Energy versus economics

Nov. 11, 2008
Energy Expert Peter Garforth says hard times and lower oil prices poise to test our resolve.

With present headlines, it’s hard not to wonder how global economic stresses will affect industry’s attitudes about energy productivity. The economic crisis caused the price of oil to drop from all-time highs around $150 a barrel to less than $66 at press time. Is this a cue to stop worrying about energy costs and energy productivity? Managers thinking this way probably are risking the competitiveness and even survival of their companies. Countries thinking this way are likely to be on the wrong side of history.

Spot prices of oil are a poor indicator of underlying trends in overall energy costs. When we look at the main fuels driving industry, coal and natural gas, we see very moderate short-term reductions, with the inexorable underlying rising trend continuing. Most good energy-management programs take two years to three years to gain traction, and at least five years to become an irreversible part of an organization’s culture. It would be a foolhardy manager who neglects systemic energy productivity because of short-term energy prices.

Clearly, short-term pressures will change the prioritization of energy productivity measures. Good energy-management programs have at least four dimensions: improved procurement, low-cost/no-cost efficiency measures, investment-based efficiency measures, and investment in fundamentally new process technology. Realigning the timing of these based on immediate market conditions might be prudent, but abandoning them will end in tears.

A focus on improved procurement and low-cost/no-cost measures has the double advantage of requiring less immediate investment while delivering short-term cost savings. These also demand a high degree of employee engagement, sending the clear signal that management isn’t jeopardizing the long-term competitiveness of the company in the face of short-term challenges.

Where energy investments are concerned, if cash positions permit, some contrarian investment in energy productivity might well make sense. If we assume that all downturns have a bottom, the companies that are the most productive as markets rise benefit the most. If, as is most likely, energy prices also rise significantly as global business activity picks up, enhanced energy productivity will be a further key competitive differentiation.

What about climate change regulation? Will the economic crisis push this back into the shade? It was interesting to watch the dynamics of this discussion in Europe. As the EU put together its well-coordinated response to the economic crisis, there was some talk about whether the aggressive greenhouse gas reductions of the Union should be diluted. The conclusion, admittedly with some diplomatic smoke and mirrors, was that the further 20% reduction on 1990 levels by 2020 would be maintained and that final target agreements for member states would be reached in December.

In the United States, both candidates for the presidency support greenhouse gas regulation, and seem set on having legislation in force by 2012 at the latest. In different ways, both candidates see opportunity for economic revival coming from the new jobs that arise from serving the national and global need for more products that reduce energy use and greenhouse gas emissions. A kind interpretation could see the inclusion of renewable energy tax credits in the recent $700 billion rescue package as having some basis in strategy rather than pure pork.

If this is the case, the climate legislation will start affecting industry almost immediately. Baseline emissions will need to be registered, advance emissions credits markets will be established, and electricity and fossil fuel suppliers will start pricing to meet the new realities. With this as a backdrop, a company that is a large energy user, or has processes that generate large amounts of additional greenhouse gases, would be wise to intensify their energy and climate-management programs, with or without a background economic crisis.

I recently had the good fortune to be a participant at both the Energy Star Industrial Focus meetings and the World Energy Engineering Congress in Washington, D.C. This is a gathering of thousands of energy professionals and senior managers from the United States and elsewhere. It was reassuring to see a consensus that the need for energy productivity is greater rather than lesser in the light of the mounting economic clouds.

It’s hard for the United States to ignore the cost of energy. We spend  $1.5 to $2.0 trillion every year on energy, and at average productivity levels, this is 30% to 40% lower than the EU average and most modern Asian production facilities. This translates to a $500 billion to $800 billion national annual energy cost gap. This is a major competitive opportunity readily accessible through a combination of leadership, good management and some policy adjustments.

Few economic downturns last as long as it takes for a company to get a good energy program in place – can you afford to delay?

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

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