Sunday, February 25, 2007

Energy Calculators and Benchmarking Tools

This is a sampling of free energy evaluation tools on the Internet for buildings and industrial processes:

1. Life-Cycle Costing Analysis (BC Hydro).
A very good introduction to the subject of life-cycle costing. A must-have reference for explaining the folly of choosing equipment purchases on the basis of up-front costs alone.

2. Energy Accounting: A Key Tool in Managing Energy Costs (Calif. Energy Commission).
Topics in this document include: Seven reasons for energy accounting… Getting started… What causes variations in energy use? Understanding utility bills… methods of energy accounting… means of energy accounting… Features of energy accounting software… Tips on software selection.

3. Building Energy Software Directory (U.S. Department of Energy)
Access a wide variety energy calculation, simulation, and analysis software. For energy, emissions, and water evaluation. About 20 links on this page, each link leads to its own family of additional links.

4. Energy Analysis Software (Natural Resources Canada).
Energy unit conversion and intensity calculator
Industrial energy intensity calculator

Office appliance energy consumption calculator

5. Office Appliance Energy Calculator (U.S. EPA/EnergyStar)

6. Industrial Energy Benchmarking Guides and Publications (NR Canada)
Benchmarking data by industry sector. Many reports are in place; more are being added all the time.

7. Benchmark Your Building (Oak Ridge National Laboratory)
Online building energy-use calculator and benchmark your performance against similar facilities.

8. Portfolio Manager Overview (U.S. EPA/Energy Star)
Build an energy-use performance database for a portfolio of buildings.


Thursday, February 22, 2007

Energy Management: Prevailing Strategies

The pinch of today’s high energy costs prompts many manufacturers to investigate energy management options more thoroughly. Some strategies focus on price control, some pursue capital investment projects and others seek savings through changes in procedure and behavior. It is possible to combine all of these strategies. Here's description of typical strategies, with some comments on the pros and cons of each:

Do nothing. Ignore energy improvement. Just pay the bill on time. Operations are business as usual or “that’s the way we’ve always done it.” The result is essentially “crisis management,” in that energy solutions are undertaken in emergency situations without proper consideration of the true costs and long-term impacts. This strategy is pursued by companies that (1) do not understand that energy management is a strategy for boosting productivity and creating value, or (2) have management in such turmoil that energy management cannot be sufficiently supported, or (3) are extremely profitable and don’t consider energy costs to be a problem. Pros: Manufacturers don’t have to change behavior or put any time or money into energy management. Cons: Savings are forfeited. Income is increasingly lost to uncontrolled waste.

Price shopping. Switch fuels, shop for lowest fuel prices. Make no effort to upgrade or improve equipment. Make no effort to add energy-smart behavior to standard operating procedures. Companies take this approach because they “don’t have time” or “don’t have the money” to pursue improvement projects. It is also preferred by companies that truly believe that fuel price is the only variable in controlling energy expense. Pros: Management doesn’t have to bother plant staff with behavioral changes or create any more work in the form of data collection and analysis. Cons: Lack of energy consumption knowledge exposes the manufacturer to a variety of energy market risks. The origin of waste is unknown, as are the opportunities to boost savings and productivity. Exposure to energy market volatility and emissions and safety compliance risks remains.

Occasional low-cost, non-capital projects. Make a one-time effort to tune up current equipment, fix leaks, clean heat exchangers, etc. Avoid capital investments. Revert to business-as-usual behavior after one-time projects are completed. Companies that do this are insufficiently organized to initiate procedural changes or make non-process asset investments. They cannot assign roles and accountabilities for pursuing ongoing energy management. Pros: Very little money is spent when just pursuing quick, easy projects. Cons: Savings are modest and temporary because facilities don’t develop procedures for sustaining and replicating improvements. Familiar energy problems begin to reappear. Energy bills begin to creep back up.

Capital projects. Acquire big-ticket assets that bring strategic cost savings. But beyond that, daily procedures and behavior are business as usual. This strategy is adopted by companies that believe that advanced hardware is the only way to obtain real, measurable savings. Similarly, they believe that operational and behavioral savings are “weak” and not measurable. Such companies may also lack the ability or willingness to perform energy monitoring, benchmarking, remediation and replication as a part of day-to-day work. However, they have the fiscal flexibility to acquire strategic assets that boost productivity and energy savings. Pros: Obtain fair to good savings without having to change behavior or organize a lot of people. The risk of such investments is reduced if sustained by appropriate maintenance and skilled staff. Cons: Forfeit savings attributable to sustained procedural and behavioral efforts. Also, payback from the new assets may be at risk if not complemented by the appropriate maintenance, procedures and skilled staff.

Sustained energy management. Merge energy management with standard operating procedures. Diagnose improvement opportunities and pursue these in stages. Procedures and performance metrics drive improvement cycles over time. Manufacturers with corporate commitment to continuous improvement can pursue this strategy. They have well-established engineering and internal communications protocols and an energy program that engages staff with roles and accountabilities. They encourage cooperation among departments. Pros: Maximize savings and capacity utilization. Increased knowledge of in-plant energy use is a hedge against operating risks. Greater use of operating metrics will also improve productivity and scrap rates while reducing idle resource costs. Cons: Companies need to recognize that there may be need for upfront investment in staff resources and training, new expertise, better cross-functional management and the time of senior managers.

The choice of strategy depends on the strength of the energy champion's leadership as well as the awareness and commitment of senior management in supporting energy improvements.


Monday, February 19, 2007

Energy: An Entitlement Under Fire?

A provacative story, entitled "Get Healthy or Else," is on the February 26, 2007 cover of Business Week. It's about employers that find it increasingly expensive to provide health insurance coverage in the face of double-digit annual cost increases. One company, Scotts Miracle-Gro of Ohio, is responding by pressuring, counselling, and coaching its employees to lose weight and quit smoking. Note that this is a corporate effort initiated at the very top of the company by the CEO. As you can imagine, there is a subtext to this story having to do with individual rights. There are legal challenges, so it's not yet clear that the Scotts example can be sustained for long.

Scotts, you see, is tired of throwing money at a problem that is already out of control. The alternate strategy is to focus on prevention. What a concept!

You would think that companies are more firmly within their rights to crack down on energy costs. After all, by attacking energy waste, a company focuses on its own assets, resources, and procedures. Be it health care or energy, the dollars at risk are not inconsequential. When you address habits (and that's the common ground between these two subjects), corporate leadership may make all the difference. If you read the Business Week article, you'll see how top leaders walk the plant floor to personally reinforce policy-- face-to-face, one employee at a time. Tackling energy waste requires this kind of leadership, too. You can find it in plants like Mercury Marine in Fond du Lac, Wisconsin. There are many more examples at


Thursday, February 15, 2007

Payback on Energy Projects, Part 3

There's yet another way that "payback" can be misused as a way to evaluate energy projects. This is the result of looking at facility components one at a time, as opposed to a complete system.

To illustrate this, consider a simple portfolio of facility improvement opportunities. In this case, it's a boiler replacement and an insulation upgrade. These are presented as completely independent proposals:
Click on image to enlarge.

Now consider three different scenarios for implementation. See the synopsis beneath each scenario, shown below:

Click on image to enlarge.
SCENARIO 1 SYNOPSIS: Management entertains two separte energy project proposals. One vendor focuses on insulation, and nothing else. Another vendor focuses on a boiler upgrade, and nothing else. Management reviews the two vendor recommendations, side-by-side. Management has a five-year payback hurdle (the project must pay for itself in five years or less, or they won't accept it). Management accepts the insulation upgrade because it is the more attractive of the two options. The boiler upgrade is rejected. The facility lowers its annual energy expense to $910,000.

Click on image to enlarge.
SCENARIO 2 SYNOPSIS: Management pursues the insulation improvement first, for the same reason as above. Then a year later, they pull the old boiler replacement proposal off the shelf. They use the boiler vendor's original specs-- which predated the insulation upgrade-- to calculate the payback on boiler replacement. No one thought to downsize the boiler specs, which is now possible because proper insulation ensures less thermal loss, so less steam production is needed. After insulation improvements, annual energy expenses are $910,000. By using unadjusted boiler specs, management calculates that the boiler project would now pay for itself in 5.5 years. This does not meet the 5.0 year hurdle, so the boiler proposal is rejected. Management also rejects the opportunity to further reduce its energy expense.

Click on image to enlarge.
SCENARIO 3 SYNOPSIS: Management pursues the insulation improvement first, for the same reasons as above. However, this time, energy use is re-evaluated after the insulation improvement. The new audit finds that the existing steam demand can be met with a smaller boiler capacity. This is because insulation ensures that less steam output is lost to waste. Accordingly, the investment in boiler capacity can be scaled down. This time, because the smaller boiler requires less capital investment, the project yields a 4.8-year payback, beating the 5.0-year investment hurdle. Management accepts the project and effectively reduces its annual energy expenditure to $750,000.

Take-away lessons: Energy performance is a function of interaction among components. Payback results for system-wide improvements is not the same as the "sum" of payback on components. Acquire complete system energy evaluations, if at all possible.


Sunday, February 11, 2007

Payback on Energy Projects, Part 2

Here’s another trap to avoid when relying on “payback” as a way to evaluate energy improvement projects. Once again, payback is a measure that describes the number of years that it takes for an investment to "pay for itself" through the annual savings or benefits that the investment creates. To calculate it, one merely divides the total cost of a proposed investment by the annualized savings (or benefits) that the investment will provide.

Look closely at the different cash flows in examples one and two below:

Click on image to enlarge

Click on image to enlarge

Example 2 provides additional years of cash flow, but the payback measure is the same! An alternative approach uses internal rate of return:

Click on image to enlarge

By relying on payback alone for investment analysis, there’s a good chance of rejecting or mis-prioritizing valuable projects. Try considering IRR results in combination with payback measures.


Friday, February 09, 2007

Stocks, Bonds, and Insulation

In some ways, a manufacturing facility is very similar to a household, at least when it comes to financial management. Both have (or should have) income, consumption expenses, and savings. Most households invest their savings in ways that conserve and grow their wealth. Some households are better than others at making investment decisions. This is also true for manufacturers.

This post discusses the investment power of mechanical insulation, which plays a multi-part role in the portfolio of industrial wealth.

To illustrate the business value of mechanical insulation, consider the analogy of a well-constructed investment portfolio. It will contain:
stocks, which support speculative revenue streams,
bonds, which conserve principal value by providing a steady and predictable stream of returns over time, and
options, which hedge against volatility in equity performance.

Insulation acts like a stock when it adds to a plant’s production capacity. Without insulation, a proportion of boiler fuel contributes directly to radiant heat loss from process tanks, pipes, and related hardware. By capturing those thermal resources, insulation adds plant capacity by redirecting energy to new or expanded production lines. Insulation effectively builds the investor’s equity position by adding to the plant’s ability to generate revenues.

We know that stocks are volatile, providing potential for both upside and downside movement. Household investors usually like to keep some of their wealth free from fluctuation. Bonds serve this purpose by preserving committed principal while paying the investor a “coupon,” which is a steady, predictable stream of income. The upside potential is not as great as is the case with stocks, but the risk of loss with bonds is far less.

Insulation acts like a bond simply by being fitted in place. No matter what the level of thermal throughput, insulation will limit radiant heat loss. So even if the plant has little chance for expanding output during in a weak market, insulation will at least reduce expenditures for the existing level of production. These are steady, predictable savings, like those provided by a coupon bond. What’s more, once the insulation is in place, there’s no need to monitor, measure, or calibrate it. Like a bond, you merely have to own it to collect its payment.

Options are contracts that allow the holder to purchase a commodity at a specific price. It’s a great way, for example, to hedge against volatile fuel prices: if prices go up, you exercise your option to buy fuel at the predetermined price set in the option contract. It prices are steady or fall, you’ve lost only the fee for establishing the contract. At least the option contract fee is a predictable amount; fuel prices are not.

Insulation is similar to an option contract. If fuel prices spike upward, it is all the more important for a plant to attenuate radiant heat losses. Higher fuel prices actually accelerate the payback on insulation. Even when the plant enjoys low fuel prices, insulation continues to avoid some fuel expenditures. In other words, installing insulation is like owning the option to avoid excess fuel purchases. In addition, a change in fuel prices requires no adjustment to the insulation in place. It saves thermal resources no matter what the fuel cost.

Corporate financial staff at a manufacturing company may or may not understand plant engineering. But they certainly understand investment principles. Hopefully, this financial view of insulation may help plant managers make a strong “business case” for valuable energy-saving improvements.


Sunday, February 04, 2007

Payback on Energy Projects, Part 1

Industrial decision-makers everywhere depend on "payback" as a way to evaluate proposed investments in their facilities. Compared to more sophisticated financial measures such as net present value and internal rate of return, payback is comparatively simple to understand and calculate—perfect for "back of the envelope" analysis. But its inherent simplicity also creates problems. As a managerial decision tool, payback remains grossly inexact and misapplied, especially when thousands or even millions of dollars are at stake.

Payback, of course, is a measure that describes the number of years that it takes for an investment to "pay for itself" through the annual savings or benefits that the investment creates. To calculate it, one merely divides the total cost of a proposed investment by the annualized savings (or benefits) that the investment will provide.

People frequently fail to properly account for all of the variables in their payback analysis. "Project cost" may be described simply as the list price for the equipment in question. But when you think about it, a discrete project incurs a number of ancillary costs. These may include:
• Search and evaluation costs
• Consultant fees
• Sales commissions
• Permitting or construction fees
• Installation fees
• Removal/scrap of old equipment
• Finance transaction costs
• Revenue lost to downtime during installation of the energy improvement
• Net projected salvage value of the new equipment (usually a positive value)

The same concern applies to the "annual savings" figure. When it comes to energy projects, there is a tendency to count only the energy savings generated by the new equipment. There are several issues with that narrow interpretation, but for now, we’ll start with a broader definition of savings. It should include:
• Annual savings in energy costs
• Subtract costs of upkeep
• Subtract changes in other operations and maintenance expenses
• Subtract monthly finance charges
• Add any non-energy improvements, such as reduced waste of water, raw materials, labor, etc.

Despite the best intentions of energy improvement champions, there is probably a sharp-penciled financial director ready to express some doubt about the proposed payback performance of these initiatives. Such doubts are not unwarranted. Facilities that pursue big capital equipment projects without addressing wasteful practices are actually putting these big investments at risk. A comprehensive investment in people skills and energy-smart operations will effectively underwrite the costs of capital projects. By having a strong foundation of energy-smart skills and procedures, a facility is better prepared to implement new equipment.

Also, keep in mind that leaks and losses are a facility’s first consumers of compressed air and steam. The energy and other inputs for these utilities must be "grossed up" accordingly. A facility that decides to live with these losses also decides to maintain greater air compressor and boiler capacity than required (which implies a greater volume of capital investment, carrying costs, and perhaps even valuable floor space). Energy-smart skills and procedures, developed prior to these capital investments, would reduce energy costs as well as the cost of maintaining over-sized equipment.


Thursday, February 01, 2007

The Evolution of Sustainable Business

"Sustainability" describes principles that minimize negative environmental and social impacts, both now and in the future. Businesses are increasingly adopting sustainability principles, and their reasons for their doing so are continually evolving. Sustainability principles are not directly compelled by law. Meanwhile, a prescription for attaining sustainable business remains somewhat elusive. ISO 14000 may offer the most rigorously-developed guidelines. ASHRAE Standard 100-2006, entitled Energy Conservation in Existing Buildings, attempts to prescribe sustainability principles for a more narrowly-defined audience.

"Sustainability" emerged as a business buzzword in the 1990s. The first business leaders to embrace the concept may have done so primarily for boosting their companies’ public images. If so, then their investments in waste recycling and resource conservation may have been perceived as a way to grow their companies’ value, as reflected in the goodwill line item on their balance sheets.

In 2002, the Sarbanes-Oxley Act was signed into U.S. federal law in response to recent examples of egregious corporate fraud. Stated broadly, the Act attempts to ensure higher standards of corporate responsibility, especially regarding financial and accounting liabilities. Since environmental performance can have enormous financial implications, corporate sustainability programs emerged as a tool for offsetting the risk of failing to meet regulatory scrutiny. In other words, by investing in sustainability initiatives, corporations insured themselves against regulatory non-compliance.

Fast-forward to today. Popular awareness of climate change is influencing consumers’ purchasing behavior. A growing number of consumers demand products and services that offer a reduced "environmental footprint." Wal-Mart advances the sustainability concept by challenging its suppliers to wring as much waste as possible from their manufacturing and distribution efforts. Eaton Corporation, a diversified manufacturer of auto and aircraft components, recently joined the Green Suppliers’ Network, so that its suppliers could coordinate efforts to "improve processes, increase energy efficiency, implement cost-saving opportunities and optimize use of required resources to eliminate waste." For suppliers, then, investment in sustainability programs becomes the cost of gaining access to markets… or perhaps the cost of simply staying in business.


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