Outsourcing: Energy Efficiency "To Go"

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Energy service outsourcing is a business relationship that allows an industrial facility to transfer responsibility for one or more energy functions—such as steam, compressed air, water treatment, lighting, or other activities—to a vendor. A contractual agreement establishes an ongoing scope of work subject to periodic renewal. The service is typically intended to relieve host facilities of the cost and effort of sustaining reliable energy-related operations. As an ongoing relationship, outsourcing is distinct from energy performance contracts for the design and installation of energy improvement projects, where vendor involvement terminates as projects reach stabilized operation.

Energy efficiency contributes to industrial competitiveness by reducing waste and associated costs. Reduced energy consumption eases stress on regional energy generation and distribution infrastructures. The environmental consequences of energy waste are reduced proportionately.

The American Council for an Energy Efficient Economy released a report on outsourcing as a way to achieve the energy efficiency program goals of industrial corporations, utility customer energy efficiency programs, regulators, and similar regional authorities. While industrial and other large facilities undertake energy service outsourcing primarily to ensure the reliability of energy performance, it can also enhance their energy efficiency.

At first glance, outsourcing appears to address all the classic impediments to industrial energy efficiency by providing some combination of capital and expertise to perform common energy functions. Closer examination, however, reveals risks to both parties in an outsourcing relationship. Broadly speaking, these risks come up in (1) the determination of adequate quantities and quality of service provision, (2) the accuracy of performance measurement, (3) assurances and contingencies for failure to provide (or consume) a prescribed level of service, and (4) mutually acceptable terms for cost recovery and related financial accounting of liabilities if capital investment is involved. Potential outsource providers and consumers alike may be intimidated by these considerations.

Some energy efficiency program administrators may consider becoming direct providers of energy service outsourcing. A more likely approach is for these administrators to influence and support the market for outsourcing as provided by vendors already serving the industrial community. This report describes business models and considerations for providing and consuming outsourced energy services. Any energy efficiency program that seeks to promote energy service outsourcing should be aware of these issues.

None of this is to imply that energy service outsourcing is impossible to pursue. Many isolated examples of its implementation exist; some are described in this report. Based on a literature review and interviews with 41 experts—both energy users and solution suppliers—we conclude that outsourcing can be a viable business solution for industrial facilities. Regional energy efficiency resource acquisition programs may find it advantageous to foster the market for these services. Doing so will require substantial program support to educate and develop the market.

Manufacturers Take Note: Superior Energy Performance

Superior Energy Performance™ (SEP) announces its new website (http://www.superiorenergyperformance.energy.gov)—a valuable resource for manufacturers who want to prove their achievements in energy management and lower plant energy costs. SEP is a certification program applicable to facilities of all sizes in all manufacturing sectors. Built on the ISO 50001 energy management standard, SEP creates value by helping companies establish energy targets and then track, maintain, and verify sustained improvements in performance. Results from the facilities already certified show an average investment payback of 1.7 years. No-cost and low-cost operational measures have posted annual savings ranging from $87,000 to $984,000. Any U.S. industrial plant can now enroll or apply to become SEP certified. Facilities with ISO 50001 experience and a strong record of energy savings can begin the SEP certification process, while others may use the SEP process to strengthen energy management skills and build toward certification readiness. Other features on the new website include certification results, case studies, details on how to certify a facility, tools and resources, and more. ISO 50001, a key element of SEP, is growing internationally. As of mid-January 2014, over 5,000 sites have earned ISO 50001 certification worldwide, greater than a 230% increase from this time last year [based on Peglau data, January 2014]. Facilities planning to implement ISO 50001 may find it expedient to do so within the SEP process, both to take advantage of the available tools and guidance and to position themselves for future certification and the market recognition that it brings. The U.S. Department of Energy Advanced Manufacturing Office worked with the U.S. Council for Energy Efficient Manufacturing (U.S. CEEM), the American National Standards Institute (ANSI), and the ANSI-ASQ National Accreditation Board to develop SEP as a transparent system for certifying improvements in energy performance and management practices. For questions about SEP, contact superiorenergyperformance@ee.doe.gov.

Sic Transit Gloria: Beware of Energy Complacency

CNBC's Patti Domm posted a very good discussion about the apparent reversal of America's energy fortunes. Advanced drilling techniques have boosted domestic gas and oil production. The rosiest forecasts predict that the U.S. can wean itself off foreign supplies within a decade.

Plentiful, secure energy supplies are a good thing. However, complacency is not. My greatest concern is that industrial decision makers will scale back their energy management efforts in reaction to headlines like this. They will say, "if energy is more plentiful, why bother?" Just crank up everything and let it run. Laissesz les bon temps rouler.

Three facts should give us pause before accepting this conclusion.

First, there may be more supply available, but it's not easy to extract. The cost of advanced drilling techniques ensures that fossil fuels shall never be free. Second, the market for petroleum distillates is global. Global demand outstrips domestic supply, so the market price-- the price paid by everyone, including U.S. consumers-- will be bid up by foreign demand. As for natural gas consumers, the short term price outlook is very good. After all, the market for natural gas is technically constrained by transmission and distribution infrastructure. In other words, there are no pipelines connecting Louisiana with China. However, the advent of natural gas liquification (LNG) technology means that domestic natural gas supplies will be increasingly available to a global market. With more buyers available, prices will be bid up accordingly.

The third fact should resonate with industrial energy consumers. Let's say that industry should scale back its energy efficiency efforts, if only because supplies are more plentiful. If so, we should also march into corporate accounting offices and declare that cash management activities should be shelved. Why? Because with the cost of money today is at historic lows due to prevailing interest rates. All the checks and balances aren't worth as much, right? Think about what would happen to corporate liquidity if cash balances were managed the same way as the old-school energy approach. With energy, just shovel on the coals and let everything run full blast. Who wants to be bothered with energy management chores? Try the same approach with cash accounts and watch what happens.

If short term energy surpluses lead to lower prices, this creates an opportunity for American industry. Cost savings can be reinvested in efficient technologies and procedures to hedge against future price volatility. Other countries are already doing this. The last time I checked, U.S. industry is competing with these countries. Complacency does not pay, especially in the context of global competitiveness.

As the Economy Recovers, the Stars Align for Investment in Industrial Energy Efficiency

[From aceee.org/blog] The economy took center stage at times during this year’s presidential debates, but scant attention was paid to the manufacturing sector, which remains an important driver of economic growth as well as energy use. Evidence of a resurgent, domestic manufacturing sector has strategic implications for energy policy as well as the economy. Understanding Industrial Investment Decision Making, a new research report by ACEEE, examines the dynamics of capital investment that drives industrial energy use and competitiveness.

There’s no question that the manufacturing sector struggled during the past decade, as revealed in macroeconomic data. However, we find uneven changes in output as some industries advanced while others declined. Interestingly, almost all industries boosted their productivity during this time period, due in part to the closure of older, less efficient facilities. In the short run, this leads to higher capacity utilization as surviving production facilities take up the slack, but another force may accelerate this trend.

Rising costs of foreign operations are causing a growing number of corporations to “re-shore” production facilities back in the U.S. These corporations also have the capital to finance this infrastructure, due to the $2.2 trillion cash balances accumulated by public corporations over the past decade. Together, these trends suggest “the stars are aligning” to drive capital investment in new, domestic manufacturing production facilities.

This industrial renewal is an opportunity to lock in energy savings for a generation for the U.S., and should be taken advantage of by state and utility energy programs. Manufacturing activity remains a significant factor in regional energy supply and demand balances, and energy efficiency potential abounds throughout the manufacturing sector. This manufacturing energy efficiency opportunity will be a challenge for industry managers who tend to prefer low- and no-cost improvements because it’s easier to secure approval for those measures. A more strategic approach would fold energy efficiency into the design and construction of new production facilities and modernization of existing plants. Energy efficiency program outreach may need to evolve accordingly to realize this opportunity.

Energy efficiency programs that address capital investment activity can support these opportunities. To help start a dialog, Understanding Industrial Investment Decision Making presents results from a survey of industry stakeholders that identifies the nature of capital investment decision-making. With a better understanding of capital investment dynamics, program administrators can work in concert with industry managers to build more efficient and productive manufacturing facilities on U.S. soil to create a more efficient and competitive manufacturing base for the future.

The Romney Camp's Take on Energy Efficiency

Consider this Romneyism: "Energy efficiency is a solution looking for a problem... if it saved money, people would do it on their own." (Source)

The assumption that consumers make "rational decisions" relies on an unstated assumption, to wit: the consumer has complete custody of every step in the decision-making process. This means that the consumer (1) detects some lapse of utility, (2) recognizes the cause[s] of that lapse, (3) seeks and evaluates a remedy, (4) procures the remedy, (5) implements the remedy, and (6) at the end of the day is able to reap the benefits of it.

Especially with regard to energy, rarely are all these stages embodied in one decision-maker. A single-person residential setting comes closest, but even then there may be disconnects-- look no further than centrally-metered apartment units. The rational decision-making assumption is shot down in flames when pondering the commercial/industrial sector. In this case, the six stages listed above usually manifest randomly across departmental lines. The decision stages belong to a management diaspora in which each individual makes energy-related choices that optimize their individual, departmental interests as opposed to being harmonized for the organization as a whole. For example, this paraphrase comes from a chemical plant energy manager who we interviewed last summer: "Our first priority is to ensure that we distribute in a timely and accurate manner all our energy acquisitions across our facility to all the points of production that need them... this is a goal that can sometimes be at the expense of 'efficiency'."

My point: the Romney statement is a non-starter only because the "rational decision maker" is not properly established. Without clear and conscious custody of the decision process, one cannot expect rational decisions to be made. The take-away is that energy efficiency opportunities are directly linked to market failures that can and should be addressed by public policies and programs.

TEN QUESTIONS YOU SHOULD ASK...

Before Accepting an Energy Manager Position

Hopefully, you have already read "What Does an Energy Manager Do." The employer will probably ask you some probing questions. What will you ask them? Here's what I suggest:

1. What are the organization’s reasons for wanting energy management?
Does top management perceive energy as a resource or as a cost of doing business? Do they want to save money, improve productivity, or create a green market image? These are all good reasons, but each option represents a completely different strategy. Each option has different implications for using time and money. You have your vision, management has theirs—you may have to meet in the middle.

2. What does the organization expect energy management to entail?
What does the term “energy management” mean to the person in front of you? Is it shopping for the best electricity price? Or does it mean reminding staff to turn off applications not in use? Is it a preventative maintenance discipline? Or is it a series of capital projects for adopting new and improved technologies? Energy management is not one of these things, but all of them, orchestrated by a business plan. Part of your job is to educate your colleagues and agree on the right mix of these activities over time.

3. To what department will you belong?
Your job effectiveness depends in part on where you reside in the organization. Energy is most closely related to a Facilities, Maintenance, or Engineering department. If you are not being hired by one of these departments, then where? Does Facilities know that an energy manager is being hired? If you are not with Facilities, then what authority or recourse will you have to influence Facilities’ priorities, budgets, or staff allocations?

4. Will you have a staff and a budget?
What resources will be specifically at your disposal? If you have no resources, then you will have to influence other people to do what you want. Will other managers be responsive to your efforts? How will top management support you in this endeavor?

5. What tools are at your disposal?
Energy management depends on data. Data comes from metering systems and special-purpose sensors, probes, scopes, data loggers, and other devices. Data handling requires software. You can get by for a while with a spreadsheet. But if you multiple utility accounts, or if you anticipate using information technologies for real-time performance monitoring, you’ll need special-purpose energy software. If you are looking at replacing or upgrading assets, you’ll need engineering help, either internally or from a consultant. You’ll need to extract information from the data and present your findings to people who are not always technical. This requires additional software and presentation equipment.

6. What protocols does the organization have for managing change?
Energy improvements are the result of changes in habits, procedures, budget priorities, and asset management. Half of the energy manager’s job is to manage change as it impacts the balance of the organization. Changes will impact other managers who have no interest in energy. How does the organization manage change? Does it employ six sigma, kaizen, or other continuous improvement disciplines? If there are no change management protocols, the energy manager will be inventing these on the spot.

7. Against what departmental budgets will costs and savings be applied?
The budget question is two-sided. On one hand, it will cost money to make improvements. From which director’s budget will the money come? The flip side: to which department’s budget will the energy savings accrue? The organization needs to have some preliminary answers to these questions before putting an energy manager to work.

8. Will you have visible support from at or near the very top of the organization?
All the utility and government energy programs advise you to get top management support for energy management. In principle, I agree. The trick is to flag them down. Chances are they won’t be interested, at least at first. You can get started by engaging middle managers and working your way up and down the chain of command. There’s nothing like some early victories to boost your credibility and expand your influence.

9. If there are multiple sites to be managed, how does the energy manager’s authority apply?
As you know, people can be VERY territorial about their jobs. What will be the scope of your activities? What are the existing management relationships that provide access to multiple sites? Are there localized energy management efforts already in existence? How will you integrate these?

10. Were there any earlier attempts to manage energy?
If so, what happened? Maybe they have tried energy management before. How successful was it? What changes were made, and of those, how many remain in place? Has anyone measured progress since then?

This is a conversation about money, business planning, goals and targets. The hands-on technical issues are still important. However, technology does not implement itself. Goals are met because organizations learn to adapt and change. Change happens when people expect some benefit as a result. The energy manager’s job is to manage expectations as well as therms and kilowatt-hours.

Toward an Advanced Manufacturing Policy

NASEO Annual Meeting Keynote Address Focuses on Key Role for States in Advanced Manufacturing

[from NASEO.org, Sep. 11, 2012] Ro Khanna, author of "Entrepreneurial Nation: Why Manufacturing is Still Key to America's Future" and former Deputy Assistant Secretary of the U.S. Department of Commerce, highlighted the State government and State Energy Office role in advanced manufacturing during his keynote address at the NASEO Annual Meeting on Monday, September 10. "State government is where innovation happens," explained Mr. Khanna to the audience of over 200 State and Territory Energy Officials and private sector energy representatives, "and what you're doing on energy efficiency and clean technology is vital for our economy." He stated that the federal government should partner with States to tap into the innovative public-private partnerships often initiated by State Energy Offices.

Mr. Khanna's address focused on why manufacturing is important to the U.S. economy as a bipartisan priority and how energy technologies fit into that vision. He emphasized the critical link between manufacturing design and production and the manufacturing sector's role in balancing the trade deficit. He indicated the manufacturing sector provides stable jobs with well-paying salaries and encouraged expansion of these opportunities.

On global competitiveness, Mr. Khanna referenced the array of government incentives offered to manufacturing companies in developing economies like China and Brazil. In the United States, he said, "it is only in the last 30 years that we decided that we either don't need manufacturing or that government shouldn't have a role in it." However, he noted a historic foundation for a government role based on a10-page manufacturing brief by Alexander Hamilton in 1791 that recommended the government invest with industry, develop an educated workforce, and provide tax incentives. Mr. Khanna suggested that the U.S. government improve manufacturing economic opportunities through streamlined regulations and enhanced approaches to insourcing jobs and decreasing the skills gaps.

Mr. Khanna reported that energy efficiency is still a sector in which the United States remains in the lead globally, creating 2.7 million jobs over the past two years in energy efficiency and clean technology. He said the nation should focus on promoting manufacturing that customizes products and innovates in order to retain and grow our competitive advantage.

Mr. Khanna concluded his remarks on a hopeful note about the American economy. He said while the U.S. manufacturing sector may have a history of being written off, it always succeeds based on the nation's free market economic principles, policy response, and encouragement of workforce creativity and innovation. According to Mr. Khanna, the United States possesses strategic advantages over its global competitors: a sense of "healthy skepticism" that inspires innovation and action in the manufacturing sector, private sector responsiveness to democratic institutions and process, and an encouragement of creativity and innovation in the workforce. He highlighted the importance of the State and Territory Energy Offices' efforts stating, "If we don't figure out how to increase supply of energy long-term and be more efficient in the use of energy, we will put our manufacturers at an economic disadvantage."