Understanding and improving energy strategy

Oct. 31, 2006
Measuring energy performance in terms of cost per unit of saleable product or service highlights the facilities and businesses that are vulnerable to fluctuation in energy-related factors. Do you have a game plan for radically improving the energy productivity at these key sites?

As a company begins to understand its energy use in detail, a clearer picture of its potential impact on different parts of the business begins to come into view. Measuring energy performance in terms of cost per unit of saleable product or service highlights the facilities and businesses that are vulnerable to fluctuation in energy-related factors. How many companies have specific game plans for radically improving the energy productivity at these key sites? The most common answer is – very few.

What constitutes a key site when it comes to energy productivity? The answers to this are many and varied. In general, it will be one where significant changes in the cost or reliability of energy could either create or destroy significant competitive edges.

The first, and most obvious, is when the site’s cost competitiveness is finely balanced, and an abrupt or sustained rise in energy costs could tip it over. To assess this, simply take the current operations and see if they would be viable in the event that energy costs doubled within 10 years. (The flip side of this scenario is to estimate the gain in competitiveness if key plants achieve breakthrough energy productivity gains in the face of escalating energy prices.)

It might be a site where a high probability of new environmental regulations, especially around climate change, could have a significant effect on the cost of operations. To date, this has been more a concern for facilities outside the United States. The recent passing of the California Climate Act of 2006 (AB 32) and a wider public understanding of climate risk is bringing this scenario closer to home. There are various approaches to evaluating the costs, risks and opportunities, but they begin with understanding the greenhouse gas emissions the plant emits, the likely thresholds in new regulation and the potential market value or cost of these emissions. Again, running some basic scenarios on existing operations around cost (or credit) for greenhouse gas emission creation (or reduction) can help identify sites that might be competitively affected.

Another site could be vulnerable to supply reliability challenges. In the past, these kinds of risks were more commonly associated with developing  economies, but recent experiences in Europe, the U.S. Northeast and elsewhere suggest that managing energy supply reliability may need to be higher on management’s agenda than it has been. A few scenarios on the possible effects of energy supply interruptions of differing frequencies and durations will highlight the competitively vulnerable operations.

Running some of these scenarios will highlight the plants and other operations that could benefit from having a long-term energy plan aimed at either mitigating these risks, or generating energy-based competitive edges. These are often termed Integrated Energy Master Plans. The plans are integrated because they encompass the three critical dimensions of energy productivity – energy sourcing, production technology and efficiency, and they are master plans because they become a guiding document as day-to-day decisions about energy-related aspects come due for many years.

When a major energy price increase hits a plant that lacks an integrated energy plan, the reactions are usually crisis cost-reduction management combined with attempts to recover the energy price increases in the market. Typically, the competition is doing the same thing, putting pressure on limited energy productivity suppliers and experts and missing an opportunity to differentiate themselves in the market.

Inevitably, plants must replace major energy-consuming equipment. A plant without an integrated plan typically will do a functional exchange, which will generally gain some efficiency but may miss an opportunity to fundamentally adapt the process and gain integrated benefits. Financially, this puts a new asset on the books, typically with a 15- or 20-year depreciation, which can close the door for a different, more productive approach for a long time to come.

A plant with an integrated plan will take these milestone events as an opportunity to implement energy solutions that may fundamentally change its energy productivity. For example, when a boiler needs to be changed out, a preplanned cogeneration solution could bring multiple advantages beyond simply choosing an alternative boiler.

In general, a plant with a well-thought-out energy master plan including multi-year energy sourcing and investment plans will be better positioned to weather the energy storms that are looming on the horizon around cost, availability and environmental impact. In fact, they will go well beyond just weathering the storms — they will thrive competitively. In reality, it takes a lot of effort to both develop and again acceptance at all levels for such a plan, so the approach is best reserved for plants that are clearly heavily leveraged on energy cost, reliability and potential climate change impact.

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