind, solar, and bio-energy worldwide. Installations are being measured in hundreds of GigaWatts annually with double-digit growth rates in multi-billion dollar businesses. This increased demand is redefining the sector, in most cases reducing cost and improving technology at a rapid rate. Some sources predict grid parity for solar by as early as 2016.
At the same time, 2011 saw unprecedented levels of extreme weather causing major reliability issues in energy distribution. The U.S. electricity grid experienced its highest number of weather-related incidents with record levels of insurance and other costs, a pattern also seen in many other parts of the world. Signals point to more frequent and more intense weather events far into the future, making supply reliability uncertain at best.
For the energy manager, these factors combine to make one’s job more complex. The potential site risks need to be understood and mitigated rigorously, and the downside supply risks are growing. However, on the upside, more mitigation tools are available at ever lower costs.[pullquote]
From an energy cost standpoint, the ready availability of fossil fuels and a slowing economy in 2011 provided for some of the lowest fuel costs in recent history. In the United States, natural gas remained at the lowest prices ever, and oil bounced around near $100 per barrel. These lower energy costs increase the energy manager’s challenge, as they always divert investment and attention from efficiency and supply investments. However, failing to invest in those areas exposes a business to risks that could blow up quickly and be highly disruptive. Keep in mind, the wide range of uncertainties seen at the end of 2011 could easily combine to disrupt this low-cost picture in the coming year and beyond. Unfortunately, overcoming the current sense of cost complacency might be more difficult than in the recent past, a factor I see in some projects.
From an environmental standpoint, I’ve always strived to stay neutral on the climate change debate and instead focus on how legislation and other associated costs from this could affect business. In 2011, the pattern of accelerating incidents of extreme weather continued. Globally, there were more than 32 events that caused more than a billion dollars of damage each. In the United States alone, there were 17 multi-billion dollar events. The year-on-year pattern of increased positive temperature anomalies continued in 2011, making the last decade the warmest on record. The scientific consensus continues to attribute much of these changing patterns to human causes, largely from the use of fossil fuels. Growing concerns over the accelerating weather changes were a major factor in the agreement reached at Durban at the close of 2011. This agreement obliges countries to negotiate in good faith to develop a binding international agreement within the next four years.
2011 saw California continue to enact laws meant to reduce carbon emissions. New EPA regulations that came into effect affect older power plants. The political debate over climate change legislation remains deeply polarized. To the surprise of many, Canada added to this at the end of 2011 by withdrawing from the Kyoto agreement. At the other end of the debate, 2011 saw China accepting absolute carbon caps for the first time, and the EU continuing to decarbonize its economy despite a challenging economic picture, led by aggressive policy from Germany.
The energy manager’s challenge, especially in North America, remains the enormous regulatory uncertainty, which 2011 did little to dispel. As we’ve discussed so many times, gaining approval for investments and focusing attention on measures to reduce greenhouse gas emissions remains one of the most challenging tasks for an energy manager. That being said, the climate risks remain and keeping this on management’s radar screen is firmly in the energy managers’ job description, irrespective of personal opinions about the causes of climate change.
Many parts of the energy equation moved dramatically in 2011. The year closed with firm indications that many of these changes would accelerate through 2012 and beyond. The energy manager’s job has become far more complex managing multiple, often conflicting, uncertainties. Their crucial role to business remains all too often undervalued, sometimes causing significant frustration. However, the constant evolution of the energy sector is increasingly making this one of the most rewarding and stimulating jobs in the company.
Peter Garforth is principal of Garforth International in Toledo, Ohio. He can be reached at [email protected].