Monday, December 11, 2006

Why Policy is Weak Medicine for Industrial Energy Costs

Let’s be clear at the start of this discussion: policy is a necessary yet insufficient tool for shielding industrial consumers from today’s volatile energy markets. Energy policy is certainly welcome and timely, but policy has its limits and must be complemented by industry’s good managerial decision-making if manufacturers truly wish to defeat runaway energy expenses.

To a large extent, a manufacturing organization’s energy expenses reflect internal, day-to-day management and staff decisions. These decisions directly impact a facility’s energy consumption and waste. Internal, proprietary business choices certainly cannot be addressed by policy, unless manufacturers WANT legislators to tell them how to run their businesses.

By necessity, U.S. energy policy initiatives through 2006 have sought to maximize positives while minimizing negatives for as many entities as possible. Accordingly, energy legislation usually promotes more energy exploration, supplies, and infrastructure. There are two main dimensions to supply-oriented energy policies:
• Regardless of how efficient a facility is, it will benefit from lower energy prices, and more supply will ostensibly drive prices lower. Opponents to this approach typically cite the negative environmental impacts that accompany the ever-more intensive extraction of fossil fuels. There are also compelling arguments that fossil fuels are becoming increasingly expensive to extract as the natural supply dwindles.
• Refineries and power generating plants are key components of energy infrastructure. In general, policies that reduce regulatory restrictions on the construction of energy infrastructure will presumably boost energy supplies and therefore reduce energy prices. Interests opposed to this approach are again typically concerned with environmental impacts. But even with regulatory approval, new energy supplies and infrastructure will take years to establish.

But let’s remember this fact: of all energy delivered to U.S. industrial facilities, about 40 percent is not applied as intended to works in progress (see this U.S. Department of Energy report). In other words, a lot of energy is wasted. Avoiding as much of that waste as possible is not only economically feasible at the facility level, but in fact desirable from the perspective of the general public. If energy consumption is inflated through waste, then investment in new energy capacity will be similarly inflated. Building new energy production capacity is fine, but that investment should be minimized so that valuable capital dollars can be directed to other much-needed investments.

A number of other policy concepts accompany the supply-side options:
• More advanced energy technology research and development (R&D). The development of advanced technology is a task that few companies can pursue alone. The money, planning, and coordination that characterize R&D is best orchestrated through government-business collaboration. Problems with technology R&D are (1) it takes years to come to fruition, (2) human skills need to keep pace with technology, and (3) industrial facility managers are best advised to improve their current energy housekeeping before investing in new technologies. The logic is simple: new capital investment projects are more likely to meet their projected payback if they are complemented with energy-smart maintenance and operating procedures. Quick example: remember to turn off equipment that’s not actively producing something!
• Greater efficiency. Since it’s not practical to tell companies HOW to run their facilities, policy incentives encourage industrial decision-makers to pursue selected activities at their option. Tax incentives can be applied to specific pieces of equipment such as high-efficiency electric motors, pumps, or lighting. But in an industrial setting, sustained energy cost control is more dependent on whole-system design and operation strategies. Episodic component changes have limited impact unless pursued as part of an overarching energy-use plan or discipline.
• Alternative fuels. Wind, solar, biomass and other non-fossil fuels are must-have components of the energy future. But one of the hurdles to ramping up these investments is the tangled mess that describes the current state of utility deregulation. Before committing to these assets, investors must have more certainly regarding (1) the viability of competing energy sources (i.e., existing fossil fuels), (2) future policies regarding the maintenance and overhaul of our national electricity transmission system, (3) the state-by-state patchwork of utility distribution costs and requirements, and (4) tax structures which directly impact investment in all of the above.

Industry truly needs more supply, technology R&D, efficiency, and alternative energy supplies if it is to achieve a sustainable solution to run-away energy costs. But understand how the policy game works in Washington: legislative support usually goes to the advocates with the most simple, one-dimensional messages. There are distinct groups backing each element of the energy policies described here. However, message coordination is lacking. Much of this is attributable to the “simple message” strategy. But at the same time, these advocacy groups need money to do their work. To some extent, advocacy groups compete for the same funding dollars. For them to recognize other agendas may put their own funding at risk. This is why it’s very difficult to find a platform that describes (and advocates) holistic energy cost control strategies for industry.

However, that’s why this blog exists….



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