Q&A For a Long, Hot Energy Management Summer

Christopher Russell

June 1, 2005

The Alliance to Save Energy released the Energy Management Pathfinding report at a news conference conducted March 10, 2005, during National Manufacturing Week. Some good questions came up, and excerpts from the transcript are worth sharing in this month’s column. Please download your copy of the Pathfinding report.

Q: The rise in energy costs is going to put even more pressure on manufacturers ready to bounce back after the recession. Can you talk about why energy consumption and cost is such a crucial issue for manufacturing today?

A: The energy problem for industrial energy consumers is not so much price levels; it’s price volatility. If fuels prices were high but stable, companies would make some one-time adjustments to their technology-to-staff mix and their procurement procedures. They would adjust their product prices and their profit targets to accommodate high but stable energy prices. But price volatility upsets a company’s whole financial picture, and it requires ongoing decision-making to address it. A company may respond to a spike in energy prices by making cuts elsewhere, like maintenance. Then if a decline in prices provides an unexpected boost to earnings, the company’s guard goes down and it is vulnerable to the next energy price spike. Any manufacturer without an energy management strategy–one that includes both procurement and consumption management–is essentially driving down a twisting, turning road with a blindfold on.

Q: Industrial energy audit services are commonly provided by universities, utilities and state assistance organizations. Why is the implementation rate of audit recommendations so low, typically 35 percent or less?

A: We all know how manufacturing payrolls have been cut to the bone. Still, the plant manager’s first priority is to make the product and get it out the door, not save energy. You can’t save dimes if you don’t make dollars in the first place. Think about the company’s organization chart. Every position–a box on the chart–has a job description, accountabilities and incentives tied to production. Departments within a company often compete against each other in the budget process. For example, energy-efficiency projects might be expensed from the maintenance budget, but the savings accrue to the production budget. Silos like those are a huge barrier to controlling waste-not just energy, but water and raw materials as well. Waste minimization is a duty that occupies the blank space on the organizational chart where there are no boxes. Some companies, like Merck & Co., build energy cost control into general managers’ performance appraisals. Its general managers are rated on a 100-point scale, which covers a wide range of accountabilities. Energy management might be three to five of those points, but that margin is enough to determine whether or not the general manager gets a bonus. Are the managers obligated to manage energy? No, but if they want those points, they take advantage of their in-house energy management assistance team.

Q: What are some of the implications if manufacturers don’t begin to conserve energy? Conversely, what are some of the opportunities, financial and otherwise, should they begin such a program?

A: There’s a dirty secret about manufacturing: It’s called embedded energy costs. I’ll give you an example. The direct energy cost for assembling my car might have been $70. That’s about three-tenths of one percent of the retail cost–no big deal, right? But think again–there was energy consumed in mining the iron ore, copper and bauxite; in metal treating; and in producing the plastics, paints and dyes, carpet fibers, rubber and glass. The upstream energy costs are disguised in the cost of inputs, and they are eating profit margins at every link in the value chain. So that’s one opportunity. Product fabricators can partner with their input suppliers to map their energy intensity and strategically squeeze out those costs. 3M is a good example. The company reduced its energy per pound of product by 27 percent between 2000 and 2004. 3M beat its own goal, and makes that fact public as it markets its products to other industrial consumers. Companies are always partnering to achieve economies in distribution and inventory; so why not in energy management? The information technology exists. It can be done.

What financial results can a company expect? Industry surveys indicate that the average plant can reduce its energy consumption by 10 to 20 percent, and a lot of that is from procedural and behavioral changes. The operations and maintenance cost in sustaining an energy management program (excluding capital investments) is around 1 to 2 percent of total energy expenditures. So right off the bat, that suggests a return of 10 to 20 times the investment. Shaw Industries in Georgia started an energy-management program in the middle of 2004. It has a corporate team of six individuals who provide energy procurement, bill reconciliation, energy audit and technical support for 53 facilities. The fully loaded cost for that staff is paid for by the bill reconciliation activities alone. All the energy benchmarking and technical assistance they provide to their plants is "free." During each month during the latter half of 2004, the company found on average about $1 million in annual savings opportunities.

Q: There are things companies can do from the top down, but there are also individual lessons for employees. How should companies empower their employees to make energy conservation a top priority?

A: First, let’s qualify that question. Rather than being a top priority, energy decisions really should be part of standard operating procedure. The top priority should be to make money, and people need to understand how energy efficiency supports that goal. Here’s what I mean: The very activities that provide energy efficiency also provide better control over plant assets and inputs. Control provides reliability. Greater reliability means less downtime. Less downtime means orders are filled faster, which allows the facility to complete more orders over the course of a year–thus making more revenue. Energy efficiency isn’t just about reducing utility bills. It’s also about boosting revenue through greater productivity.

Awareness is important. Manufacturers should know how much energy they consume, of what fuel type and for what purposes. Employees should be aware of energy costs and how their decisions drive those costs. For example, compressed air systems are too often taken for granted because to a lot of people, "air is free." That conclusion ignores the fact that it takes six horsepower of electricity to generate one horsepower of compressed air.

Empowerment works if incentives and accountability go along with it. A great example of this comes from Mercury Marine in Fond du Lac, Wisconsin. The facility installed a metering system that monitors power consumption at the substation level within the plant. The work supervisor at each substation not only has cost control responsibility, but gets an internal utility bill from the central facilities manager. The supervisors have incentive to enforce energy-smart behavior by their staff. The central facilities manager is not just a bill collector–he also provides how-to assistance like tip sheets from the U.S. Department of Energy’s BestPractices program.

Q: This is also not an issue of big companies versus small companies. Any size company, it seems, can benefit from energy cost reduction efforts. Can you discuss some smaller companies that have enjoyed significant success in this area?

A: Along with Mercury Marine, there’s C&A Floorcoverings, a privately held, five-plant facility in Dalton, Georgia. It is one of the first companies to adopt Georgia Tech’s Management Standard for Energy (MSE) 2005, an ANSI-approved standard along the lines of ISO 9000. This protocol established roles and accountabilities for operations, maintenance, engineering, finance and corporate leadership to collectively tackle energy cost management. This multi-disciplined team identifies, prioritizes and implements energy projects and procedures that provide net value. This is a great mechanism for overcoming the silos that so often let dollars slip away.

Q: What is one thing every manufacturer in America can do to reduce energy consumption and, as a result, reduce operating costs?

A: The one thing every manufacturer should do is get a plant-wide audit of their energy consumption. You need to know how much energy you consume. Audits are often free through utilities, state energy offices and university-based industrial assistance programs. If you know your energy consumption patterns, then:

  • You have a lot more leverage with marketers who buy your fuel commodities. Don’t give the marketer a blank check.

  • You can quantify the before-and-after impacts of your energy improvements. You can’t claim victory if you don’t know the baseline from where you started.

  • You can prioritize your improvement opportunities by targeting the prime movers that consume the most fuel.

  • You are better able to assess the value and impact of new technologies as they become available.

  • You can also inventory your emissions sources and prioritize opportunities to reduce risk of non-compliance with emissions thresholds.

Your questions and comments are welcome. Please reply with your energy management question, concern or story. I’ll respond to each, and publish the more provocative discussions in this column. E-mail crussell@ase.org, and please include your phone number if you wish to discuss the item prior to publication.