Monday, December 18, 2006

Energy Policy, Energy Programs: Who Speaks for Industry?

Industrial energy cost issues are addressed by a variety of interest groups. By virtue of their professional training, these camps have very different approaches to the subject, and each group speaks a “language” that is often undecipherable to outsiders. As will be noted below, this creates problems when it comes to developing and prioritizing energy policy options. It helps to start this discussion by clarifying what constitutes energy “policy” versus energy “programs.”

Energy policies, in general, either restrict or encourage certain investment activity. Restrictions tend to focus on the terms and conditions for fossil fuel exploration, extraction, refining, and the interstate transmission of gas and electricity. Restrictions also prescribe performance standards to which entities must adhere when designing buildings and operating certain energy-using equipment. Policies often impose penalties against entities that don’t meet prescribed criteria, which obviously requires some kind of administrative enforcement. Energy markets are influenced by policies that encourage investment, usually through tax incentives, in certain kinds of energy-related equipment. Policies also authorize the development of energy-themed programs.

Programs are activities carried out by government agencies. Each program reflects an agenda with clear themes, milestones, and objectives. Note that policies authorize programs, but program funding usually requires a separate legislative action. In other words, the policy act of authorization “makes a parking space” for a program concept, but the decision to allocate (or “park”) funds is a separate matter.

Industrial energy consumption is a complicated matter that touches many decision-makers in a variety of ways. If policy is the result of “listening” to constituents, then who speaks for industry?
Industry’s corporate leaders are keenly aware of their rising energy expenses. These leaders demand relief primarily in the form of lower prices.
Facility managers note the growing lack of skilled human resources needed to run their plants and keep pace with new technologies. They want training resources for existing staff as well as properly-educated new employees.
Vendors want to sustain industry’s demand for the motors, pumps, insulation, controls, and other equipment that manufacturers rely on for their operations. Vendors want tax credits and other incentives to raise the demand for their products.
Facility engineers are responsible for the reliability of plant equipment. They evaluate the technology options for meeting production goals. Engineers want unbiased guidance to sort out the promises made by equipment vendors.
Universities host much of the activity funded by energy research and development expenditures. They want sustained government support for new technology development.
Gas and electric utilities must maintain the infrastructure that delivers energy to all consumers, including industry. Business planning is a difficult chore for utilities, since their customers’ energy supply and demand projections must be sorted out before utilities can decide on their optimal level of infrastructure investment.
Environmental advocates challenge the unnecessary depletion of natural resources, and seek to restrict energy-related practices that negatively impact air and water quality.
Efficiency proponents remind us that energy depletion can at least be tempered through advanced technologies and best-practice procedures. Efficient use of traditional energy sources helps to buy time while advanced technologies and alternative fuel sources are being developed.

All of these stakeholders have a valid agenda. There are distinct advocacy groups that back each approach, and obviously these groups need money to operate. Each group in turn has its backers who will benefit if the government were to support their particular niche. Only so many federal dollars can be allocated to “energy” programs, so these become competing options. Note, for example, that many general observers tend to confuse “renewables” with “efficiency.” This confusion becomes problematic when deciding where to allocate sponsorship dollars. Advocates are compelled to stick to their niche, because visibility lent to other agendas may be at the expense of one’s own. It’s easier for lawmakers to craft individual policies for each of these agendas. But taken singularly, none of these agendas represent a comprehensive solution to industrial energy challenges.

Segmented energy policy concepts are valuable to individual advocacy groups, but are of limited value to industrial energy consumers. Unfortunately, a comprehensive energy policy, for which the whole has a greater value than the sum of the parts, has no backer. For advocates, it simply “doesn’t pay” to take a comprehensive position.

Manufacturers can’t expect policy alone to solve energy cost challenges. Remember this fact: of all energy delivered to U.S. industrial facilities,
about 40 percent is not applied as intended to works in progress
. In other words, a lot of energy is wasted. While lower fuel prices certainly help, energy cost control comes primarily from within industrial facilities. Each industrial facility must take control of its own energy fate through energy optimization plans that set goals, establish internal leadership, and assign accountability for results. Each facility is unique, and so is its optimal energy strategy. Public policy is weak medicine for energy issues, and certainly no replacement for good managerial decision-making.


Friday, December 15, 2006

Michigan: An Evolving Approach to Industrial Energy Outreach

Michigan’s manufacturers, like those in the U.S. as a whole, are challenged by inflated energy bills. Energy waste is a contributing factor to high energy expenses, but many industrial decision-makers are unaware, unable, or unmotivated to do anything about it (see Energy Pathfinder’s post dated 2006Oct25). It’s hard to make good energy choices without the knowledge of available options. Boosting awareness of energy-efficient technologies, procedures, and behaviors remains an ongoing challenge. This is in many ways a marketing opportunity.

“Marketing,” however, is a concept with which many government entities are not comfortable. And to be fair, no one—business, government, or otherwise—seems to have mastered the marketing of “energy strategies.” Not that it constitutes “marketing,” per se, but the limited federal energy assistance that exists is mostly channeled through states. This allows each participating state to serendipitously customize its outreach strategy. We would expect that some states are better than others at boosting awareness of (i.e., “marketing”) energy cost control strategies. We will look at Michigan’s experience in a minute.

A number of well-intentioned industrial energy efficiency outreach strategies have been developed over the years, primarily by state energy offices, utilities, and power authorities. The individuals behind these programs have been primarily technical people who anticipate a technical audience. A couple leading outreach strategies include:
Best practice documentation. By using the Internet as a repository, some programs have posted tip sheets, case studies, and other do-it-yourself reference documents. “Build it and they will come” is the underlying promotional strategy.
Workshops. These classroom-style events, generally attended by mechanics and tradesmen, provide a day’s worth of instruction focused on technology and equipment. The typical workshop attendee is almost never a “decision-maker.” Without the power to set priorities, create budgets, or develop procedures, these individuals cannot muster the organizational change that is a prerequisite to effective energy cost control.

These strategies fall short for a reason: Even the most compelling technology does not implement itself. People implement. But people must first run the gauntlet of competing organizational priorities.

Michigan, which imports nearly all of its $30 billion annual energy tab from other states, decided to evolve this approach. To do so, the Michigan Energy Office competitively selected a private management consulting firm, Shepherd Advisors, to implement their U.S. DOE Special Energy Project. In short, the Michigan Dialogue to Reduce Energy Use (MiDRE) seeks to “grease the wheels” of outreach through enhanced communication. Being in place less than a year, this program has little track record to evaluate. But it is certainly one to watch. Some elements, such as workshops and newsletters, are standard fare. But by leveraging Internet resources for two-way communications, program manger Ramsey Zimmerman seeks to (1) discover energy assistance needs at the individual plant level, (2) direct participating companies to the appropriate resources, and (3) develop a peer-to-peer networking platform. One interesting feature is an Internet bulletin board that invites input from industry, solution providers, and other stakeholders.

MiDRE’s biggest challenge is to make the right industry contacts, then motivate them to participate. Contact with one individual, even if it is the “right” person, does not mean that a whole facility has been engaged. Then there is the matter of building trust. MiDRE is after all a public sector energy program, and industry often suspects that a regulatory agenda lurks behind any government initiative.

By using cutting-edge communications, the MiDRE concept is an evolutionary step beyond the traditional forms of industrial program assistance. The next step should be to facilitate communication within participating industrial facilities, so that management teams achieve the awareness needed to untangle the turf issues that so often stall energy cost-control efforts. Some of Energy Pathfinder's suggestions for future messages:
• Create some urgency by communicating the "Seven Deadly Sins" of energy cost control
• Give amnesty to individuals who may "take the fall" for yesterday's energy waste-- Remember that the real culprit is a lapse in organizational preparedness.


Monday, December 11, 2006

Why Policy is Weak Medicine for Industrial Energy Costs

Let’s be clear at the start of this discussion: policy is a necessary yet insufficient tool for shielding industrial consumers from today’s volatile energy markets. Energy policy is certainly welcome and timely, but policy has its limits and must be complemented by industry’s good managerial decision-making if manufacturers truly wish to defeat runaway energy expenses.

To a large extent, a manufacturing organization’s energy expenses reflect internal, day-to-day management and staff decisions. These decisions directly impact a facility’s energy consumption and waste. Internal, proprietary business choices certainly cannot be addressed by policy, unless manufacturers WANT legislators to tell them how to run their businesses.

By necessity, U.S. energy policy initiatives through 2006 have sought to maximize positives while minimizing negatives for as many entities as possible. Accordingly, energy legislation usually promotes more energy exploration, supplies, and infrastructure. There are two main dimensions to supply-oriented energy policies:
• Regardless of how efficient a facility is, it will benefit from lower energy prices, and more supply will ostensibly drive prices lower. Opponents to this approach typically cite the negative environmental impacts that accompany the ever-more intensive extraction of fossil fuels. There are also compelling arguments that fossil fuels are becoming increasingly expensive to extract as the natural supply dwindles.
• Refineries and power generating plants are key components of energy infrastructure. In general, policies that reduce regulatory restrictions on the construction of energy infrastructure will presumably boost energy supplies and therefore reduce energy prices. Interests opposed to this approach are again typically concerned with environmental impacts. But even with regulatory approval, new energy supplies and infrastructure will take years to establish.

But let’s remember this fact: of all energy delivered to U.S. industrial facilities, about 40 percent is not applied as intended to works in progress (see this U.S. Department of Energy report). In other words, a lot of energy is wasted. Avoiding as much of that waste as possible is not only economically feasible at the facility level, but in fact desirable from the perspective of the general public. If energy consumption is inflated through waste, then investment in new energy capacity will be similarly inflated. Building new energy production capacity is fine, but that investment should be minimized so that valuable capital dollars can be directed to other much-needed investments.

A number of other policy concepts accompany the supply-side options:
• More advanced energy technology research and development (R&D). The development of advanced technology is a task that few companies can pursue alone. The money, planning, and coordination that characterize R&D is best orchestrated through government-business collaboration. Problems with technology R&D are (1) it takes years to come to fruition, (2) human skills need to keep pace with technology, and (3) industrial facility managers are best advised to improve their current energy housekeeping before investing in new technologies. The logic is simple: new capital investment projects are more likely to meet their projected payback if they are complemented with energy-smart maintenance and operating procedures. Quick example: remember to turn off equipment that’s not actively producing something!
• Greater efficiency. Since it’s not practical to tell companies HOW to run their facilities, policy incentives encourage industrial decision-makers to pursue selected activities at their option. Tax incentives can be applied to specific pieces of equipment such as high-efficiency electric motors, pumps, or lighting. But in an industrial setting, sustained energy cost control is more dependent on whole-system design and operation strategies. Episodic component changes have limited impact unless pursued as part of an overarching energy-use plan or discipline.
• Alternative fuels. Wind, solar, biomass and other non-fossil fuels are must-have components of the energy future. But one of the hurdles to ramping up these investments is the tangled mess that describes the current state of utility deregulation. Before committing to these assets, investors must have more certainly regarding (1) the viability of competing energy sources (i.e., existing fossil fuels), (2) future policies regarding the maintenance and overhaul of our national electricity transmission system, (3) the state-by-state patchwork of utility distribution costs and requirements, and (4) tax structures which directly impact investment in all of the above.

Industry truly needs more supply, technology R&D, efficiency, and alternative energy supplies if it is to achieve a sustainable solution to run-away energy costs. But understand how the policy game works in Washington: legislative support usually goes to the advocates with the most simple, one-dimensional messages. There are distinct groups backing each element of the energy policies described here. However, message coordination is lacking. Much of this is attributable to the “simple message” strategy. But at the same time, these advocacy groups need money to do their work. To some extent, advocacy groups compete for the same funding dollars. For them to recognize other agendas may put their own funding at risk. This is why it’s very difficult to find a platform that describes (and advocates) holistic energy cost control strategies for industry.

However, that’s why this blog exists….


Friday, December 08, 2006

Energy Cost Control: How Uncle Sam Helps Industry

There are a couple of ways that the federal government currently assists industry. We’ll describe those below. But first, let’s address an obvious question that no one else seems to ask: if energy improvements reduce expenses (and therefore boost income), why are incentives necessary? The reasons are embarrassingly human, as discussed in “Why Does Industry Resist Energy Management?.”

Somewhere, there may be some debate over the necessity of such incentives, but Energy Pathfinder doesn’t have a dog in that fight. Having said that, it’s worth describing some of the leading incentives that are still available.

An income tax deduction is currently available that can be worth up to $1.80 per square foot. This deduction applies companies that make improvements to their lighting, building envelope (such as windows and insulation), and heating ventilation and air conditioning. Admittedly, energy use by industrial buildings can be small relative to the production machinery housed in the buildings. However, building improvements are usually easier to pursue because they typically don’t interfere with production activities. The tax deduction applies to certain improvements made during 2006-07. Note how Paccar Winch in Okmulgee, Oklahoma took advantage of this incentive.

We’ll say it again: You can’t manage what you don’t measure. The U.S. Department of Energy’s Save Energy Now initiative is providing energy assessments (audits) to large industrial facilities. The application period is currently open for companies seeking an assessment in 2007. Be sure to check out the published results describing over 100 such assessments already conducted in 2006.

The U.S. EPA has developed THE authoritative depository of information for developing a corporate energy management plan. Think of this as the “Cadillac” of strategies—something that is best pursued by companies that maintain a full-time, corporate energy management team.

There’s one more alternative. Wait for policy action, project permits, and contracts that open up new fossil fuel reserves and allow the construction of new power plants. Expect a five-ten year lead time for these projects, which MAY lower energy prices through the additional supply that they deliver. Can you afford to wait?


Monday, December 04, 2006

The Seven Deadly Sins of Energy Cost Control

7. Believing that the financial impacts of energy decisions are reflected only in utility bills, ignoring the wider impact on raw materials, labor, time, and other inputs.

6. Relying on technology and equipment alone to improve energy performance, without recognizing the role of behavioral and procedural change.

5. Believing that energy prices are the sole determinant of energy expenses, while confusing “efficiency” with “environmentalism.”

4. Placing energy bills in the hands of people who never see how energy is used, while equipment operators never see the bills for the energy they use.

3. Justifying isolated energy improvement projects one at a time, rather than following a day-to-day, comprehensive business plan.

2. Failure to merge energy performance criteria with standard operating or asset management procedures.

1. Fear of admitting that energy waste exists, yet holding individuals responsible for waste that is really attributable to management system failures (see all points above).


Friday, December 01, 2006

Canadian Utilities: Champions for Energy Management

I spoke yesterday at the Pulp & Paper Energy Efficiency Conference sponsored by BC Hydro in Vancouver. You will appreciate the timeliness of this conference when you realize that British Columbia is a net importer of electricity—despite the province’s massive investment in hydro power generation in decades past. To meet future electricity demand, the province has three basic choices: import power, generate power, and offset consumption through reduction of consumers’ energy waste. The latter tactic is the focus of BC Hydro’s well-funded “Power Smart” campaign.

By “campaign,” we’re not talking about placing stickers on switches that remind you to turn lights off when leaving the room. Instead, this is outreach to each sector of the electricity-consuming economy—residential, commercial, and industrial—with a communications and assistance agenda that is proportioned according to the size and importance of each sector. This strategy is in stark contrast to the U.S., where energy policy and woefully-funded outreach almost ignore the industrial sector, which represents one-third of national energy consumption.

BC Hydro’s Power Smart for industry provides cost-shared, plant-wide energy audits and studies for specific systems. But here’s the real eye-opener: the utility is paying for up to 75 percent of the fully-loaded cost of placing a full-time energy manager on-site at most of the huge, energy-dependent paper mills in the province. Why? Because the scale of industrial energy use allows a handful of well-placed individuals to make a massive difference in energy waste, and by consequence, reduce the energy market price spikes that impact all consumers, not just the industrials.

On the other side of the country is Enbridge Gas Distribution of southern Ontario, which sponsors energy audits for its large customers. Their “Steam Saver” program has compiled about 100 such audits since 1997. A report describing this effort identifies about 13 percent potential energy savings across the total portfolio of participating organizations. These are savings that facilities can accomplish by simply changing the way they use energy. Enbridge’s Steam Saver program exists because an innovative tariff actually rewards the utility for avoiding natural gas deliveries above a certain threshold. It’s just good, old fashioned commerce at work. In the U.S., there is growing interest in “decoupling” utility revenues from the volume of energy they deliver. Decoupling allows utilities to either “make or buy” the energy needed in their service territory. In other words, they can acquire energy for distribution to customers, or work with customers to reduce energy waste—a two-pronged strategy to ultimately meet energy needs.


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