Using community for energy risk management

Jan. 17, 2007
Companies face three main dimensions of energy risk — unpredictable and probably rising prices, availability and reliability, and environmental impacts and costs. Energy Expert Peter Garforth examines how the surrounding community can help you manage these risks.

A recurring theme in this column has been the challenge that companies face in managing the three main dimensions of energy risk — unpredictable and probably rising prices, availability and reliability, and environmental impacts and costs. This month, we’ll explore the potential role of the surrounding community in helping companies manage these risks.

Companies are in regular contact with city and state governments to select a site for a new facility, or to decide whether to invest in expansion or upgrade of an existing site. Communities are interested in attracting and generating quality employment opportunities. The company is interested in having the most productive workforce and location. The result is usually a range of tax and other incentives combined with some degree of commitment from the company to support medium- to long-term employment. If energy is discussed at all, it’s usually about fairly predictable commodity pricing agreements and providing sufficient gas and electricity capacity. There’s rarely a strategic conversation that leads to vastly more productive energy relationships.

Most manufacturing plants need a mix of energy-related utilities in addition to electricity and natural gas. These can include large amounts of cooling, heating, process steam and compressed air. If it needs process steam, for example, a company has to design a facility with enough space for the steam boilers, install them, and maintain them with specialists. If the community could offer an industrial park where process-grade steam was provided as a utility, the company’s investment and operating costs would drop and the real estate footprint would be reduced, making for a very real long-term incentive. There would be similar benefits for a company needing large amounts of cooling, heating or compressed air.

From the community side, it can frequently be cost-effective and environmentally attractive to supply a portfolio of services. Heat and steam can be recovered from cogeneration and reliably distributed at low cost. Cooling can be had through a blend of heat recovery and electric chillers and reliably and cheaply distributed.

Centralized compressors, chillers and heating also allow the benefit of “coincidence” efficiencies — not everyone needs maximum energy services at the same time, so a service supplying multiple users can be sized somewhat smaller than the equivalent made up of individual equipment. The effect is a system with reduced capital cost, lower operating costs and reduced environmental footprint. Last, but certainly not least, integrated energy architecture makes it easier to consider less traditional fuels such as biomass or combustible municipal waste.

If the benefits for community and users are potentially so great, why are industrial and commercial parks with multi-utility supplies relatively rare? I have the privilege of advising a Canadian city on long-term energy planning to ensure they remain an attractive destination for investors and radically reduce environmental impact. One of my recommendations is to develop multi-utility services tailored for industrial and commercial users. Not unreasonably, there’s a debate about whether such communal investments would pay off and whether the commercial and industrial would be comfortable with nontraditional energy services.

In a situation like this, a single major employer asking for these kinds of services as a part of a community incentive package would have major negotiating power. For the community, it will serve as a customer-of-first-resort to seed development of the wider system. For the company, it results in lower-cost, reliable energy services tailored to their specific business needs.

There are more subtle benefits as well. As the system serves more clients, its coincidence efficiency increases, further raising its potential to reduce costs. Multi-utility systems can generate less greenhouse gas, benefiting the user, the community and the planet in a variety of ways. Such systems, once in place, become a magnet for other high-quality investors, benefiting the community as a whole, and leading to a wider and deeper talent pool for local businesses.

This approach has been around for many years in parts of Europe. As one small example, the city utility of Mannheim, Germany delivers process steam, heating, natural gas and electricity to an industrial park on an island in the Rhine River. This mix of services has attracted high-quality investors, including leading pharmaceutical, food and metal-processing companies. Incidentally, a significant part of the energy is fuelled by municipal waste and biomass.

Austin, Texas is developing a major commercial park in which Austin Energy will deliver heating, cooling and compressed air along with traditional utilities. Again, the motivation is the combined objectives of attracting high-quality investors and improving environmental and economic performance of the utility.

Companies should consider including more creative and holistic energy needs as a part of their community negotiations around incentives. They can offer value that extends well beyond the more traditional tax and other incentives.

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

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