Energy Efficiency Without a Capital Budget

Industry’s interest in energy cost control may be outpacing its willingness to invest in energy efficient technologies and equipment. If you think about it, this means cutting energy costs by changing the way we use the same ol’ machinery. Only a heretic would suggest this approach to facility with a strong engineering culture. Yet there are people in industry who are taking a bite out of energy costs through behavioral and procedural change.

If you ask the industrial energy management congoscenti to identify its most accomplished players, every list seems to include Jim Pease of Unilever. Attached to Unilever’s Home & Personal Care division, Jim is a corporate safety, health and environmental compliance advisor for 14 North American sites. In 2000, Jim was tasked with energy cost control, as were many corporate environmental managers around this time. And like many of his peers, Jim’s cost control mandate came with no capital budget support.

Jim’s epic story is captured in a case study that I assembled a few years ago for the Alliance to Save Energy. The primary tool in Jim’s capital-free strategy was a spreadsheet to track actual-to-budget energy consumption, normalized for production levels. In this spreadsheet, current month results are color-coded to instantly show how well a plant is doing: red for overages in excess of 20 percent, yellow for overages 20 percent and below, and green for better-than benchmark performance. All 14 sites could be compared at a glance—a feature that often mobilized friendly competition between sites.

But what about actual energy saving measures? Jim understood that when machines ran unnecessarily, the facility was wasting money, but he needed equipment operators to be aware of that. Instead of taking an adversarial approach, Jim reinforced good energy behavior through an upbeat and sometimes humorous communications campaign. To ensure that he was the bearer of good news, Jim made sure that staff got energy information that was valuable to them at home as well as in the workplace. Messages that were brief and positive, yet frequent, characterized his campaign.

Of course, only so much can be accomplished through behavioral change. But by tracking results and creating a buzz about early results, Jim paved the way for capital investment in subsequent rounds of energy cost control.

Defining Energy Efficiency: Engineer vs. Plant Manager

A provocative article recently claimed that “energy efficiency alone has not resulted in an absolute reduction in energy use.” The rationale: “increased efficiency tends to decrease energy use per kilogram of product produced… efficiency and increased production go hand in hand, thus the increased production would offset gains in efficiency.”

I’m scratching my head over this one. What does this say about the value of energy efficiency? I invite your comments here on the blog.

Given the quote above, at least one mechanical engineer defines “energy efficiency” as increasing production output from a constant volume of energy inputs. Let’s say my manufacturing facility increases output while my energy consumption remains flat. Assume all other expenses have risen proportionally with output. I have reduced energy consumption per unit of output. I have therefore reduced my expenses and raised my profit margin, both on a per-unit basis. In addition, I have improved my return on assets and earnings per share. Is it my goal to reduce absolute energy consumption? If so, then I have failed. But if my goal was to improve my facility’s financial performance and competitiveness, I was successful.

Just because energy efficiency gives me the potential for expanded production, it doesn’t mean that that the market is ready to accept my extra output. My production may be driven by batch orders. But it’s still my job to meet my production targets with the best possible operating margin. Reducing energy waste contributes directly to my profitability.

Even if I can expand my production through the engineer’s concept of energy efficiency, can I assume that 100 percent of my energy consumption is performing useful work? My facility can lose energy in a myriad of ways: inefficient combustion, steam and compressed air leaks, and motor drives left running when there’s no material in production. According to the U.S. Department of Energy, the average manufacturer can lose 10 to 20 percent of its energy inputs to such insidious waste. I can install the latest, most efficient technology in the world, but I'm still wasting money if I let it run unnecessarily. If my goal is to optimize the economic performance of my facility, “energy efficiency” becomes a tool at my disposal. In other words, “energy efficiency” ensures that my energy dollars don’t literally dissipate into thin air.

Checklist for Securing a Successful Energy Audit

NOTE: If you simply want a list of energy "projects," then look at the Energy Efficiency Manual. This is truly an encyclopedia of projects.

If you want to effectively reduce your organization's energy costs, you will need to develop a business plan for systematically identifying, selecting, and implementing energy solutions. The first step is to secure an energy audit. Continue reading this post to learn more...

___ Prepare facility staff in advance for the energy audit. Consider referring to it as an energy “profile” or “assessment” so that it sounds less threatening. Declare amnesty for current staff so they won’t feel blamed for past energy waste. Clarify that the audit is not an exercise in finding fault, but instead is a way to make more effective use of energy and improve business performance.

___ Prepare your top management or board of directors for the true business impacts of energy use now and in the future. They probably don't understand or care about pump curves, chiller set points, or power factor correction. Talk to them in their language-- business language-- that explains how energy contributes to the organization's wealth. Demonstrate the resources you will need to be an effective energy manager. Become familiar with the tools used by energy managers to addresses business priorities just as effectively as the technical aspects.

___ Secure the audit from a qualified energy engineer that has no commercial interest in providing the equipment that their audit recommends. The rationale for this should be obvious. Before accepting a free energy audit, think very carefully about what it does and does not represent. You may also want to read this post about free energy assistance resources in general.

___ A standard energy audit will produce an inventory of energy inputs, uses, and waste. It should identify the capacities of energy-using equipment. Consider expanding the scope of the audit to evaluate operating and procurement procedures. Can maintenance best practices be identified and implemented? What kind of staff training should complement the new technology? Can procurement directors observe total-cost-of-ownership criteria instead of purchasing on the basis of lowest initial cost? “Soft” aspects like these, discounted by many engineers, should be addressed in the final audit report. A failure to recognize these issues allows them to become barriers to hardware and technology improvements.

___ A standard energy audit will culminate in a list of improvement recommendations. Each line item may be described in terms of its energy savings, cost to implement, and financial payback. Consider organizing the recommendations into scenarios. Each scenario can reflect a different energy management strategy. For example, one scenario can emphasize advanced technology capital projects. A less costly scenario may feature operations and maintenance (O&M) initiatives. Other approaches might prioritize improvements that are least time-intensive or pose the least interference with facility operations.

___ Your selection of energy improvements will probably depend on who is available to implement them. Give some thought as to the risks and rewards involved in using in-house staff versus or outsourcing these tasks.

___ Establish a protocol for following up recommendations. Revisit payback analyses periodically as energy prices change. Document the total consumption savings related to implemented improvements. Express savings not only as total dollars, but as dollars per unit of production. How much output would you have to sell to have an impact on income equivalent to energy savings? Also show the cost to your organization when it chooses to delay of certain recommendations. Document these using clear graphics. Report your progress to facility staff and recognize people who contribute to your positive results.

An Industrial Energy Program Breakthrough?

Workshops have historically been the format of choice for promoting industrial energy efficiency. Utilities and government sponsors usually promote workshops as a one-day agenda for a technical audience, focusing on motor drives, pumps, steam, compressed air, combustion, and other distinct energy systems. Responding facilities send a couple of maintenance or engineering staff to attend, where they often pick up superb technical information. However, because the workshops focus on specific hardware, they are actually promoting isolated project activity. Who promotes strategies for continuous energy improvement? This is a crucial question, because without a durable energy management strategy, the facility engineer is forced to justify projects one at a time, running a gauntlet of skeptical review by procurement, finance and operations people. This is an exhausting process that explains the partial and intermittent implementation of energy-saving improvements.

Southern California Edison (SCE) is using an alternative approach for industrial outreach with their Sustainable Energy Efficiency (SEED) program. Recognizing industrial managers’ increasing familiarity with management systems to address safety, environmental, and waste control risks, the SEED program applies these same management concepts to energy. SCE uses a consultative format designed and conducted by EnVINTA corporation. This approach challenges industrial facilities to develop internal policies, procedures, and performance benchmarks for continuous energy improvement. According to Fabian Biagetti, EnVINTA’s VP of operations, utilities are already accustomed to enlisting specialists to boost industrial customers’ awareness of efficiencies in specific technologies. SCE now takes this concept one step further in having a specialist that helps those customers to devise energy management strategies.

Instead of inviting personnel to an off-site workshop, the SEED program effectively brings the workshop into individual facilities. A one-day agenda begins with an assembly of the site management team for a 90-minute analysis of current business energy practices. This is immediately followed by a walk-through of the site to compare and validate the findings from the opening discussion. This is also an opportunity for the SEED program analysts to identify potential physical energy improvement opportunities. At the end of the day, the SEED staff reconvenes with site management to develop an Energy Improvement Action Plan, which includes (1) a benchmarking of energy-related business practices, and (2) a “roadmap” for organizing the milestones, timeline, resources, and accountabilities for pursuing the top five energy improvement opportunities. These first-day results are immediately available on the spot, thanks to a lap-top computer software template, developed by Chandan Rao of Graphet, Inc. Consultative support can be offered later, to help facility managers in developing energy-efficient procedures and criteria for operations, maintenance, and equipment procurement. SCE hopes to reproduce in their service territory the 60 to 70 percent implementation rates that Graphet and EnVinta have achieved elsewhere with this strategy.

This approach helps all facility decision-makers to understand and support energy management concepts. This is a hurdle that traditional, offsite workshops could never achieve. EnVINTA’s Biagetti assures site managers that they “don’t need to be technical—they just need to understand business processes.”

The Hunters and Farmers of Energy Savings

“Companies approach energy management with one of two basic strategies,” a colleague of mine once said. “One is that of the hunter, and the other, the farmer.” That comment has stuck with me for a long time, and now it’s time to blog about it.

Imagine living on the frontier before the advent of supermarkets, convenience stores, and restaurants. Frontiersmen had to be self-sufficient in providing not only daily sustenance, but (if times were good) some surplus commodities for the market. The same opportunities await manufacturers that proactively manage their energy resources — or in other words, “hunting and farming” wealth in their own facilities.

The farmer stakes out a fixed territory and produces value by systematically sowing, tending, and harvesting valuable crops. The farmer’s discipline of daily chores, patiently applied year after year, allow him to reap wealth from his acreage. Aside from some weather-related risk, the farmer can look forward to a predictable yield of commodities. The farmer may produce only one or two crop varieties per season, but the volume is enough not only to feed the farmer’s family, but also to sell for cash income.

The hunter roams freely about the land in search of game. His task is opportunistic—relying on chance and skill to secure a small volume of meat and pelts. The hunter works hard for his bounty, but the goods return a much higher price per unit of mass than do the farmer’s. The hunter’s effort returns value very quickly, but the hunter shoulders a sizeable risk of failure for his time commitment. It is not unusual for a team of hunters to pool their talents when stalking their game.

So we would expect the frontier head-of-household to put some effort into both hunting AND farming, balancing his time wisely between the two tasks in a way that reflected the risks and rewards inherent in each activity. A clever individual could ensure the harvest of staple grains for his family with a surplus to generate cash. At the same time, the effort applied to hunting would bring meat for the dinner table as well as pelts that might bring in some extra income.

Now, let’s apply this thinking to industrial energy management.

Energy is to the factory as fertile land is to the farmer. Through the distribution of electricity, steam, and compressed air, energy can potentially “fertilize” every square foot of space. This energy can either be harnessed to make products, or it can dissipate through waste. Remember that in either case, the plant pays for that energy.

The “farmer,” in today’s factory, harvests value from existing plant assets. He ensures that leaks and losses from steam, air, water, and other distribution systems are minimized. Operating benchmarks indicate the optimal level of energy consumption per unit of production, while periodic data snap-shots indicate when systems stray from those benchmarks. Like the farmer who methodically plows each row of land, the industrial energy manager monitors each layer of energy utilization data. He develops a protocol for reacting to anomalies in the data. The industrial energy “farmer” needs to know the cost-benefit of taking remedial action. Benchmarks and operating data are his ledger—they are crucial for establishing guidelines for taking action. They are also evidence of the value he has saved. In other words, documentation of energy flows will demonstrate the total value saved (and the revenue it will generate) as well as the value of avoided waste.

The modern industrial analog to the “hunter” is the plant engineer who seeks singular pieces of technology, strategically chosen to improve operating effectiveness. Through consultation and research, the plant engineer scopes out new and improved applications that pay for themselves through the savings and extra productivity that they provide. He lobbies his corporate directors in the capital budgeting process. There’s an elevated risk-reward aspect with the selection of strategic projects, but the successful engineer is skilled at both technical analysis and in presenting his proposal to corporate officers, to explain “what’s in it for them.” It is not unusual for the engineer to pool efforts with others who can help to secure his “game.” In this instance, the engineer’s allies are the technical assistance teams located at universities, professional societies, utilities, and consulting firms.

Industrial plant managers today are on the frontier of a challenging future. We know from history that frontiersmen survived by diversifying their modes of livelihood, and by teaming their skills and efforts with others. While some manufacturers will falter, others will thrive, especially if they harvest their resources wisely. Energy is the “fertilizer” of industry. Information is the ploughshare. Truly competitive manufacturers will enlist both farmers and hunters to reap value from their energy use.

Understanding the New World of Energy Procurement

Volatile energy markets and the de-regulation of gas and electric utilities are forcing industrial energy consumers to adopt energy procurement strategies. Risk is inherent both in the way energy is purchased and consumed, but for a variety of reasons, organizations mostly focus on procurement. Business consumers seek protection from energy price spikes that can destroy earnings and upset budget performance. Management of procurement risk is a necessary component of energy cost control.

Consumers want to be shielded not just from high prices, but also from volatile price movements that complicate fiscal and budget planning. In a deregulated energy market, consider the potential for price movement between the time when a consumer presents an offer to buy and the time when the transaction is fulfilled. Price “risk” describes the degree of market volatility between those two points in time. The techniques used to manage financial investment risks are directly transferable to energy procurement. The key concept here is “hedging,” or structuring a transaction for the express purpose of neutralizing the potential for lost value.

Hedging involves the assignment of risk. In other words, for a transaction with some lag time between contract ratification and actual fulfillment, who will absorb the risk of market price fluctuation—the buyer or the seller? The consumer that wants 100 percent certainty of energy expense must pay the supplier a premium for a contract to receive a commodity at a fixed price on a specified date. Conversely, the consumer that accepts the risk of market fluctuation evades that premium by purchasing indexed contracts, i.e., contracts with prices set to reflect the natural ebb and flow of the market. Many consumers blend their consumption with a combination of fixed and indexed contracts. A related hedging tool is the “option,” which gives the bearer the right, but not the obligation, to procure energy at a fixed price.

A fixed-price contract makes sense for the consumer that anticipates any upward movement in the future price of energy. A contract can lock in a chosen price for a specific quantity of energy. The consumer that purchases 100 percent of its energy this way “assumes a fully-hedged position,” or is shielded against the potential for higher market prices in the future. But by the same token, such contracts—as obligations to buy at a fixed price—prevent the consumer from enjoying market price dips. The opposite end of the risk spectrum is the “fully-indexed position.” This means, for an energy consumer, making all purchases at the market price that prevails at the time of order fulfillment.

In reaction to energy price spikes in the wake of the 2005 hurricane season, many industrial energy consumers aggressively hedged their consumption through 2006. This means they purchased fixed-price contracts that anticipated continued upward movement in the market. However, energy prices dropped during 2006. In effect, the hedged consumers ended up paying higher prices—at least during 2006—than the prevailing market. Does this experience mean that hedging is a bad strategy? To answer, think of it this way: chances are that you paid for homeowner’s insurance in 2006, but you did not need to make a claim against your policy. That doesn’t mean that your insurance expenditure was a waste. Think of energy procurement hedging as a form of insurance—in this case, against the risk of dramatic price spikes.

An important point to remember: by consistently assuming a fully-hedged position, the consumer pays more for a commodity in the long run. This is because of the premium that is paid for the surety of a fixed-price contract. In contrast, by assuming a fully-indexed position, the consumer absorbs the risk of market volatility. This entails enduring the occasional price spike, but consistently avoiding risk premium payments.

Procurement strategies can only be a partial solution to high energy costs. Hedging only stabilizes price risk. Consumers seeking to proactively and consistently reduce energy expenditures must reduce their energy waste. This requires a business plan that employs technologies, procedures, and behaviors for continuous energy improvement.

What CAN You Save? What WILL You Save?

The question that industrial decision-makers will most frequently ask about energy cost control is “How much can I save?” I will share my answer below, in today’s post. The question that they really should be asking is “How much am I LIKELY to save?” An answer to this question will also be offered below.

“How much can I save?” The average industrial facility can expect to reduce its energy consumption somewhere within a range of 10 to 20 percent. Keep in mind that “10 to 20 percent” describes an average range of expectations. Some facilities can capture more savings, some less. If you want a more precise number, you will need to conduct an energy audit—a facility-wide study of energy inputs, uses, and losses. Keep in mind that energy audits are a very human process, reflecting the skills and experience of the team that conducts them. Ten different audit teams can examine the same facility—and develop ten different sets of recommendations. Their findings may generally overlap, but each report will present different cost-benefit evaluations, suggested priorities, or even unique findings. I say “10 to 20 percent” because of the following sources:

1. See the U.S Department of Energy fact sheet entitled Save Energy Now in Your Motor Systems. It includes comments about all potential sources of industrial energy savings, not just motors. According to this document, plants with an energy management program already in place can save an additional 10-15% by using best practices as recommended by the U.S. Department of Energy. Remember, that’s in addition to an existing energy management program.

2. See Energy Loss Reduction and Recovery in Industrial Energy Systems. This U.S. DOE document claims, on page 22, that industry’s overall energy consumption can be reduced by 24 percent through efficient technologies and practices. Appendices in this report share industry-specific claims for energy savings potential.

This cannot be overemphasized: no single industrial facility is “average.” Each facility features a unique design, purpose, product mix, operating schedule, maintenance history, and work habits. Savings potential varies accordingly.

“How much am I LIKELY to save?” I wish more people would ask this question. My answer involves this checklist. The more times you can answer with a “yes” to these questions, the more likely you are to achieve savings (or the higher you will be on that range of potential savings).

__ Will you conduct an energy audit?
__ Will your staff know the purpose of the audit and not be intimidated by it?
__ Will your facility support energy cost control as an ongoing process rather than as a one-time project?
__ Will your top management stand behind the goals and accountabilities set by an energy management plan, or ignore them after a year has passed?
__ Will staff be responsive to energy awareness training?
__ Will operations, maintenance, and procurement people be willing to change the way they do things by incorporating energy best practices into their work habits?

Take heart—no one answers “yes” to all these points. But as you achieve more “yes” answers, the more you are likely to save.

Thinking About Power Factor Correction?

There appears to be a great deal of interest in power factor correction these days, if the volume of inquiries that I get is any measure. In VERY simple terms, “power factor correction” optimizes the way that electric power is consumed by motors, fans, pumps, and other apparatus. Is power factor correction a good thing? Yes. Is it the first or best initiative to be pursued by a facility that seeks to reduce its energy costs? Not always.

A bit more explanation is needed. Electricity provides a “basket” of three services, which include voltage, frequency, and current supply. The steadiness and predictability of these services are the key to optimal power consumption and the efficient operation of electricity-dependent equipment. Motors and other electronics suffer damage caused by poor power quality, such as deviations in the supply of voltage or frequency. Weak currents starve these loads of power, causing motors to overheat, and thus suffer premature failure.

Power utilities, especially those that are seeking to offset the need to build more generating capacity, like to promote power factor correction as a way to maintain the overall demand placed on their system. And depending on the structure of electricity tariffs, utility customers opting for this service may enjoy lower power bills. Industrial engineers find it attractive for several reasons: (1) the task can be achieved quickly; (2) the cost-benefit can be very positive, and (3) the task imposes little or no interference with facility operations or behavior. In other words, power factor correction is a one-time “project” that doesn’t require a lot of coordination across departments.

Now here’s the issue: is an old clunker made valuable by giving it a fresh coat of paint? This CAN be the situation set up by the promise of power factor correction. For example, let’s say a facility operates a set of five air compressors. A thorough energy analysis may indicate that only three compressors are needed after the facility implements a leak detection/repair protocol and converts some compressed air functions to less-costly alternatives. Power factor correction, in this case, needs to be applied only to three units, while the other two units can be removed and the floorspace used for other activities.

Similarly, the return on investment for power factor correction is inflated when it is applied to capacity that could be avoided. In other words, it doesn’t make sense to optimize a power supply that ends up being wasted. Show me a plant where oversized motor drives are left running during breaks, and I’ll show you a very attractive rate of return on a power factor correction job.

This is by no means a testimony against the concept of power factor correction or the many good professionals that provide this service. Almost every plant will benefit from power factor correction. But would it not make sense to improve energy “housekeeping” first by eliminating waste and redundancies, right-sizing equipment, and establishing energy-smart operating procedures?

Beware of "Fugitive" Energy Costs

As the life-blood of industry, energy transforms raw materials into the final products we consume. The same characteristics that make energy valuable—as heat, pressure, and motive power—also make it potentially destructive. This premise allows us to discuss the concept of fugitive energy.*

To begin this discussion, consider the total volume of fuel and power purchased by a facility. From that delivered total, some energy will be used, and some will be wasted. Focus now on the waste: as fuel is converted to heat, and as heat and power are converted to work, some energy simply dissipates to the atmosphere. Energy is wasted when machinery is left running while not actively producing products. But energy is not only “lost to thin air.” Because it dissipates in the form of heat and friction, energy also contributes to the destruction of the machines and fixtures through which it travels. This is referred to here as “fugitive energy.”

Examples of fugitive energy are many. They include the corrosion of the interior of metal smokestacks attributable to fossil fuel combustion gasses that condense to form acids. Undissolved gasses in boiler feedwater promote similar corrosive effects inside steam distribution hardware. Energy is misapplied as “water hammer” when high-pressure steam collides with stagnant water in a distribution main. Water hammer can rip pipes and valves from their moorings with force that can injure or kill bystanders. Poor electric power quality can cause motor drives to overheat and fail prematurely. Pumps rigged to run at full capacity over the weekend (so that maintenance crews won’t have to get up during the football game) are sustaining additional friction that will shorten their operating life. Inefficient light fixtures expend unwanted heat while also causing air conditioning systems to work longer, consume more energy, and fail earlier.

The pecuniary implications of fugitive energy are several fold. A proper accounting only begins with the value of wasted energy purchases. It also includes the premature depreciation of equipment, wasted material and works-in-process, settlement costs associated with personnel injuries, fines assessed when fossil fuel emission limits are exceeded, and the interest costs (and lost revenues) attributable to downtime. Consider also the floorspace given up to equipment that is oversized or redundant. In many instances, the right-sizing of energy-using equipment will reduce energy costs and relinquish floorspace to more productive uses. Floorspace wasted this way also adds to fugitive energy costs.

Industry is generally familiar with energy risk imposed by forces external to their facilities. These include volatile energy price performance, inconsistent quality of energy commodities, discontinuous supply, and technological change. Contrast this to fugitive energy, which is a self-imposed risk suffered by facilities that delay, defer, or otherwise ignore potential energy improvements. Fugitive energy is the kind of energy risk that industry should be most able to control, or in other words, the dollar losses that should be easiest to avoid.

*Thanks to Bill Adams of Flowserve for introducing me to this concept.