Wednesday, May 09, 2007

Energy At-Risk: Make or Buy?

A thought came to me today at the Industrial Energy Technology Conference in New Orleans. The energy that an organization consumes is either put to work or lost to a variety of causes, many of which are avoidable. Unavoidable losses are best attributed to the laws of physics and thermodynamics. Perhaps another blog out there will explain those phenomena better than I can. Let’s focus instead on the avoidable part, which I will call “energy at-risk.”

From a business perspective, think of energy at-risk as the quantity of energy that an energy-consuming organization can either make or buy. This figure illustrates the concept:

Click on image to view

At the root of this argument is the fact that energy performs work. Purchased fuel must first be converted to heat and power, which are in turn converted into work. The conversion process always sustains some energy loss, but some proportion of these losses (the energy at-risk) can be contained with varying degrees of effort. Therefore, an energy-consuming organization has one of two choices for the at-risk portion of their energy consumption. They are:

Buy it. The organization decides it can do nothing about energy waste (because managers “have no money, time, accountability,” etc.) and consequently it will need buy more energy than it will actually use, because it has chosen to forfeit its energy at-risk.

Make it. Alternatively, the organization can implement efficiencies that allow the recapture of energy waste so that it can be re-applied to useful purposes. By “recapture,” we mean anything that reduces energy conversion losses.

The organization can use make-or-buy analysis to handle energy at-risk. The business concern now is to consistently monitor the cost to purchase energy versus the cost of saving it. Hopefully, the organization has conducted an energy assessment that indicates the cost and savings potential of energy improvement recommendations. When it’s cheaper to save a unit of energy than it is to buy it, then the make-or-buy decision should be pretty easy to make.



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