What if There WAS NO Industrial Energy Policy?

Let's say, for whatever reason, that an industrial energy policy is not wanted or needed. Let's ignore for now the predictable rejoinder that "no policy" is itself a policy. From a U.S. perspective, here's the result:

1. Without a public policy emphasis on energy, we'd be competing against "energy smart" economies that have a greater flexibility to handle resource scarcity and evolving regulatory and market needs.

2. Without development of energy-efficient technologies, we would simply conduct business-as usual, a model predicated on a 1960's expectation of cheap, limitless energy. This would be reinforced by our dependence on old paradigms for industrial technology, capital and organization.

3. Without a supporting energy research and development infrastructure, we lose the power, efficiency, and economy of coordinated R&D resources. We condemn ourselves to wasteful "reinvention of the wheel" instead of harnessing collaborative synergies. We can argue that there's a risk management benefit in having redundant research paths, but this works only if political battles among the different path sponsors don't get out of hand.

4. If we fail to encourage the training of an energy-efficient workforce, we forfeit the comparative advantage of labor productivity characterized by energy-smart behavior and procedures. We resign our industry to competing on wage rates alone-- not a good strategy for the U.S. and many other developed nations.

5. If we do not convene industry-wide initiatives to adopt energy efficient technologies, we forfeit a competitive advantage to countries that excel in such coordination-- as many already do.

6. If we chose to forfeit our national security, a good way to do this is to remain dependent on foreign suppliers of resources-- the more the better.

Free Cash Flow and the Competition for Capital Dollars

Here’s an all-too common scenario: It’s capital budget time. Everyone lines up with proposals. Industrials tend to favor capital projects that build the business—equipment to establish new product lines, plant expansions, new plants, and so on. And they should. Now, compare that to the typical facilities department offerings: stuff like chiller retrofits, boiler replacements, lighting upgrades. To say that these proposals fail to excite corporate decision-makers may be an understatement. Facility managers everywhere routinely see valuable energy improvements passed over, year after year.

Here are some thoughts on how to change that situation.

You’ll notice I didn’t say “fight back.” This is not an us-versus-them discussion (for now, at least). What I propose is a win-win partnering strategy. Here’s how it works:

· If yours is like most other organizations, you justify your capital investments using “simple payback.” I have railed against that metric elsewhere, but for now, let’s recognize “payback” as a fact of life. Let’s use it to our advantage.

· You are accustomed to competing with other departments for funds. We can’t totally reverse that, but we can strike up some alliances in certain situations.

· Identify the product manager for a new initiative for your organization. Understand the hurdles for getting that new initiative underway. For example—it MAY survive a proof-of-concept analysis. It MAY graduate from prototype to full production. You MAY secure the inputs to effectively make that product. Customers MAY buy it. Competitors MAY refrain from entering your market. Remember that ALL payback calculations are estimates. Which is a better investment: a two-year payback with high risk, or a two-year payback with low risk?

· Understand what you provide. Typical energy prime movers—chillers, boilers, air compressors and so on—operate year-in, year-out. We know that greater energy efficiency means reducing the expense of running these assets. But more to the point, you’re not just saving money—you are creating a LOW RISK source of free cash flow. Here’s where it gets interesting.

· Partner with that new product manager. Instead of competing for capital funding, arrange a package proposal—one that combines your energy efficiency project with the new product concept. If the company accepts the package, they accept not only your energy improvement, they obtain free cash flow that directly subsidizes your ally's new new initiative. Win-win for the proposal managers, win-win for the company as a whole.

What’s the alternative to this approach? Business as usual. Compete with each other for capital funds. Use boring titles for your capital budget proposals like “10-ton chiller retrofit.” Or, think about the strategy offered here. Submit a capital budget proposal entitled “Free Cash Flow Subsidy for New Product Development.” Drop me a line and me know what happens.

A Snapshot of Corporate Energy Management in 2009

A superlative study of energy management as practiced by 48 U.S. corporations was released in April 2009 by the Pew Center on Global Climate Change. Their survey, conducted in early 2009, provides insight on how companies from a cross-section of industry formulate and implement energy cost-control strategies. While the survey includes both manufacturing and non-manufacturing companies, the sample frame was designed to purposely focus on the results of companies that have declared a proactive focus on improved energy performance. For this reason, the survey presumably captures “best practices” as opposed to “average” practices. The survey highlights a number of lessons-learned:

• The motivations for pursuing energy management vary. The most frequent reason cited by survey respondents was to contribute to the reduction of their company’s carbon footprint. This was followed by (2) need to offset rising energy prices, (3) demonstration of social responsibility, and (4) to leverage energy efficiency as a way to boost productivity innovation and growth. Additional reasons are cited.

• Corporate energy programs are led by a variety of professionals. Per this survey, plant or facility managers, environmental health/safety officers, and operations directors (when counted collectively) are cited as the energy champion more than twice as often as a senior corporate officer.

• Widespread engagement of all personnel. Almost 90 percent of all companies surveyed conduct outreach to engage and inform their employees with respect to energy use and its impact on business as well as in their homes.

• Moving from reactive to proactive. To varying degrees, all survey participants anticipate increasing energy prices and the onset of climate change regulation that will impact their operations. Forty-nine percent of respondents indicate that energy performance is integral to their job performance and career advancement.

• Strategic planning. Most corporations set their own internal targets and timelines for improved energy performance. The average base year for benchmarking is 2003 while the average target year for goal achievement is 2013. The average annual energy savings goal among respondents is approximately 2.2 percent. The modal value of energy reduction goals is 25 percent savings. Forty-eight percent of respondents indicate that they are meeting or exceeding their goals.

• Spin-off impacts and benefits. Energy managers cite a variety of positive impacts from their efforts. These include increased employee engagement; better communications across business units; and support, recognition, and awards from management.

• Energy management is not without challenges. These vary across companies, but often include limited capital availability, limited management leadership and support, competing priorities and resources, and lagging momentum and employee interest.

• Networking and recognition. Most companies participate in government-sponsored support programs and reference materials, such as the U.S. EPA’s Energy Star, the U.S. Department of Energy’s Manufacturing Energy Consumption Survey, the Carbon Disclosure Project, and other networks.

• Lessons learned. Companies applied corrective actions as they gained experience. These included increased use of energy audits to inventory and evaluate their potential improvements, team-building to enhance accountability and effectiveness, development of employee feedback mechanisms, capital fund set-asides strictly for energy, and securing upper management endorsement.

Budgets Before Profits: Hidden Barriers to Energy Cost Control

In most industrial organizations, daily decision-making can be woefully disconnected from the overall profit motive. Why? In part, this is because of the size and complexity of the organizations themselves. Because many skills and resources are needed to serve a production process, division of labor is a practical necessity. This is evident in the creation of departmental functions—- and budgets. But in an environment of scarce resources, departmentalization can foster an internal, competitive dynamic that misallocates wealth.

Here’s why: Budget development is as much about perception as it is the money itself. Budgets tend to be modeled on the previous year’s actual experience. This puts the manager in a precarious position: under-spending this year could undermine the claim for next year’s funding, while overspending may create the impression of waste or mismanagement. In effect, the department manager who economizes has just demonstrated the need for a smaller budget in the coming year. Managers tend to guard their budget dollars as a source of discretionary power. Over time, the annual cycles of budget development, defense, and execution yield a culture of hoarding.

Within the typical industrial organization, certain barriers to energy cost control are a consequence of departmental competition for budget dollars. Energy control activities and costs may be delegated to a “facilities” department, or wherever engineering and maintenance tasks are handled. An industrial facility manager ensures that buildings, manufacturing processes, and attending staff have the heat, power, ventilation, and other services needed to function effectively. These activities are often perceived as secondary in importance, relative to the core business of manufacturing products and meeting production goals. Accordingly, facility managers may be at a disadvantage when competing for internal budgetary and analytical resources. “Success” for a facilities manager means keeping emergency failures to a minimum. By definition, emergency issues are unpredictable in size and frequency. Given the choice between emergency preparedness and the efficiency of ongoing operations, many facility managers are hesitant to spend money on “fixing things that aren’t broken.” This allows energy waste to persist.

Everyone else carries on business as usual without regard to the energy expense implications of their actions. The facilities manager alone would be responsible for reversing the wasteful choices of others. This could be the job of a proverbial Sisyphus, never-ending and without reward. Unless everyone is accountable for energy use, an energy manager’s effectiveness is severely limited. Under these circumstances, energy waste will prevail, directly reducing the financial return available to shareholders.

Energy Managers At Risk in 2009?

Here’s a true corporate energy management story. I share this with you to illustrate the role of strong communications. Energy managers need to be prepared to defend their agenda from short sighted “cost saving” decisions.

A facilities director was informed that the electric utility serving their Arizona location would be raising their utility rates. Armed with his limited understanding of energy value, this facility director did a back-of-the-envelope calculation. He shared the result in a message to his team. To paraphrase, his message was:

“Based on the last 12 months’ consumption, this rate increase will raise our electric bills by $323,000 this year. Looks like we have to put off our ‘green infrastructure’ initiative. We’ll need the money to pay the rate increase!”

I kid you not.

A strong energy manager should be prepared to protect his program from the unwise. Here are some of my potential responses:

• The key phrase here is “based on last 12 month’s usage.” No one said we HAD to consume the same amount of power this year, or in any year, for that matter. This is why we seek efficiencies to reduce our consumption. Every kWh that we avoid is one less kWh subject to the rate increase.
• There are three variables driving our electricity expenditure. They are (1) price, (2) weather, and (3) consumption requirements. Two out of three we cannot control: prices are ultimately market-driven and weather is determined by a higher power. We can control consumption.
• When it comes to energy improvements, there are two price tags. You have your pick of one or the other: (1) the cost of the improvement, or (2) the cost of NOT making the improvement. Efficiency lets you avoid some consumption—at a per-unit cost of YOUR choosing. In other words, you can pay the utility’s price per unit to buy that volume, or you pay a cost per unit to AVOID buying that volume. In either case you will pay for that avoidable volume.

The real problem is a reward system that focuses on this year’s budget at the expense of future years’ earnings. A failure to act now on energy waste reduction will bleed the organization for years to come—at a cost many times that of the improvement.

Johnson Controls Releases Third Annual "Energy Efficiency Indicator"

Johnson Controls, Inc., a global multi-industrial leader in energy efficiency, commissioned research within the North American business community to examine perceptions of energy efficiency and sustainability. Named the Energy Efficiency Indicator (EEI), this survey includes responses from more than 1,400 executives responsible for managing, reviewing or monitoring energy use within their organizations.

The third annual survey examines how events from the previous year have impacted the management of energy within companies, including financing strategies, expected return-on-investment, incentives, certification, renewable energy strategies and the outlook on building efficiency trends.

Please note that in the survey questionnaire, energy was defined as natural gas and electricity expenditures. The survey was conducted in April 2009.

METHODOLOGY AND RESPONDENT PROFILE
•Online survey completed in April 2009 by energy management decision makers.
•Job responsibilities included “reviewing or monitoring energy use within their company’s facilities, or proposing or approving initiatives to make facilities more efficient.”
•Respondents had “capital- or operations-related budget responsibility.”
•Respondents were sourced from an executive panel and facilities professionals who are members of the International Facility Management Association (IFMA)
•The survey was completed by a total of 1,422 respondents.
•The majority of respondents (71%) were chief executive officers, vice presidents, general managers, facility directors and managers.

EXECUTIVE SUMMARY
The 2009 EEI results reveal an important distinction regarding the perception of energy efficiency within the North American business community. While a majority of key decision-makers continue to cite their enthusiasm for energy efficiency, that interest is countered by diminishing action.
Business leaders nationwide expect significant government legislation and utility incentives to promote energy efficiency investments; however a lack of available capital and unattractive payback periods are creating barriers to capture potential energy savings.

Of the organizations making public carbon commitments, 45 percent identified energy efficiency in buildings as their top carbon reduction strategy. Within the North American business community, renewable energy does continue to play a role in construction and retrofit projects, with solar electric and geothermal technologies seeing the largest increase in consideration.

It is clear that interest in energy efficiency remains high despite the turbulent economy; however fiscal limitations are barring many business leaders from taking measurable action.

KEY FINDINGS
Enthusiasm for energy efficiency remains strong, but is not translating into action.
•71% are paying more attention to energy efficiency than they were one year ago.
•58% continue to say that energy management is very or extremely important.

Access to capital is constraining many business leaders from making investments.
•Only 46% expect to make energy efficiency improvements financed with capital expenditures, down from 56% in 2008.
•60% expect to spend less than 10% of their facilities-related capital budgets on energy efficiency.
•The two largest barriers to capturing potential energy savings are limited capital availability (42%) and unattractive paybacks (21%).

Business leaders hold energy efficiency investments to a high payback standard.
•Nearly 50% require paybacks periods that are less than three years.

Overall, executives have a less pessimistic outlook on energy prices.
•60% believe that natural gas and electricity prices will rise over the next year, a drop from an estimated 80% response rate in 2008 and 2007.
•31% do not expect those prices to change significantly.

Business leaders now have a greater anticipation of regulation and incentives.
•85% think that significant legislation mandating energy efficiency and/or carbon reduction is likely within the next two years, up from 76% in 2008.
•44% say utility or government incentives are very/extremely influential in making energy efficiency decisions, up from 38% in 2008.

Building efficiency is the first priority for business leaders who want to make their companies more energy efficient.
•45% of business leaders say improving energy efficiency in their buildings is their top strategy to meet public greenhouse gas reduction commitments.
•Only 10% of business organizations responding to this survey have made public greenhouse gas reduction commitments.

Business leaders continue to adopt lighting tactics to address energy efficiency.
•77% have switched to energy efficient lighting, down only 6% from 2008.
•38% have installed lighting sensors, down 4% from 2008.
•Other top energy efficiency measures implemented by businesses nationwide include adjustments to HVAC temperature controls (64%, up 3% from 2008) and education of facilities operations staff (62%, down 10% from 2008).

The upward trend to include renewable energy technologies in new construction or retrofit projects continues.
•Solar electric (46%), solar thermal (26%), wind (21%), and geothermal (21%) continue to be included or considered in these building projects.
•Among the renewable technologies referenced above, solar electric (up 8%) and geothermal (up 7%) have seen the largest increase in consideration.

Note: Overall the findings highlighted above have consistent response rates from the C-level executives to facility managers. Responses are also consistent among those with large and small real estate portfolios. All statements are supported by 2009 EEI data.

Why Do You Need a Corporate Energy Management Policy?

Well-run companies are implementing formal corporate energy policies for the following reasons (in no particular order; the importance of these varies across companies):

1. Demonstrate administrative and legal compliance with respect to environmental liabilities, both current and future. Carbon is the big item here, but so are other direct emissions (fossil fuels used onsite) and indirect emissions (the emissions generated by the power plants that supply your electricity). Your front office should know that the U.S. EPA issued a mandatory greenhouse gas (GHG) reporting rule on 3/7/2009. This rule requires facilities to keep records, starting Jan. 2010, of the GHG it is responsible for producing. Facilities must begin reporting their GHG emissions starting Mar. 15, 2011. Compliance penalties for not doing so will clock in at $32,500 per day. This applies to any facility that generates in excess of 25,000 tons of GHG emissions annually. The biggest and most controllable element of emissions compliance is energy use. That’s why an energy policy is relevant.

2. Capture investment incentives that can improve energy performance and boost productivity. The federal stimulus package provides the latest in an evolving set of investment incentives. There is not “enough money for everybody.” While the disbursement of these funds is still a work in progress at this date, you can bet that the limited funds will ultimately reach the entities that are best prepared to receive them. That means (1) knowing your current energy profile, (2) knowing what the optimal profile SHOULD be, and (3) having a business plan for achieving that optimum. An energy policy is that roadmap.

3. Keeping new business opportunities open. You may be familiar with Wal-Mart: as a corporate policy, they demand that their suppliers demonstrate clean, waste-reduced production processes, or else Wal-Mart doesn’t buy from them. Your customers (the defense department and government agencies) are under executive order direction to improve the energy and sustainability performance of their facilities. It’s only a matter of time before such criteria appear in the terms and conditions of work that they bid out to contractors. It’s hard for a contractor to demonstrate compliance with these expectations WITHOUT a formal energy policy in place.

4. A formal policy is the key to buy-in from your staff. Execution of any organizational effort hinges on its people. Energy cost control requires many staff to change the way they work and make decisions. In the absence of policy, there’s very little to compel them to make those changes.

5. A good policy means less work, not more. A good corporate energy policy sets the standard for taking action. It establishes clear roles, accountabilities, and investment criteria. A clear energy policy saves the company from wasting time and effort. Without such a policy, the company must deliberate energy improvements one at a time, mixed in with all the other core business decisions that have to be made. The energy agenda then becomes a stop-and-go process, and expect to “reinvent the wheel” many times over. Think of a corporate energy policy as a way to largely “automate” the decision-making process, removing the debate and speeding up the results.

BOTTOM LINE: a corporate energy policy has two major purposes: (1) to harmonize energy improvements internal to the organization, and (2) to prepare the organization for outside scrutiny and opportunities, such as compliance and market development. In other words, if energy policy is focused only on internal cost reduction, the glass is only “half full.” A valuable energy policy is one that also helps to improve productivity and provides entry to new business opportunities.