Challenges and Opportunities for Industrial Energy Users

Christopher Russell

September 1, 2005

There are two primary reasons for petrochemical facility owners to consider an energy appraisal: to reduce cost or to increase productivity, both of which should increase profits.

Many forces have emerged since 1970 that make industrial energy consumption more challenging. Today’s industrial energy decisions must accommodate changes in technology, increasingly stringent emissions regulation and volatile energy markets. To offset these forces, manufacturers now must manage both their procurement and consumption of energy on a continual basis. Plants of all types, sizes and locations use energy, so the potential for energy-driven productivity gains is everywhere. The benefits only begin with reduced energy bills. Energy efficiency is an indispensable component of any effort to improve productivity. Ultimately, energy efficiency contributes to wealth.


Energy’s Role in Manufacturing

Energy allows manufacturers to transform raw materials into final consumer goods. Raw materials pass through a number of intermediate stages that represent the bulk of industrial energy consumption. In an economic sense, energy performs work that adds value to intermediate products as they are progressively transformed into final consumer goods. Opportunities to improve energy efficiency occur at each step of the manufacturing process.

A recent U.S. Department of Energy (DOE) analysis of industrial energy use and loss concludes that only 43 percent of all manufacturing energy inputs are applied to process work. The remainder is lost mostly to conversion as energy is transformed from fuel to power to heat and, finally, to work. However, industry pays for all energy consumed, whether it is used or wasted. The recovery of lost industrial energy—to the greatest practical extent—is an opportunity for U.S. manufacturers to improve financial performance in a globally competitive marketplace.


Energy Efficiency: Boosting Revenue Through Greater Productivity

If industrial facilities do not optimize their energy consumption, opportunities to create value are lost with energy waste. Energy waste plus the forfeit of additional revenues have a two-fold negative effect on earnings. Energy-efficiency refers to technologies and standard operating procedures that reduce the volume of energy per unit of industrial production. Manufacturers selectively implement energy efficiency initiatives for their potential to reduce expenses, build revenue capacity and contain operating risk.

Facility managers need to understand how energy efficiency supports overall corporate goals. The very activities that provide energy efficiency also provide better control over plant assets and inputs. For example, energy-efficient practices ensure that thermal resources are applied at the right temperature, for the right duration and in correct proportion to raw materials. This control reduces a facility’s scrap rates as well as energy consumed per unit of production. Control provides reliability. Greater reliability means less down time. Less downtime means orders are filled faster, allowing a facility to complete more orders over the course of a year—thus making more revenue. Energy efficiency is not just about reducing utility bills. It is also about boosting revenue through greater productivity.

A combination of new technologies and the optimization of current assets and practices are required to reduce energy consumption. Estimates provided in several industry studies indicate that, on average, 10 percent to 20 percent of industry’s energy consumption can be economically avoided. Remember that 10 percent to 20 percent represents “average” savings. Some plants will experience greater savings, some less.

Good energy decisions can reduce certain non-energy expenses as well. In a 2002 U.S. Environmental Protection Agency (EPA) white paper, a summary of 77 case studies gives some indication of the value of non-energy benefits attributable to energy efficiency in a manufacturing setting. Of the total number of cases, 52 included a monetized estimate of both energy and non-energy savings. Based on energy savings alone, project paybacks in aggregate were 4.2 years. With non-energy benefits included, the aggregate payback was 1.9 years. It is also interesting to note that 41 of the 77 cases involved “state-of-the-art” technology installations, while 35 involved everyday, conventional technologies. As a subset, the conventional technology case studies displayed a 2.3 year payback on energy savings alone, while the inclusion of non-energy benefits dropped the payback to just 1.4 years.


The Role of Government Policies and Programs

In the United States, the national government plays an important role in promoting energy efficiency in the private sector. For example, the DOE, with substantial help from federally chartered national laboratories, has been effective in advancing research and development (R&D) for energy-efficient technologies. Recently, DOE’s Industrial Technologies Program—and earlier programs—published BestPractices technical reference materials to help plant managers develop their own strategies for improving energy efficiency. State governments often follow DOE’s lead on energy priorities and draw on DOE grants to implement programs at the state level.

The EPA also has program activities that seek to promote energy efficiency and to address financial, marketing and community relations issues (www.energystar.gov/index.cfm?c=business.bus_index). The EPA’s services include a clearinghouse of information to help businesses select, evaluate and receive recognition for energy-efficient improvements.

Utility deregulation is another policy variable affecting industrial energy use. Reliable, plentiful energy has long been taken for granted as a key feature of the U.S. economic infrastructure. That advantage is at risk today. Since the 1980s, the progressive deregulation of U.S. utility markets has permitted more large energy consumers to shop for fuel and electrical power in competitive markets. However, deregulation also dismantles the mechanisms for market-wide investment planning of in utility infrastructure. These investment decisions are increasingly left to the free market. As a result, underinvestment progressively compromises utility services in some regions of the country where assets reflect age and capacity limitations. Energy efficiency practiced by large industrial consumers, therefore, not only lowers their energy consumption costs, but also helps reduce stress on overburdened utility distribution systems in their communities.


The Role of Technological Innovation

Manufacturers recognize technology as the primary driver of industrial productivity, which in turn drives the rest of the economy. From 1977 to 2002, productivity in the U.S. economy overall rose 53 percent, while U.S. manufacturing productivity rose 109 percent. Investments in information technology are estimated to account for 60 percent of the increase in manufacturing productivity.

Energy applications compete with information technologies and other activities for industrial R&D budgets. For the past 20 years, industrial R&D has favored refinements of existing products and production facilities. This reflects industry’s preference for lower, short-term risks and a more immediate return on investment. But this focus is at the expense of developing next-generation technologies that will ensure long-term industrial competitiveness. Certain energy-efficient technologies face developmental hurdles because of industry’s investment priorities. To facilitate overall U.S. industrial R&D, the DOE’s Industrial Technologies Program partners with industry to identify, sponsor and develop new technologies.

Industry’s best R&D options for reducing energy costs were summarized in a study sponsored by the DOE. This study identifies energy efficiency opportunities that yield energy, economic and environmental benefits primarily for large-volume, commodity/process industries. Opportunities were prioritized to reflect the magnitude of potential savings, broadness of suitability across industries, and feasibility to implement. In total, these energy-saving opportunities represent 5.2 quadrillion Btu—21 percent of primary energy consumed by the manufacturing sector. The savings equate to almost $19 billion for manufacturers, based on 2004 energy prices and consumption volumes. Table 1 summarizes these leading opportunities.

It is very important to note that this summary describes savings for the U.S. manufacturing sector as a whole. Individual manufacturing facilities have unique designs, operating protocols and maintenance histories, all of which affect energy-saving potential. Individual facilities may save more or less than the industry average.

Note that about 30 percent of the potential savings (1.4 quadrillion Btu) described in Table 1 are derived from “best practices,” which are generally low-cost opportunities to reduce the energy consumption of existing assets. Best-practice savings come from changes in behavior and procedures. Insulation optimization would be included in best practices. Facilities that sustain energy best practices can use the cash flow of savings to underwrite the cost of capital improvements that save even more money. Manufacturers investing in best-practice training can think of it as “intellectual R&D”—knowledge and skills that save energy with today’s assets while preparing the workplace for the next generation of advanced technologies.

The other 70 percent of potential savings in Table 1 are equipment upgrades that typically require capital expenditure. Some of these are currently high-cost capital items, and not yet fully commercialized, so they are ideal elements for the DOE’s R&D agenda. These investments may be most feasible as a part of the construction of new facilities.


Energy Efficiency Is Not Limited to New Technologies

Energy-saving technologies are not limited to commodity/process facilities. A study released in 2001 by the American Council for an Energy Efficient Economy (ACEEE) offers a list of 54 emerging technologies (refined from a longer list) that offer the most potential return value to industry through energy efficiency. Many of the 54 technologies apply to specific industries. Others are widely applicable, and feature a variety of well-proven, low-risk technologies. The four technologies highlighted here were selected because they: 1. are broad in their potential application and are not industry specific; 2. represent large savings potential, due in part to their broad applicability; and 3. offer additional non-energy benefits, such as enhanced productivity, product quality or workplace safety.

Emerging advanced listing technologies have the greatest likelihood of success, with a simple payback of 1.3 years—”payback” referring to the number of years it takes for an investment to pay for itself through the savings it creates. The four other emerging technologies with the lowest cost and quickest payback opportunities are: advanced lighting design, with a payback of 3.0 years; compressed-air system management, with a payback of 0.4 years; motor system optimization, with a payback of 1.5 years; and pump efficiency improvement, with a payback of 3.0 years. While all four are considered to have a medium likelihood of success, the chances of the last three could be enhanced if complemented by improved procedures/behavior.

Industrial energy efficiency is not limited to exotic, new technologies. Note that the opportunities listed here—related to lighting and electric motor-drive systems—are routine technologies that pay for themselves quickly though the savings they generate. As energy prices rise, the payback on these opportunities becomes even more financially attractive.

Why would routine, everyday technologies top the list of energy-efficiency opportunities? Because powerhouses, which host energy support systems such as steam, air compressors and other “prime movers,” remain literally on the periphery of management attention. This fact is underscored by the typical physical layout of industrial properties. For historic engineering safety reasons, the powerhouses that perform combustion duties are isolated from the structures that host core processes. Energy systems are secondary to manufacturing activities that make money. Alliance research indicates that the remoteness of industry’s powerhouses—both physically and managerially—is why they get only the remainders of budget authority and talented investment analysis. Taken for granted year in and year out, these common plant utilities become a stealthy drag on financial performance as their integrity is allowed to slip.

Industry’s near-term energy-saving opportunities come from best practices (behaviors and procedures) applied to current energy systems. A company’s investment in energy training and skills also helps to reduce the investment risk associated with new technologies.


Energy Efficiency’s Impact on Business

What financial results can a company expect from energy management? Industry surveys from 2002 indicate that the average plant can reduce its energy consumption by 10 to 20 percent, and much of that is from procedural and behavioral changes.
The cost of sustaining an energy-management program (operations and maintenance costs only, omitting capital expense) is around 1 to 2 percent of total energy expenditures.

Energy management usually provides savings through a number of ways: 1. reduced fuel use; 2. reconciling errors in utility bills; 3. using consumption information to negotiate better fuel purchase contracts; and 4. reducing raw materials waste, attributable to the enhanced precision of energy use. In addition to savings, many manufacturers enjoy the additional revenue generated from current assets when energy waste is captured and redirected back into process activities.

Energy management is a process of continuous improvement. Initial savings pay for subsequent rounds of improvement. Companies that develop best practices with current assets are more capable of absorbing new technologies. There are scale economies in waste management—the discipline that saves energy can be extended to water and materials consumption.

Energy management bears a striking resemblance to financial planning:

  • Identify goals;
  • Select the investments needed to reach the goals;
  • Establish a blueprint and strategy for goal attainment;
  • Start early, if only with small efforts;
  • Maintain regular contributions over time;
  • Keep track of earnings; and
  • Defeat risk through reinvestment and diversification of earnings.

“Diversification” means expanding beyond one-time energy projects to make energy management part of standard operating procedures—bumper to bumper—throughout the organization. The financial and energy-planning analogies share the same result—the growth and preservation of wealth.

Today’s forward-thinking corporations improve their business performance through better stewardship of energy and other resources. This strategy allows companies to improve their income performance while reducing operating risk. It is imperative that people working in today’s industries learn waste minimization principles.


Closing Thoughts: Insulation and Today’s Energy Markets

On August 8, 2005, President George W. Bush signed into law the first federal energy policy act since 1992. Is it what industry wants? The energy production and utility industries will answer “yes.” For industrial energy consumers, the answer is maybe. We may or may not see increased energy supply (and lower energy prices) as the result of relaxing the regulatory restrictions imposed on energy producers. Most of us will simply wait and see.

Today’s forward-thinking corporations improve their business performance through better stewardship of energy and other resources. This strategy allows companies to increase income while reducing operating risk. Energy management is additional work for folks working in industry, and it is best pursued through a business plan for identifying, evaluating and prioritizing improvement opportunities. At world-class manufacturing companies, the staff conducting this extra work pay for themselves several times over both in energy savings and productivity improvements.

Even the most elaborate energy management plans have to start somewhere, and therein lies the biggest opportunities for promoting insulation through the rest of this decade. In-house energy programs need a few quick-payback, easy-to-do victories to gain momentum and support from plant staff and managers. Insulation is a prime example: It is a low-cost, non-capital item. From the user’s standpoint, it is not maintenance intensive. Install it, and leave alone—it does not need to be constantly adjusted, tuned or monitored—as long as it is properly sealed. Except for proper sealing, it does not add to facility staff’s daily operational chores.

If a company’s energy management program is going to be at all sustainable, however, someone must absolutely monitor fuel use before and after individual projects are put in place. The key to this is obtaining an energy audit prior to taking action. Every facility should know how much fuel, power, water and other key inputs are required to make a unit or batch of its products. After all, you can’t manage what you don’t measure. The manufacturers that survive in today’s globally competitive markets will be those that understand and control their costs. Energy waste is not part of a successful business formula. Insulation is a part of the solution.