The State of Energy Efficiency
How can industrial energy users combat increased energy demand–and skyrocketing prices? What role can insulation play in energy efficiency? To find out, Insulation Outlook interviewed Neal Elliott, industrial program director for the American Council for an Energy-Efficient Economy (ACEEE), and an internationally recognized expert and author on industrial energy efficiency. Here, he shares some of his insights.
What current trends is the ACEEE tracking with regard to energy efficiency?
The most important issue we see right now is the current increase in energy prices, coupled with the high degree of volatility in the market today. We’re fundamentally in a period of transition in terms of energy markets, with respect to both natural gas and oil. This country is moving from a period of relatively plentiful supply to a period in which we’re essentially going to see demand constrained by available supplies of energy, and this in turn is going to drive up the prices of other energy sources, such as electricity.
How do the trends in natural gas and oil markets affect the commercial and industrial sectors?
It’s interesting. The impacts are pretty much across the board on manufacturers. Groups such as the chemical industry–an important consumer of oil and natural gas as well as electricity–use oil and gas as both an energy source and a feedstock for their product; so it might affect them disproportionately over some of the other sectors. Another sector we have seen be hit exceedingly hard has been the agricultural fertilizer and chemical manufacturers, in particular fertilizer. As a result of the high natural gas prices, we’ve seen about 25 percent of the domestic production go overseas.
What the energy price marketplace is doing is fundamentally changing some of our domestic industries. It’s making them less competitive in the global marketplace, tending to make them more domestically focused and emphasizing the need for them to look at things like stability, customer service and other things like that to retain competitors in that market. The impacts extend across the board, to sectors such as glass manufacturers, even the wood products industry.
There are also some other surprising things that have occurred. One is the dramatic increase in natural gas consumption by the oil refining industry. This has resulted in a large part because of tight crude markets and a high demand for refined products, especially gasoline. Because crude has been difficult to get, many refiners are willing to buy natural gas, and use that to run their plant, so that they can turn a higher percentage of the barrel of crude that they buy into a saleable product. They’re willing to pay a premium price for the natural gas because they’re getting a pretty high premium for their refined product.
How can American industry survive the current energy crisis without going overseas?
There are a couple of things they need to do. One of the first things is to look at being as efficient as they possibly can. That is imperative for an industrial consumer–that they get the maximum benefit out of every dollar they spend, and try to squeeze as much as they can. Eliminate waste. Invest more money in plant audits, new equipment, new insulation and better motors. No single thing will make them more competitive, but efficiency is a key element. The other thing is looking at the energy choices the company is making, in a risk-management, investment portfolio perspective.
Increasingly, people are starting to look at energy-efficiency investments as well as a diversification of energy resources. Among the things that make economic sense in this kind of a price environment is renewable energy. We now have, for example, Dow Chemical looking into putting wind energy into a facility on the Gulf. It’s cheaper for them to generate their own electricity through wind than to buy it from the utility company. They actually generate a lot of their own power through combined heat and power/co-generation.
People often think of combined heat and power as an electric power technology. It’s not. It is a steam technology. It replaces an industrial boiler. As a result, for a small marginal investment in fuel, you get electricity as a byproduct of steam production.
What energy-efficient options are available for those in the industrial levels that are trying to cut costs?
The first is, as Tom Casten with Primary Energy points out, to go look for the $20 bills on the floor–the low-laying fruit. There’s a lot of rotting fruit lying on the ground. Companies who are out in the forefront in terms of their energy efficiency–like Alcoa, Dow and DuPont–are going out looking for efficiency opportunities in their own manufacturing facilities, and they’re not having any problem finding them. Many of these opportunities are very low-cost.
Alcoa has an interesting chart from when they surveyed their opportunities. They fall into two categories. There’s one set of opportunities, which has an average payback time of six to eight months. Then there’s another group that has an average payback of three to four years. In the short-term a lot of it was elimination of waste, operational changes and making small investments, especially in control technology. That’s where the energy is going, to the process. Companies want to target their efforts so that they know just where the energy is going, so that they’re using the right amount of energy in the process.
If you look at the longer term, this is where you see the majority of capital investments. You’re buying a new piece of production equipment; you’re revamping a production process. Those are the types of things you don’t do on an ongoing basis, but you factor them into your planning process down the road.
When you do the plant modernization process, in many cases, you’re investing in new equipment. You want to take that extra 1, 2, 5 or 10 percent investment and make it there because at that point the energy savings from incrementally investing in better equipment is likely to pay back well.
What are the three most important things that industrial users can do to improve energy efficiency?
First, know where your energy is going. If you don’t know what your energy expenditures are and what they’re going for, you can’t manage them. Second, look for those big-cost, high-energy-use processes, with an eye to eliminating any waste that you can from the system. And third, empower your employees. They know where the energy is, and in many cases they’re your best resource in terms of identifying how to make energy efficiency more important and actually translating opportunities into actual cost savings.
If plants/facilities stand to gain so much from energy efficiency, what’s stopping them from making the investment?
That is a complex issue. A number of things contribute to it. The first is that it’s not always clear in most firms that energy efficiency/management is anybody’s job. If there’s nobody accountable, it’s unlikely it’s going to get any attention. The second challenge is that most plant managers and corporate managers think that energy efficiency is something that costs a lot of money. In a capital-constrained environment, and probably even more importantly, in a labor-constrained environment, you’re going to hear, "Let’s not go look at that because we don’t have time to look at energy efficiency, and even if we found an opportunity, we can’t afford it because it’s too expensive."
In short, people don’t even look for it.
What is ACEEE’s role in helping companies to overcome these obstacles and improve energy efficiency?
ACEEE is a think-tank. Our goal is not so much trying to help the individual companies or plants, and is more structured on trying to get the infrastructure in place at the local level so there’s somebody down there who can help the industrial firm. We spend a lot of time working trying to refine the programs that are being offered by state energy offices, electric utilities and regional economic development agencies. These are programs such as the manufacturing extension partnership, the Department of Commerce and industrial assessment centers across country run that are run by the U.S. Department of Energy at major engineering universities.
Many people have said that what we need to do is to train the industrial plant operators to find energy efficiency. I don’t think that’s really the problem. I think the problem is really giving them the time to go find it. Here’s a good example. We do a lot of work with electric motor systems. I think this is indicative of a trend: In the late 1980s, the leading cause of motor failure in the petrochemical industry was over-lubrication of motors. By the late 1990s the leading cause of motor failure was under-lubrication of bearings in electric motors. What happened during that intervening period was a wringing-out of any excess in engineering and maintenance staffs. It’s the first thing you do: You try to squeeze your labor budget and you eliminate anything that’s perceived as nonessential. The bottom line is that means people just don’t have the time anymore to look for these opportunities.
One of the trends we’ve seen over the last six to eight years is that as energy issues have become more important, we’ve seen an increase in activity, but no increase in staffing levels working on the energy management area. So who’s doing this? Companies aren’t doing it with internal staff. There are two groups that have gotten in to the market. One is the vendor: Groups like motor service companies, who used to be rewind shops, are now providing engineering services. The other group is engineering firms, which traditionally have been brought in for special projects but who are now doing more operational-type projects, and in some cases are coming in and doing projects in the plants on an ongoing basis.
The trend continues to grow. We’re finding that energy management is often outsourced. This has been really important to many of the vendors because it has allowed them to move beyond just being a commodity provider. Now they’re becoming the value-added resellers, and in many cases it’s the value-added part that becomes more important to the customer than the equipment itself.
This provides a very interesting opportunity for the insulation industry as well. Many insulation companies are specialty companies; so they tend to be very tightly tied to providing a fairly high-value product to a customer. But going in and providing that extra-added service might be an interesting strategic market decision that may be worth considering.
Given the trends, what does ACEEE surmise in regards the future of domestic industry?
We think the manufacturing sector in the United States will continue to be an important part of our economy, perhaps less export-focused and more domestically focused than it was two decades ago or maybe even a decade ago, but still it’s going to remain a major part of the economy. It’s just going to take creativity on the part of the industrial companies, and the service industry that supports them, to make sure they remain competitive in the marketplace.
Some companies are small and might not be able to afford a big investment; others are large and obstinate to change. What type and size of companies is best fit for making energy-efficient changes?
ACEEE looks a lot at this question, and we’ve done a fair amount of work studying this. We’ve come to appreciate that there are probably three categories of company sizes. There are the very large companies, the Dows and DuPonts of the world. By and large, most in this category can take care of themselves.
The really small companies of about 100 kilowatts of demand, with 10 to 20 employees, fall into two categories. Either they’ve already figured this out and they’re doing a really good job and don’t need help, or they’re not doing a good job and unfortunately they’re so small you can’t afford to help them. That’s always been the challenge–the small guys either get it or not, and there’s not much you can do either way.
It’s the companies in the middle, the mid-size manufacturing companies, which represent the real opportunity. In general, their biggest problem is lack of staff time and expertise to identify and implement efficiency opportunities. That’s where programs can come in and make a difference–whether it be energy service guys, the vendors, or government programs such as the manufacturing extension partnership or some of the electrical utility or state energy office programs around the country. The most successful one we’ve probably seen is New York State Energy Research and Development Authority’s FlexTech program (Find out more about this program at www.nyserda.org/programs/flextech.asp).
They’ve run this program for close to 30 years. What’s made it successful is that they don’t just run the audit. They really work with the customer to identify the opportunity and provide technical assistance to figure out how to implement the opportunity. They then follow through to make sure the systems are running and provide the worker training necessary. And they do this in concert with the electric utilities, with the consulting engineering community in New York State, and with groups like the community college.
They are publicly funded programs. It varies who runs them and where they get their money. In some cases, they are federally funded programs that are augmented with state money. In some cases these are unique programs that are run by an electric utility–in some cases with their own money, other times with public benefits money.
Can you share some specific examples of potential returns on investments from companies who have made changes to become more energy-efficient?
There are almost too many to name. There are some impressive projects out there. We recently named the Rohm and Haas Inc., Deer Park Plant as a champion of Energy Efficiency in Industry. They also won an award from Texas A&M University for their energy efficiency program.
They did everything, and that’s the key. They went and looked systematically at their operation. They also looked at it from a very strategic standpoint. This is their largest plant in the United States. They looked at where their energy was going in that facility and what they were buying, and they knew from a strategic vulnerability perspective that they were tied into the electric facilities, natural gas companies and oil providers. This represented a strategic vulnerability for their company. So they looked at where the energy was being used. They looked at their steam system and they looked at combined heat and power and employed that. They also looked at where the electric loads were: compressed air. So they went through and optimized their compressed air system. They looked at their motor management practices and improved the motor management practices so they were buying the most efficient product and maintaining it in its most efficient operation.
Stonyfield Farms, which makes yogurt and other dairy products, holds a similarly impressive record. They have been attentive to these issues for many years. Once at a forum, someone asked Stonyfield’s energy manager, "You’re doing all these things that are cost-effective. When are you going to start doing the things that are not cost-effective?" The energy manager gave a blank look and said, "Well, we’re not going to do the things that aren’t cost-effective, because we’re all shareholders. There’s still plenty to do that is cost-effective." So I think it’s a question of commitment. This company made a commitment to look throughout their entire operation and to do things in a cost-effective way. In many cases, the companies who are doing the environmentally right thing are making good profits too.
One of the things we’ve seen that there are three kinds of companies, regardless of size. There are companies that are leaders. They’re already out there, doing what needs to be done. Then there are the companies that have their heads in the sand. You can’t do anything for them, either–they’re probably going to go out of business or get acquired by another company. Then there are the companies in the middle–the ones whose hearts are in the right place. They simply don’t know what to do, or, more frequently, are so fixated on trying to keep things going that they just don’t have time. Those are the ones who can be helped.
The key is, like Stonyfield and Rohm and Haas, to understand the importance of energy to your company and to the company’s bottom line. And in order to understand that, you need to look for the opportunities out there. And you don’t have to do 100 percent–you don’t have to do everything. You want to get the low-hanging fruit out there, which in turn reduces your exposure to the energy market. In the case of Rohm and Haas, they had reduced their energy purchases to such a degree that their exposure to the markets was little enough that when the energy prices went up so rapidly, they were not in the potential financial peril they may have otherwise been.
Foremost, you go after the rotting fruit on the ground. No need to go for the cherry picker–you get the easy stuff first. As you tend to find out, there’s plenty of easy stuff to find if you know where to look for it and you know how to look for it.
What kind of role does insulation have in the larger picture of energy-efficient industry, buildings, and utilities?
Insulation is a quintessential energy measure. We’ve spent too much time focusing on electric issues without paying much attention to thermal issues, whether heating or cooling. One of the important factors we need to think about is that we generate a significant amount of our thermal energy with electricity, whether it be through vapor compression, refrigeration, etc.
Insulation is always important, for reasons of operation, safety and efficiency. When you see natural gas prices more than double, oil prices almost double, and a 15 to 20 percent annual increase in electricity prices, making sure you make the right investments, making sure you have enough insulation, becomes an important measure.
When we talk about insulation, it falls into both the short-term and the long-term categories we mentioned earlier. There are opportunities out there to make strategic investments in major new insulation products. For example, there’s the guy going through the plant with an infrared thermograph gun/camera and finding a hot spot on a valve, pipe, etc.–it’s an opportunity to go out there, address the issue and slap some insulation on some neglected spots.
In many cases, the vendors play a part here in helping the customer identify the opportunity and solve it. Many of the larger insulation manufacturers servicing the larger industrial customers are playing an important role in this regard.
ACEEE has concluded that consumption of natural gas will continue to constrain supply in the near future. What is the long-term prognosis?
We are a little more optimistic in the long-term on the natural gas side. What we tend to see is that there are new options for energy supply out there, whether they be liquefied natural gas imports or new domestic sources. As a result we think we are in a period now where we are seeing exceedingly high prices for natural gas. Those prices will probably decline in the 5- to 10-year time frame. They’re never going to go back to the level we saw 10 years ago, however.
We are not so optimistic about oil prices. We see a global tightening of the oil marketplace out there, particularly being driven by China and India, the two most rapidly growing energy consumers in the world.
Both of those countries are going to be competing for oil globally. So we are potentially looking at a long-term steady increase in oil prices over the next 10 years. We are probably at a near-term peak right now, and we think it’s leveling out from there. The $30 to $34 a barrel is stable price today, and that will trend upwards to the low $40s down the road as terms of a stable price.
Because demand for oil is growing more rapidly than the ability of the market to deliver supply, we’re likely to see periods of very significant volatility. We would not be surprised to see oil spiking at $60 to $70 per barrel and then go back down. What we don’t anticipate is that it will drop back into the low $20s again.
The benefits of becoming more energy-efficient now will be manifest if not in lower energy prices, in more stable energy prices. The very tight market is causing the volatility. Energy efficiency and energy demand production are going to be critical if we are to avoid the swings in prices we’re seeing now–such as 10 percent differences in one day. This volatility makes it very difficult to plan–it has a huge impact on companies’ financial welfare. My experience is that industry can deal with stable prices. What they can’t plan for is uncertainty, and right now what we have are huge degrees of uncertainty in the market, especially in the oil market. We are seeing it increasingly in all the energy markets. You can look at oil, gas, electric and coal markets. Ultimately, they’re all tied together. And this includes markets for alternate sources of energy for the time being.
We love efficiency, but the reality is, efficiency isn’t going to solve all our problems. We need to diversify our sources of energy in this country. Different technologies emerging in the marketplace have promised to diversify the investment portfolio, and are things we should look at. These will be important in the long term.
What is the impact of the Clear Skies initiative on power plants and utility companies?
We have had some real problems with this for two particular reasons. First, it doesn’t include carbon, and we think that ultimately we will need to deal with the carbon issue. Not dealing with it now creates uncertainty in the future that is likely not good for the American economy. Second, it doesn’t give credit to efficiency. That’s a fundamental issue. It’s based largely on a concentration-based or input-based emissions standard–how much emission you get per Btu of fuel you burn. We think it should be focused not on that but on how much emission per kilowatt-hour of electricity you’re able to produce; an output-based standard.
We have had a less-close relationship with the current administration than we have had historically with administrations of both parties. On the other hand, we have a close working relationship with congressional offices and committees. We maintain very close working relationships with those offices and many state houses as well.
What is ACEEE’s most important program in place right now?
We are working with the Coalition of Industrial Consumers on natural gas legislation at the federal level. Part of the issue right now is in order for us to have a sustainable growing industrial manufacturing base in this country, we need stable gas markets. The bottom line is, we need federal intervention in this regard. Moving forward with legislation to help rebalance the natural gas markets is the most important thing we’re doing now.
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ACEEE is a nonprofit organization dedicated to advancing energy efficient technologies and policies. For more information, visit www.aceee.org.