Thursday, September 27, 2007

How to “Do Nothing” About Your Energy Costs

“Do nothing” may be a valid way of dealing with energy costs. It’s a particularly attractive choice if you are determined to operate the plant the way you've always done it. You don’t have to run the gauntlet of approvals to get money for energy improvement projects, and you don’t have to force people to change behaviors and procedures. You avoid the risk of getting fired because the project that you fought to get approved failed to meet its projected performance measures. So instead of taking on the sharp pain that accompanies change, you settle for the dull ache of income lost to energy waste.

Doing nothing saves you from many problems, but it does not shield you from the fact that financial statements don't lie. Top management may not track energy, but they do track money. So as it turns out, “doing nothing” about energy eventually puts you at risk. Here are some suggestions for how to cover your tracks:

• Blame your energy expenditures on rising energy prices. You don’t set the price for fuel and power, the market does. You’re at the mercy of the market. Front-office people don’t always understand how your mechanical systems use energy, but they certainly understand price. To strengthen your case, start charting energy prices over time. Pictures like this are worth a thousand words. Use this price data to explain why your energy expenses keep going up.

• Remind your management that your competitors have to buy energy, too, so they have the same problem and therefore the playing field stays level. Don’t mention the fact that your competitors may be addressing their energy waste, because that would shoot a hole in your “level playing field” claim.

• Cut other expenses. As your energy bills go up, the money to pay them has to come from somewhere. The favorite targets are maintenance (which can always be deferred, right?) and labor, assuming you haven’t already trimmed payrolls to the bone and then some.

• Pass the costs increases on to your customers. There’s only one problem with this: competition. Customers can take their business elsewhere if they don’t like the price you charge. Compensate for product price increases with enhanced service that presumably doesn’t add to your expenses in other ways.

• Alter the mix and quality of subcomponents that make up your final product. For example, some creative manufacturers are settling for more brittle grades of plastic or metal hardware that’s not heat treated or thoroughly plated for corrosion resistance. That’s one way to hold down costs, but you run the risk of alienating customers with junk products.

• Change your accounting of energy costs. In other words, change the way facility-wide energy bills are broken down for assignment to individual departments. Many organizations have one meter for electricity, for example. An accountant merely prorates the total bill over the departments by some artificial measure, such as number of employees or square feet—measures which usually are poor indicators of energy use, but they are convenient for the accountant’s task. Use a spreadsheet to model energy cost allocations under different scenarios. Find an allocation that works to your benefit (that is, hides your energy waste), and persuade the finance controller to adopt your approach.

• Get political and start lobbying your legislature to ease restrictions on energy supply. Presumably, if we dig, drill, refine, and generate more power, the increase in supply will drive prices down. Corporate officers and politicians understand “price.” Any discussion about how energy is used (and wasted) gets too complicated. By focusing on price, you keep it simple, and therefore increase your chances of getting political support.

Good luck.


Monday, September 17, 2007

Free Energy Audits

You landed here because you’re looking for a free energy audit for your business facility. Please read this post--in just two minutes, you learn what an energy audit is and what it is supposed to do. You can then decide whether or not a "free" energy audit makes sense for you. I share some thoughts about other forms of free energy assistance elsewhere.

Understand the purpose and outcome. An energy audit identifies energy consumption that is in excess of what is needed to adequately serve a facility. The audit process itself doesn’t fix anything. It merely provides a “roadmap” that shows where savings are. A report of findings should list potential improvements, showing anticipated energy savings and an estimate of the cost to achieve those savings. Expect the recommendations to include “projects” (changes or upgrades of equipment) as well as behavioral and procedural changes.

Know the inputs that are required. An energy audit is not a commodity to be shopped for the lowest price. You will get what you pay for. Energy audits require professional expertise and experience. The auditor should have a technical understanding of heating, cooling, ventilation, lighting, combustion, and other technologies. No one can stick their head in the door and guess in advance how much savings are in a facility. It takes time to prepare for, conduct, and analyze a facility and its systems. It involves a physical walk-through of the facility as well as the study of blueprints, mechanical drawings, and production or operating schedules. Your staff should be aware of this process, and prepare accordingly.

Who provides free audits, and what should you expect from these? There is no free lunch. A “free” audit is usually a front for a commercial agenda. This means the provider of a “free” audit is not truly working for you and your benefit. Different providers have different agendas-- and therefore they offer different value propositions. Your options:
• Some utility companies provide free audits, usually because regulators order them to do so. These utility programs, however well-intended, are chronically underfunded. Even the people who conduct these audits will tell you how they have to cut corners to produce a report that fits their limited budget. To be fair, it's better than nothing.
• Equipment vendors offer free audits. Do you really expect someone who makes money by selling their equipment to give you an unbiased audit? Having said that, if you choose to go this route, you should get more than one vendor to give you their "free" audit. You might get some valuable insight by comparing the differences between the vendors' findings.
• University or government agency audits. You can get some value here, but again, these providers are underfunded. They don’t have the resources to perform extensive study and analysis. At least there is a lack of commercial bias, and again, it’s better than nothing.

Do you not have the money to pay for an energy audit, or do you not have the authority to spend the money for it? If you don't have the authority to pay for an energy audit, you probably won't have the authority to make the investments or operational changes that an energy audit will recommend. The issue here is actions that will shape your energy bills for the next five, 10, 20 or more years. Do you want your cash flow for years to come to depend on the results of a "free" audit, or the results of a proper analysis? Research by the U.S. Department of Energy shows that the average industrial facility wastes 40 percent of the energy that it buys; and, on average, perhaps half of that waste is economically recoverable. Every facility is unique; your savings potential may be greater, or it may be less. What is certain is that the value of wasted energy wasted will soon outweigh the amount you could have spent for a proper energy audit. You might also want to see how your energy waste effectively raises the "price" of the energy that you actually use.

I realize that this may sound complicated, especially when compared to the way we've historically thought about energy bills. Similarly, I realize that many people are looking for a plug-and-play energy cost solution-- something that allows them to "fix" the problem and get back to regular work. Consider the business philosophy that will guide your organization's response to energy audit recommendations. Yours will not be the first organization to ask, "Now that I have an energy audit, what do I do next?"

If all else fails, simply scour the Internet for energy saving tips. Make a list of potential improvements, and prioritize these the way you think best: do what’s cheapest, do what’s easiest to accomplish, etc. Be sure you benchmark your energy consumption over time so that you can measure the impact of your improvements. How much potential savings will you capture this way? And how long will it take? To answer that question, you will need to secure... an energy audit. To make sure your energy audit does not sit on a shelf collecting dust, you'll need to act effectively. Consider these "seven steps to successful industrial energy management." And if you DO decide to take action, start thinking about if it's better to perform the work in-house, or if it should be outsourced. To make sure you're on the right track, see my checklist for a successful energy audit.

Of course, your last resort is to "do nothing" about your energy costs. It's a valid approach, but it has its costs, too. See How to Do Nothing About Energy Costs.

If you still have questions, contact me. I love talking about this subject.

Good luck.


Wednesday, September 12, 2007

Seminar: "How the Money Works"

I will be conducting an energy seminar via Internet on September 20, 2007 and again on November 1, 2007. The title is "Energy Cost Control: How the Money Works." These are produced by the Association of Energy Engineers. To sign up, please click here. The two-hour program will provide insight on:

* Translating the costs and benefits of energy improvements into terms that resonate with front-office managers.
* Budget and management metrics that link energy performance to fiscal performance.
* Demonstrating the linkage between energy cost control and shareholder value.
* Putting energy efficiency/procurement strategies on an equal footing with energy procurement strategies.

For more details, click here.


Energy: What Do You WANT it to Cost?

Here's the point of this post: you can either buy energy, or pay to avoid buying it. You should know what the cost is in either case.

Today, I visited a corrugated container manufacturer with a boiler that's near the end of its useful life. Annual boiler fuel consumption works out to 390,780 therms of natural gas. In its current condition, the facility's boiler fuel is used as follows:

1. Sixty-eight percent will be fully converted to heat that serves the corrugation process. An additional nine percent will accrue to unavoidable thermodynamic losses that occur as fuel is converted to heat. This 77 percent in aggregate is what I call "committed energy."

2. The remaining 23 percent will be wasted in ways that can and should be avoided. These therms are what I call "energy at-risk."

Consumers WILL PAY for energy at-risk in one of two ways: (1) they will buy the fuel at the supplier's contract price and then waste it, or they will pay for an energy improvement that will end the waste. In this case, we are dealing with therms, so the cost of either choice can be expressed on a per-therm basis. As was stated above, the supplier provides therms at a price of $1.61 per unit.

We tried to tally up the cost of individual improvements, but quickly decided that a complete boiler and steam system replacement may be the best option. Total installed cost: $269,205. This is a 25-year asset, and with the cost of capital being 8%, this amortizes to an annual payment of $25,219. Hold that thought.

The improvements would reduce the annual (budgeted) therm consumption from 390,780 to 298,998. The difference is 91,782 therms "at-risk" each year. In the coming year, the facility WILL PAY for those therms at-risk in one way or the other: (1) buy and waste at $1.61 each, if the energy supplier's price remains the same; or (2) pay to avoid purchasing these therms. They would "avoid purchasing" by investing in improvements that cut the energy waste. In this case, the annual amortized cost of the improvements is $25,219, or $0.2748 per therm.

So let's recap: 91,782 therms are at-risk. What to do? One option: buy and waste each at a cost of $1.61 per therm-- a price which can change at any time. The alternative: avoid buying these therms at a cost of only $0.2748 per unit-- a price that is amortized and will therefore remain the same for the next 25 years.

What's the final decision? We'll have to see, because it takes time for the management team to consider this proposal. And while they ponder it, their boiler continues to gobble up fuel at $1.61 per therm.


Tuesday, September 04, 2007

Energy Management: Move Forward or Fall Behind

Notice that in the title of this article, there are only two choices: move forward, or fall behind. When it comes to energy management, there is no “idle” setting. Failing to take action has its costs, too. This is the implicit choice of companies that choose to continually resist their pursuit of energy cost control.

If you choose to “do nothing,” it costs nothing, right? Let’s think about it: you may have already obtained an energy audit, but that by itself accomplishes nothing. All savings from an energy audit remain forfeited until you actually implement the recommended improvements. Many good proposals languish while the concept must be “sold” to a variety of decision-makers within the organization who may or may not understand the proposal’s technical aspects. This internal “sales” process can take months, because it has to find a place on a series of meeting calendars. The longer it takes to ponder energy improvements, greater is the chance that capital will be diverted to some emergency repair item that inevitably arises. No wonder the “do nothing” approach is so enduring.

Here’s how you can fall behind by simply standing still: the nominal efficiency of energy-consuming machinery inevitably erodes over time as heat and friction take their toll. Maintenance expertise similarly erodes with staff attrition and turn-over. If best-practice procedures are not documented, people scramble to reinvent knowledge that should have been part of standard operating procedure to begin with. In the meantime, new best practices and technologies are appearing all the time. Is anyone scouting for these opportunities? Does it still make sense to do things “the way we’ve always done them?”

The good news is that energy management does not have to happen all at once. Successful programs start out in first gear, seeking early victories to give the organization confidence in what they can do. Momentum pushes their efforts into the second and third gears, as decision-makers become comfortable not just with hardware changes, but with team-based decision-making. They’ve reached full speed when energy-saving initiatives become part of standard operating procedure. Then—and only then—does the organization occupy the driver’s seat when comes to moving forward with energy cost control.


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