Monday, June 04, 2007

A Challenge to "Rear-View Mirror" Energy Management

We’re all familiar with the monthly budget review meeting. This is when the general manager sits down with department heads to compare the latest month’s financial results to the organization’s operating budget. This is one way in which department managers are held accountable for their year-to-date fiscal performance. It’s a very common and well-intentioned business habit. It’s also potentially one of the most damaging, because the actual-to-budget review process focuses on the past at the expense of the future. It’s sort of like trying to steer a car by looking in the rear-view mirror. And as you will see, it is a big reason why organizations perpetually fail to take meaningful control of their energy costs.

While the organization as a whole attempts to make money, department directors are primarily concerned with spending money for materials, labor, utilities, support services, and the like. The monthly budget review is a discussion of variances—particularly those instances where spending is on a pace to exhaust funds before the end of the fiscal year. Top management provides annual performance incentives that focus on this year’s budget outcomes, not those of future years. A preoccupation with this year’s budget may be at the expense of potential savings that can accrue for years to come. The idea of investing in energy improvements this year usually causes grief because it simply widens the gap from this year’s budget targets.

But if you think about it, this year’s budget is largely derived from last year’s actual fiscal performance. History provides some useful insight, but it can also obscure future potential. The following is an example that illustrates the “rear-view mirror” management approach to moving forward.

Let’s say a facility has yet to adopt energy-efficient technologies, behaviors, and procedures. This means that it habitually buys more energy than is actually needed, because waste is built into its operations. The budget account for energy, then, is inflated to accommodate these inefficiencies. For example, energy losses add up to about 40 percent of the total energy delivered to U.S. manufacturing facilities as a whole. Stated differently, the typical manufacturing facility must inflate its energy procurement budget by a factor approaching two-thirds to account for energy that is both used and wasted.

Possible solution: Break down annual energy expenses into two separate line items. One represents the value of energy that will be actually applied to perform useful work. The second line item represents energy that will be wasted. How do you allocate energy expenditures into these categories? The answer is found by conducting an energy audit that thoroughly evaluates energy inputs, uses, losses, and potential consumption improvements. While industry averages are generally helpful, the most reliable indication of any single facility’s energy flow depends on a proper energy audit—the more thorough its scope, the better.

Without distinguishing between energy applied and energy wasted, department directors so often conclude that they “don’t have the money for energy improvements.” The account for energy waste (a budget artifact directly related to past performance) is in reality an account from which energy improvements should be budgeted. The energy waste line item is also brings attention and urgency to the issue at each and every monthly budget review. Managers can use the “energy waste” account to either MAKE energy savings or BUY energy that ends up being wasted. Dollars from the “energy waste” account are devoted to energy improvement projects when the cost to save a unit of energy is less than its purchase price per unit. This is one line item that actually forces managers to look forward, and not in the rear-view mirror, when planning energy consumption.



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