Friday, December 21, 2007

Economic Outlook 2008: Industrial Energy Efficiency

What kind of year will 2008 be for manufacturers and the rest of the U.S. economy? The business press sounds cautious, pointing to weak housing and credit markets. Regardless of what happens, wealth does not disappear—it simply awaits harvesting from alternative sources.

If the coming year’s economic growth slows as expected, it will be an ideal time to develop wealth from within. This means improving efficiencies that lower operating costs. Manufacturers can use 2008 to intensify the profitability of their existing assets and facilities.

Utility expenses are a prime opportunity for improving operating income. The market outlook for fuel, and especially electricity, anticipates escalating and volatile prices. Any investment that allows manufacturers to reduce energy consumption will reduce their exposure to energy market turbulence. If 2008 is not a good year for expanded output, it may very well be a good time to invest in efficiencies that will boost operating margins now and during the recovery that follows.

The economics for investment in efficiency are compelling: by comparison, think of the value of dollar-cost averaging when you purchase mutual fund shares. The shares purchased when fund prices are low will provide the most gains to your portfolio when prices go up again. The same profit leveraging awaits businesses that invest in operating efficiencies during slow growth periods. Your payoff will be in the form of higher profit margins per unit produced.

Energy procurement strategies are only one side of the coin. A robust energy cost-control strategy will develop a portfolio of potential improvements that cost-effectively reduce energy waste. Like any financial portfolio, an energy portfolio can be mobilized by the “strike price” concept—criteria that initiate energy improvements in response to energy market price signals.

For manufacturers, energy management is a multi-dimensioned strategy. The potential for utility cost control is obvious. However, there may be at least as much value in a marketing initiative—one that responds to consumers’ increasing awareness of energy costs and related environmental impacts. Customers, boards of directors, and shareholders increasingly demand products and production processes that minimize costs as well as environmental impacts. For this reason, 2008 may be the perfect year to develop a strategy both for energy cost-control and to engage growing customer demand for environmentally-beneficial products.


Sunday, December 16, 2007

Energy Advice for Facility Managers

The facility manager for a precision-tool manufacturer in Maryland had a simple energy strategy: shop for the lowest-priced fuel available. To do this, he gladly enlisted the help of an independent energy advisor.

In early 2007, this advisor encouraged him to pursue a business plan for energy improvement. Beginning with an energy audit, this plan would inventory the “gap” between current energy use and the optimal consumption that would be made possible by changes in technologies, behaviors and procedures. The facility manager refused an energy audit unless it was provided for free. As a result, we have a facility with an annual energy expenditure of $10 million. The manager forfeits the opportunity to identify $1-2 million in potential savings, simply because he wants to avoid spending $10,000 on an energy audit. Why? Because this guy doesn’t want to miss the opportunity to pick up a $500 bonus for coming in under budget for the year.

In mid-2007, the trade press announced that this facility was purchased by a holding company. The advisor contacted the facility manager again, pointing out that new ownership signaled a time for staff to be on their toes. After all, new owners usually bring with them an agenda for change. The energy business plan concept was suggested again to the facility manager as a way to demonstrate to the new owners his vision and preparedness for his accountabilities. And again, he refused the idea. Energy audits and planning were apparently not worth paying for.

The latest news about the facility manager surfaced at a holiday party last week. He had been laid off, and was calling around about new employment possibilities. Was there direct causality between his lay-off and his refusal to get serious about energy management? We don’t know. Hopefully, he will be employed soon. Maybe next time, his approach will be somewhat different.


Sunday, December 09, 2007

What Does an Energy Manager Do?

An industrial energy manager’s job is to protect the organization’s business performance from the risks imposed by today’s volatile energy markets. Depending on the scope of authority vested in such a manager, the job could range from simply administering utility bills to implementing a business plan for continuous energy improvement. The energy manager’s job has implications for the organization’s on-time performance, mechanical integrity, workplace safety, emissions compliance, and the ability to make products that can be marketed as environmentally-benign alternatives.

The energy manager contributes to the organization’s bottom line. A facility’s financial performance can be dramatically impacted by sudden swings in energy expenditures—either due to fuel price spikes or unforeseen mechanical failures. By establishing an energy manager position, a facility explicitly commits to controlling its energy flows, instead of the other way around. A strong energy manager will monetize their company's energy position, showing the costs and benefits of improvements as well as the cost of doing nothing. The energy manager’s regular tasks include:

Hedging against fuel price spikes, which requires the assembly of a procurement portfolio of fixed contracts, options on future fuel purchases, and similar derivatives;

Energy benchmarking, to determine normal rates of energy consumption and energy-to-product ratios;

Goal-setting of plant-wide targets for reducing the volume of energy required per unit of product;

Monitoring and verification of energy flows, from the point of delivery through its end-use application;

Repair and correction when energy consumption data indicate a significant deviation from expected levels;

Training and communications to build organizational knowledge of energy optimization and to sustain the momentum of energy-saving initiatives;

Scouting for new technologies and best practices as presented by trade press and networking forums.

The energy manager concept is relatively new, compared to operations, finance, engineering, and other traditional industrial duties. Accordingly, the energy manager’s agenda requires an unprecedented kind of collaboration from these other departments. Top-level direction is typically a prerequisite for getting these other departments to recognize and support energy management functions. The energy manager needs to muster strong interpersonal and communication skills in addition to technical acumen. If you believe that energy management is all about "projects," you might want to read this.

Before accepting an energy management job, you really should ask what the organization expects the position to accomplish. Here's ten questions to ask the employer. Energy management will require other managers to change the way they do some of their tasks. Operations directors, for example, will participate in the design and implementation of energy performance benchmarks and improvement goals. They will also harmonize their scheduled maintenance calendars so that process equipment and supporting energy systems can be serviced simultaneously. Operations and maintenance directors will work with the energy manager to develop a training calendar and criteria so that staff can obtain energy best-practice knowledge. Finance professionals assist the energy manager by modifying production data to include metrics and ratios that describe energy use. Procurement directors will work with the energy manager to develop purchase criteria that minimize the total cost of equipment ownership. Communications staff will work with the energy manager to recognize innovators and document success stories for replication throughout the organization. Top-level direction ensures facility-wide support energy-related goals.

How much work should be expected of an energy manager? The answer depends on how much time is allocated to the task. The energy manager role might be only a part of one person’s job. Alternatively, the full list of duties may employ more than one person. At the very least, the energy manager should be responsible for energy procurement functions, especially for facilities that make purchases in deregulated electricity markets. The rationale for this is straight-forward: as long as it is in operation, the facility will always purchase energy, even if it has no plans to manage consumption and reduce its waste.

An energy management agenda may be best pursued by a team as opposed to one person. There are several advantages to the team approach:

* The work load is distributed across a number of individuals.

* The energy team can draw its members from operations, finance, maintenance, and procurement—thus ensuring that these departments are properly represented in the energy decision-making process.

* Team membership can be revised over time to bring in new people and build energy knowledge throughout the organization.

* Energy team leadership is an opportunity to get a big-picture understanding of facility operations, and to build skills for managing project implementation, human resources, budgeting, and other activities.

While top-management backing is important, the energy manager also needs to be a strong, visionary communicator who makes the benefits of energy management clear to everyone from the boardroom to the plant floor. A solid understanding of finance and accounting principles will help greatly, although a good working relationship with the finance team will serve the same purpose. The energy manager is able and willing to keep abreast of technical developments in the field, and will take advantage of trade press and professional society membership for this purpose. In sum, it is the ability to contain business risks and capture emerging opportunities that makes the energy manager position truly effective.


Monday, December 03, 2007

Getting Energy Efficiency on the Executive Radar Screen

Stock analysts will tell you that the typical industrial executive is fully challenged to remain in control of his or her company’s top three business issues. These usually include revenue/profit targets, product development, and “stay-out-of-jail” compliance issues. Energy doesn’t make the list. It’s one of those “other” issues that are routinely delegated down below the executive suite.

This is why it’s so difficult to give away free energy audits. For those of you who don’t know, the U.S. Department of Energy’s Industrial Technologies Program conducts the Save Energy Now effort that provides free energy assessments and energy analysis training to qualified industrial plants. DOE-ITP maxed-out its 2006 budget for this activity in providing 200 assessments. They budgeted for 250 more assessments in 2007, but by October, they were scrambling for takers—so DOE lowered the thresholds of eligibility. At the same time, 250 more slots were announced for 2008.

According to DOE-ITP’s 2006 annual report, there are just over 200,000 manufacturing facilities in the U.S., and probably half of those are eligible to get a free assessment from DOE-ITP. However, not even 500 takers have been identified to date. Of course, no one expects all the eligible plants to participate, but with today’s energy markets being what they are, you’d think there would be a line out the door for this service.

There’s a TON of explanation about Save Energy Now on the DOE website. But for the reasons given above, industrial executives don’t spend a lot of time trolling the Internet for energy-related news. It’s just not on their radar. The program is aggressively promoted via email from DOE, state energy offices, and other intermediaries. But these messages are directed to the usual industrial contacts: mid-level engineers who are rarely empowered to do something radical like invite the government to poke around their plants, which is how Save Energy Now is frequently (and erroneously) perceived.

Energy, as a stand-alone issue promoted by energy people (read: “engineers”), will not capture executive attention. However, it might get noticed if it were attached to one or more of the top three executive issues. It would also help if the message came from the influencers upon whom executives rely for advice. How much more compelling would Save Energy Now be if it were promoted by the U.S. Chamber of Commerce? Also, executive demand for industrial energy assessments would skyrocket if the concept were to be promoted by the accounting community.

Next question: how easy is it to get government agencies to collaborate across their turf boundaries?


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