How Waste Raises the “Price” of Energy

In reaction to rising energy costs, many industrial plant managers will naturally focus on the price they pay for fuel and power. A “price-centric” approach seeks lower prices for the same fuel, or if possible, a switch to a different, lower-cost fuel. This is not a bad idea, but it recognizes only one side of the expense equation:

EXPENSE = PRICE times QUANTITY
Of course, any reduction in energy waste will reduce the total quantity of energy consumed. The companies that understand this concept proactively change the way they consume energy. Other companies—especially those which remain focused on prices—fail to grasp this opportunity. Others may consider this concept: they can reduce their expenditure per unit of energy available to do useful work.

First, consider the relationship between fuel and the work it performs. Industrial facilities purchase fuel which must be converted several times in succession before it does the work for which it is intended. For example, consider steam systems, which consume over half of total fossil fuel purchases by industry. Almost all manufacturing processes require heat, and steam is an effective medium for heat supply. Fuel is transformed to heat in several stages:

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Each stage of conversion allows some energy to be lost. The volume of loss depends on the quality of technology, procedures, and behavior applied by the facility and its staff. The U.S. Department of Energy’s Energy Use, Loss and Opportunities report describes the overall industry average energy losses incurred at each stage of the energy conversion process. While these figures vary across and within industries, it’s useful to use aggregate industry measures:

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In other words, only about 60 percent of the energy purchased is actually applied to the work for which it is intended. The other 40 percent includes waste that can potentially (and economically) be avoided.

So does energy waste “impact” fuel prices? An example facility shows how it works. This facility purchases 100,000 units of natural gas (units are million Btu, or MMBtu). The acquisition price per MMBtu is $8.00, for a total outlay of $800,000. Here is how fuel is put to work, beginning with its delivery to the facility:

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This facility effectively spent $800,000 for 60,000 MMBtu available for actual use. Or, in other words, it spent $13.33 per available MMBtu.

Another way to look at it: Energy changes hands several times after it is delivered to the facility. At each step in the conversion sequence, the handler incurs energy waste which effectively "marks up" the "price" of the energy that is eventually applied to do useful work.

This result shown here is based on industry averages. Naturally, some facilities are better than others. But virtually all industrial facilities have the potential—through reduced energy waste—to improve their energy expense performance.

Why Does Industry Resist Energy Management?

Misperceptions surround not only the concept of energy management, but also its anticipated impact on daily job functions. Many corporate leaders genuinely believe that energy use is an uncontrollable cost of doing business, so they focus solely on energy prices. Then there are business leaders who truly believe that their facilities have already eliminated energy waste. This conclusion is often based on bad information, including different understandings of what constitutes “energy efficiency.” Some common misinterpretations include:
• installing a backup generator
• participation in a municipal recycling program
• switching fuels
• purchasing energy at the lowest available price or tariff
• purchasing energy through a non-utility marketer
• cutting back production or services to reduce energy consumption
• adopting renewable fuel sources, such as solar or wind power
• installing dual-fuel capabilities on boilers and other large energy-consuming assets

With misunderstanding comes resistance. Some plant personnel may believe that admitting the need for energy improvements is evidence of their ineffective job performance. Meanwhile, the larger and more complex an organization is, the easier it is for individuals to distort measures of their performance and to hide certain inefficiencies.

The pursuit of industrial energy management encounters some large hurdles. To a certain extent, industry consumes energy through large, fixed assets that operate for years or even decades at a time. This includes equipment such as boilers, furnaces and air compressors. In addition to these assets, most facilities operate complex production systems that employ a wide variety of smaller equipment such as pumps, fans and motors. Compared with the larger assets, these smaller components are more easily replaced. However, the design of the overall system in which they were installed is not as easy to change. Industries typically conduct multi-year planning cycles to organize major facility upgrades and system changes. Planning cycles allow facility managers to avoid frequent disruptions to their production schedules. These cycles take years to conduct and involve a number of considerations, including energy costs. This partially explains why many manufacturers do not respond immediately to proposed energy improvements, even if incentives are involved.

Human nature also plays a role in energy waste. “That’s the way we’ve always done it” is the justification for long-entrenched work habits that become default procedures. Certain habits that save time and effort may be at the expense of excess energy consumption. These practices had little consequence when energy was cheap. However, the trade-offs between time and money change as energy prices escalate. Attempts to change these work habits can cause friction among staff. A manufacturer’s decision to make energy improvements must compete with other priorities. Procurement officers are often compelled to make equipment purchases based on the lowest cost of acquisition, not the total cost of ownership. Production deadlines may force operations personnel to make emergency repairs using whatever equipment is available, as opposed to what is optimal from a total-cost-of-ownership perspective. Energy performance considerations are usually secondary to a plant manager’s need to meet production targets.

Industrial facilities that lack a clear energy cost-control mandate will allow waste to continue. Unfortunately, energy waste is an inexorable drain on earnings. This waste does not wait for people to figure out how to defeat it.

The Industrial Sector: Energy Use and Waste

Industrial activity occurs in facilities that manufacture products. Certain basic products, such as fats and oils, pulp and paper, chemicals, petroleum refining, and primary metals production, are intermediate components which are eventually fabricated or refined into the products actually purchased by consumers. For example, an automobile is assembled from a vast array of intermediate materials, most of which were produced elsewhere before they were shipped to the point of final fabrication and assembly. The finished automobile contains material and sub-assemblies supplied by manufacturers of steel, aluminum, copper, glass, rubber, plastic, paint, and other intermediate products.

A manufacturing corporation may operate one or more production sites. Each site features a number of structures that are arranged on a campus-like setting. The volume and form of energy required by a manufacturing site is highly varied—it depends on the type of product being made as well as the design of the production process and the structures that house those processes. A “typical” industrial facility’s layout and energy consumption may resemble this diagram:
[Click on image to enlarge]Source: Alliance to Save Energy

The entire site (1) is a large property suitable for hosting production facilities, offices, warehousing and storage, employee parking, and infrastructure for moving materials on and off the property.

U.S. industrial power houses (2), in aggregate consume about 18 quadrillion Btu annually. Power houses organize the energy needed to transform material inputs into a finished product. Material is transformed by adding and/or subtracting heat and applying force and pressure. Energy is used for motive purposes, i.e., pumping, cutting, lifting, sifting, stirring, rotating, folding, etc. Also, energy is used to control the atmosphere in certain production facilities. The power house may host boilers, turbines, air compressors, and electricity transformers and switchgear. Boilers create steam, which is an efficient medium for transferring heat. Steam can also be used to power a turbine that generates electricity. Alternatively, electricity can be purchased from a merchant and/or utility, in which case the power house merely transforms the purchased electricity into voltages required by the facility. Electricity is also used to operate air compressors. Compressed air performs a wide variety of functions—too numerous to list here. Note that industrial power houses experience energy losses as they convert fuel to heat and power. In the U.S., those losses are, on average, equivalent to eight percent of total industrial energy purchases.

The distribution infrastructure (3) transmits steam, electricity, and compressed air to buildings that host production activities (4). Distribution system losses are characterized by leaks and radiant heat losses, which on average add up to 16 percent of energy purchases. Another 16 percent of purchased energy is lost as heat and power are converted to work in the production facilities. Some facilities recapture residual thermal energy (steam, hot water, and combustion emissions) and return it (5) for reuse by the power house. Only 60 percent of industry’s purchased energy performs useful work, yet much of that waste can be economically recaptured.

What is "Sustainable Business?"

An intriguing entry from Barb Haig posed this question on Johnson Controls' blog. Think about it... isn't "sustainability" relative to a starting point of some kind? This concept implicitly recognizes that things change over time, right? So what makes the starting point ideal? How about this: "Sustainable business" is a strategy for profit-seeking entities to minimize the risks (and maximize the profits) related to the environmental, health, and social consequences of business operations.

Pondering Our “Energy Straightjacket”

I capped off a very busy week at Flowserve Technology’s latest annual energy summit in Kalamazoo, Michigan. I shared my Energy Management: What’s in it for You” presentation, which immediately followed a brilliant speech by Neal Elliott of DC-based ACEEE. One of his major take-away concepts is that of the “Energy Straightjacket” that increasingly explains today’s rising electricity costs. Here’s how it works: With electricity demand reaching all-time highs, power generators can’t take full advantage of America’s abundant coal resources. Why? There’s not enough rail stock (in the right places at the right time) to move coal from the mines to power generating plants. There are also periodic shortages of replacement tires for the huge mine-hauler trucks that move coal out of strip mines. Why? Key ingredients in the manufacture of those tires are various petroleum distillates. Those ingredients become scarce when our limited petroleum refining capacity is tied up in making gas and diesel commodities. With a shortage of coal, our electricity generators turn to natural gas. But, as we saw in the aftermath of the 2005 hurricane season, natural gas prices are subject to price spikes when production capacity is disturbed. In sum, energy markets suffer not so much from a lack of supply, but from critical bottlenecks in supply infrastructure… hence the straightjacket.

Yes, Kansas, There IS an Unbiased Energy Audit!

Here’s another indication of heartland communities coming to grips with the energy costs that place a relentless drain on organizational finances. The County Commissioners of Shawnee County, Kansas agreed to secure an energy audit for three county-owned buildings. This decision, however, was not made without some debate. At least one Commissioner felt “wary of backing the county into a corner where it would have no choice but to have the firm that conducts the audit put its recommendations in place.” The Commissioners apparently assumed that energy audits are provided only by organizations with a commercial ax to grind. This is sometimes the case. But it's not clear if the Commissioners realized that independent engineering consulting firms can provide an unbiased audit. They could have found any number of independent energy auditors by contacting the Kansas-Missouri Chapter of the Association of Energy Engineers. On October 20, the Commissioners selected Chevron Energy Solutions to audit energy, water and other utility usage at the three buildings. The cost of the energy audit will be $28,406. The cost of installing any recommended energy-saving measures would be paid by the subsequent savings in energy costs. We should anticipate positive results from the energy audit, and hope that other communities watch and take note.

Carolina Classic

South Carolina's Manufacturing Extension Partnership offices are nothing short of superlative. On October 16, they organized the state's first Energy Symposium, which served (by my count) 87 attendees. The agenda's tag line says it all: "Cut energy costs. Boost Production. Reduce waste. Enhance competitiveness. Increase profits." It wasn't too long ago that such presentations were dismissed as feel-good sessions for the "environmentalist" community. No longer. Companies are realizing that energy purchasing strategies, by themselves, will not sufficiently control energy expenses. They are rediscovering the principle that price times CONSUMPTION equals expenditure. I was pleased to speak about energy cost control strategies at this event. Please see "Use it or Lose it: Tracking Industrial Fuel Consumption."

Kick off!

WELCOME TO ENERGY PATHFINDER, which is dedicated to the rapidly evolving field of energy management. This is generally a non-technical forum. The focus here is on the practical, human choices that organizations must make if they are at all serious about minimizing the impact of energy volatility on their business performance. This forum is maintained by Christopher Russell, principal of Energy Pathfinder Management Consulting, LLC of Baltimore, MD. See Energy Pathfinder for more information.