Energy productivity proves profitable for utilities

Feb. 14, 2007
Managing energy productivity and greenhouse gas emissions is a common thread running through the habits of leading companies embracing eco-friendly approaches. It's proving to be a profitable venture too, says Peter Garforth in his latest Energy Expert column.

Who would have thought, even a few years ago, that the cover story in the current issue of Business Week would declare, “Imagine a world in which socially responsible and eco-friendly practices actually boost a company’s bottom line. It’s closer than you think.” Managing energy productivity and greenhouse gas emissions is a common thread running through the habits of leading companies embracing eco-friendly approaches. Examples of success are global brands with the stature of Hewlett-Packard, Sony and Nokia. But only five of the 30 corporations cited are headquartered in the United States, suggesting there are still some perception hurdles to overcome.

We should explore the value of energy productivity to the company that makes and distributes electricity, and how its decisions can fundamentally affect its relations with key customers.

From a pure productivity standpoint, this isn’t a trivial question, as electric utilities only manage to sell about 30% of the energy value of the primary fuels. The remaining 70% is lost in heat during generation, transmission and distribution. Very few other manufacturing operations would be satisfied with a saleable yield of 30% on key raw materials. Also, because more than 70% of U.S. electricity comes from fossil fuels, any effort to substantially reduce greenhouse gases must challenge this structural inefficiency.

Many approaches are immediately available. The most obvious is to invest in upgraded generation, transmission and distribution efficiency. Clearly, this hasn’t been done systematically, as evidenced by the underinvested and stressed system. In most of North America, the regulatory system allows recovery of most operating costs through the retail pricing, clearly discouraging major capital investments that deliver incremental improvements.

A less obvious approach is to treat the heat from generation not as an undesirable waste product, but as potentially saleable heat or steam. To be effective, this would require substantial heat loads to be located within a few miles of the heat sources, a situation that rarely occurs in North America, with the exception of the occasional industrial load. Compare that to many major cities in Europe and Asia where the bulk of domestic hot water and heating is delivered via city-wide district energy utilities. A utility assessing this choice is confronted with the chicken-and-egg paradox. No developer or city will be comfortable without clear assurance of a high-quality energy supply, and no utility will make the needed investments without a guarantee of customers.

And as long as pricing regulations allow cost recovery, why would any utility invest in developing a new approach that might not gain market acceptance, and is unlikely to be approved by the regulator anyway? The irony is that once this standoff can be resolved, heat sales can be highly profitable for the long haul. The utility in Mannheim, Germany, sells large amounts of heat from coal-fired generation, and makes more money selling heat than electricity.

Another logical reason for a utility to save energy within its own operations, especially electricity, is that what it doesn’t use it can sell. It’s one of the rare manufacturing operations where the waste product is identical to the saleable product. In many case, this is seen as a negligible opportunity, but with transmission and distribution losses included, it represents as much as 10% of the potentially saleable product. A long-term way to radically reduce these losses is to move generation closer to final use, which, incidentally, should make it easier to find markets for the so-called waste heat. But if traditional transmission and distribution losses are counted as legitimate costs, and are recovered in the regulated price, where’s the incentive for a fundamental change in a utility’s business model?

Past columns have discussed the benefits for a manufacturer that not only manages its own energy productivity, but also its vendors and customers to ensure the entire value chain remains competitive. For a utility, this could seem like the proverbial shot in the foot — the more energy-efficient the user, the less the utility sells — so is there really a productivity benefit in helping customers become more efficient?

Utilities all too often fail to find compelling reasons for change, but it is becoming increasingly obvious that there are limits to the negative economic and environmental effects the community can accept from an intrinsically inefficient system. Within today’s North American business reality, what is the compelling case for senior utility management to embark on the energy productivity journey? This will be the topic of next month’s column.

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