Energy Solutions: "First Costs are Not Last Costs"

I had a great conversation this week with a colleague. She made one of those profound statements that instantly and thoroughly resonated with me, as I think it will for you:

“First costs are not last costs.”

As anyone who promotes industrial energy efficiency knows, facility managers operate with tight budgets. First costs—meaning the initial cost of buying an asset—are the sole focus of a hard-nosed procurement director. The procurement director's neck is on the line for minimizing costs today. He couldn’t care less if the lowest-cost assets actually lead to excessive energy or maintenance expenses for years to come. Those costs simply become another manager's problem. Unfortunately, the opportunities for bad procurement choices are many. The typical industrial facility will consume a significant volume of hardware, lubricants, tools, filters, and other consumables that are integral to the facility’s daily functioning. The procurement director will secure products from the lowest bidders—supposedly ensuring the company’s out-of-pocket expenditure is minimized. Unfortunately, the “cheapest” selection is not always the most durable, especially when it comes to valves, steam traps, couplings, and similar hardware. That which wears out faster is replaced more frequently. Similarly, capital investments in energy system maintenance and upgrades may be scaled back to satisfy this year’s spending limits—a great idea until the sacrifice of proper instrumentation, insulation, condensate return, and commissioning results in excessive energy loss that stripped-down assets will endure—often for years or decades to come. So who’s to blame? The procurement director makes his bonus today by keeping first costs to a minimum. Other department managers will bear the costs of energy and labor that compensate for these bad choices. Facility-wide financial performance suffers as a result.

The alternative to this dilemma is to use life-cycle cost criteria. In other words, asset selection is predicated on the total cost of ownership, which includes the first (initial investment) cost as well as energy, maintenance, and financial carrying cost over the asset’s useful life. To make this happen, top management must ensure that procurement managers have the incentive to use life-cycle criteria.

Energy Solutions: In-House or Outsource?

When seeking ways to reduce energy costs, where do business organizations go for help? For many, the choice boils down to in-house versus outsourced expertise. The issues here are many: Who provides the best outcome? Who brings truly valuable expertise to the task? Who has ulterior motives or hidden agendas that may lead to a less-than optimal solution from a business standpoint? Let’s take a look at the risks involved with using in-house OR outsourced expertise.

ABOUT OUTSOURCING:
Facilities may outsource energy performance analysis, system design and engineering, retrofits, construction, and energy management strategy development. By outsourcing, one takes advantage of the depth of expertise that an energy expert provides. Well-seasoned energy experts see the best and worst of many facilities, bringing a wealth of knowledge to the client. However, this expertise costs money, and there are many facility managers who cringe at the thought of writing a check to pay for a service that maybe—just maybe—could have been accomplished with in-house resources. The cost of outsourced help may be higher because of the profit margin reflected in the vendor’s cost. The expert may cost more, but he might also make the solution (and therefore the savings) available more quickly. Then there may be some risk, real or perceived, that the vendor will make prescriptions that benefit equipment suppliers more than the customer who purchases the solutions. Facility managers are all wary of the “snake oil” that has been hustled by more than one energy solution provider over the years.

ABOUT IN-HOUSE EXPERTISE:
There may be a sense of pride in ownership, articulated as “this is our plant, we’ve operated it for years and no outsider can know any better than us how to run it.” A grey-beard supervisor may be the best source of cumulative knowledge about a facility, its design, and it standard operating procedures. You cannot seek or implement energy improvements without the input of such talent. On the other hand, a reliance on in-house expertise has risks of its own. Keep in mind that in today’s economic environment, facility staff are usually trimmed to the bone. People “wear many hats,” scrambling to keep up with multiple tasks while not mastering any one very well. They see the same workplace each and every day, not getting exposure to the lessons-learned from a variety of facilities. Unfortunately, in-house staff can offer up just as much “snake oil” as an outside vendor. All too often, in-house staff resist help from outside sources, primarily out of fear of embarrassment, or worse. Controlling energy costs usually involves some kind of change. Facility workers are prone to resist the "extra work" that energy optimization may entail, especially when their paycheck stays the same, regardless of energy performance. Rather than risk the exposure of waste attributable to “the way we’ve always done it,” many in-house staff can and do advise their management not to seek outside help. Many top managers lack the technical credentials to appropriately judge such opportunities. When this happens, organizations continue to waste energy—and pay dearly for fear and misplaced pride.

THE BIGGEST COST may be the cost of doing nothing. This is the very common result when organizations lack clear lines of “ownership” and accountability for energy issues. Unless someone is directly accountable for energy cost control, waste can go unchecked, with losses accruing not to any one department, but to the organizational bottom line.

Live Online Energy Presentation: "How the Money Works"

"Energy Cost Control: How the Money Works" is a presentation that I have given a number of times across North America. The next presentation will be on Friday, July 18 at 2:00 pm eastern time. This will be live and online, given by the Association of Energy Engineers. For more info and to register, please link to: http://www.aeecenter.org/realtime/CostControl/.

The online presentation is a comprehensive, two-hour discussion in three parts:

1. Rethinking energy issues in a business context.

2. Project analysis: Making a more compelling justification of energy improvements to corporate and financial decision-makers.

3. Demonstrating the connection between energy improvements and cash flow.

Please consider registering for this online presentation. It will forever change the way you think about energy and its impact on business performance.

Free Industrial Energy Assistance: What You Should Know

Many industrial facility managers are looking outside their organization for some kind of free assistance for controlling their energy costs. Energy assistance programs of various kinds are conducted by certain state, federal and utility outreach offices. It costs money to conduct these programs, and that money almost always comes from tax payers, utility ratepayers, or from industry associations. On one hand, it can be argued that the cost of energy assistance is an investment in economic development. A more cynical take is that these programs allow industry to benefit from other people’s money. Let’s not rush to judgment. For now, let’s simply review the most common forms of program assistance—and the pros and cons of each.

New technology research and technology (R&D). Leading researchers develop new technologies that may allow industry to make more products with less energy. Since the 1980s, the U.S. Department of Energy (U.S. DOE) has led the charge in pooling costs, risks, and know-how needed for energy R&D. R&D work—and hence the funding—is channeled mostly through universities and national labs.

PROS: By pooling resources and risk, R&D funded cooperatively by government and business consortia makes a wider variety of energy-saving technologies available somewhat faster and with less redundant use of resources. R&D funds ultimately trickle through to the local economies that host the national labs and universities. The universities are not just developing technology—they are also the training ground for the next generation of energy experts.

CONS: R&D efforts usually take years to develop. Note, for instance, efforts led during the late 1990s by the U.S. Department of Energy—industrial energy “roadmaps” that culminated in a “Vision 2020,” or in other words, results that were expected some 20 or more years after their inception. For the 15-person metal fabrication shop in Arkansas or the 100,000 square-foot food processor in Pennsylvania struggling to meet this year’s production targets, the benefits of industrial energy R&D may seem way beyond reach—or even relevance.

Energy information “tool kits” for the do-it-yourself (DIY) plant technician. By the year 2000, government and utility program designers rightly noticed that many industrial facilities simply lacked awareness of energy waste and the means for becoming more energy-efficient. This is when U.S. DOE’s BestPractices effort emerged, wisely focused on the handful of technologies that are common to most facilities, such as steam, compressed air, and motor drives. The “tools” are tip sheets, sourcebooks, diagnostic software, and case studies, all mounted on the BestPractices website-- available for free download via the worldwide web.

PROS: Developed by expertise drawn from industry, government, and academia, the BestPractice tool kit provides comprehensive, unbiased guidance to its users.

CONS: The BestPractices program (and its many spin-offs and imitators) is predicated on the assumption that “if you build it, they will come.” In other words, we assumed that practitioners in industry would readily adopt any and all “how-to” direction if it was given away for free. In practice, we find that is not the case, since many facilities remain indifferent to these materials. Facility managers tell us they lack the time and expertise to pursue information resources, regardless of cost. We should also recognize the lack the incentive to focus on “efficiency” when one is held accountable for meeting production targets at any cost.

Corporate energy management strategy guidance. The U.S. Environmental Protection Agency’s (EPA) Energy Star program attempts to communicate directly to corporate leaders, issuing a message that generally links energy management to profitability, competitiveness, and the abatement of combustion and related environmental risks. The EPA’s body of work encourages industry to implement strategic energy goals, plans, and accountabilities.

PROS: EnergyStar for industry is certainly the deepest and richest well of information regarding corporate energy management planning. Based on lessons learned from the best-of-the-best corporate energy programs, EnergyStar provides a roadmap for designing and implementing a rigorous energy management discipline. It’s all on a website, and it’s free.

CONS: “Energy management planning” is a concept yet to be accepted especially among small- and mid-sized industrial facilities. While top managers are generally interested in reducing energy costs, very few leaders establish the appropriate staff accountabilities to make it happen. People in an industrial environment stake their careers on meeting production targets and growing the business, not achieving “efficiency,” per se. Industry’s common practice is to seek relief in the form of a one-time project—“once and done”—so that they can return to what really matters. “Energy management,” and its emphasis on continuous improvement, implies a new layer of responsibilities which don’t appeal to industrial staff who are already overworked and spread too thin.

Energy audits. An energy audit measures the gap between current and optimal energy performance for a given facility. Why not offer individual facilities some quantification of potential their savings? If industry leaders saw how much value was at stake, would they not be more inclined to cut the waste by implementing greater efficiency? The U.S. Department of Energy has been doing this, to date providing several hundred industrial energy audits for free. In return, the DOE asks only for the privilege of publishing the results of each so that the rest of industry can be informed and inspired by the magnitude of potential savings.

PROS: Some, but not all industrials, will accept a free energy audit. Some documentation of potential savings is provided to those that do. As energy prices go up, managers are beginning to enquire more frequently about energy audits.

CONS: The energy audit concept is poorly understood by many. For one thing, the very act of getting an energy audit fixes nothing. It only provides the roadmap for getting to the savings. Almost always, an energy audit is a technical document written by engineers for an engineering audience. It usually says nothing about the “people” issues that will help or hinder the implementation of recommended improvements. While the number of enquires about energy audits ( and “free” audits in particular) is on the rise. As explained at length elsewhere in this blog, energy audits are not a commodity, and you effectively get what you pay for.

Capital grants. A handful of entities have attempted to provide grants—to actually give away money—to industrial facilities that commit to a specific energy improvement project.

PROS: The preparation for such grant programs certainly stimulated a lot of discussion about needed technologies.

CONS: In the end, it was actually hard to give away money. Energy “projects,” pursued without the larger context of an improvement program, are often seen as a distraction from all-important production goals. Also, such projects simply represent change—and where there’s change, there’s risk. In a business environment, the time and effort that are devoted to efficiency are expended at the risk of missing all-important production schedules.

Lessons learned? The promotion of industrial energy efficiency depends on a carrot AND a stick. The give-away of free resources will help only if industrial leaders first ensure that their staffs have the goals and accountabilities for making measurable energy improvements.