Live Discussion: Economic Case for Industrial Energy Projects

Why just read this blog when you, me, and 200 other like-minded folks can chat together in real-time?

The U.S. Department of Energy's Industrial Technologies Program conducts a free web seminar each Thursday from 1 PM to 2 PM eastern. I was asked to present for the April 9, 2009 edition. Most presentations in the series are about technology, and rightly so. However, someone made the clever observation that the technology does not implement itself. In other words, someone has to justify the time and expenditure. This is a topic that gets scant treatment in the typical engineering textbook.

Therefore, I will be presenting a 60 minute discussion entitled "Energy Cost Control: How the Money Works." This time slot includes about 15 minutes for Q&A. Registration is free, with all the particulars at http://www1.eere.energy.gov/industry/newsandevents/events_detail.html?event_id=3727.

I welcome your participation-- a little two-way conversation would be a nice change for me.

See you then.

Home Energy Audits: An Investor's Experience

Wealth accumulation is not unlike trying to fill a bucket. As investors, we seek ways to fill that bucket with cash flow. But leaks in that “bucket” will offset the inflow. A dollar lost has the same value as a dollar added.

If you’re like me, you reacted to last year’s stock market melt down by looking for alternative investment opportunities. Being the energy geek I am, I finally decided to take my own medicine and look at energy losses right under my own roof. As an investment, this opportunity is neither high-tech nor foreign-based. There is no shady middle-man. My best investment opportunity in 2009 comes from tapping into the annual cash flow that I currently spend on my home’s gas and electricity consumption. In other words, it comes from “fixing the holes in my bucket.”

We secured a home energy audit last February. This is an exercise that inventories energy use, losses, and potential remedies for reducing utility bills. We purposely sought an energy auditor that had no commercial interest in providing the recommended improvements. Note that the audit itself “fixes” nothing. Instead, it yields an inventory of improvements, ranked in order of their savings potential.

We found that our house leaks THREE TIMES as much air as it should. This was the volume quantified by the auditor’s “blower door test,” and shown graphically with infrared camera images that help to pinpoint the sources of heat loss. Heat loss is due to a combination of air leaks and lack of thermal insulation. Losses are especially evident around the sill where the house frame meets the masonry foundation. Attic space is equally important. Poor-fitting windows, doors and other penetrations to the house’s external walls can also contribute to losses. Results like ours are not at all unusual for houses built before the energy crises of the 1970s.

In our case, we’re looking for an estimated $560 savings on our annual outlay of over $2,600 per year on gas and electricity. We expect the biggest impact to be on wintertime use of natural gas. The investment should be about $1,375. The first $375 covers the energy audit, while I’m budgeting $1,000 for insulation, caulk, weather-stripping, and other materials. The labor will be my own, and I’ve got the whole summer to work on it. We expect to be in this house for at least another 15 years, so the 2.5 year simple payback is perfectly acceptable. The return on investment is a whopping 40 percent. Compare this to a 2.5-year certificate of deposit, which right now earns about 2.75% APR.

I’m comparing these results to annual returns on stocks, which we are told is eight percent on average—a return that was nowhere to be seen in 2008! I’m not at all worried about investment risk. We will always need energy. Energy improvements to my house will save even more money as energy prices trend upward. Another benefit is reducing the size of the furnace when it’s time for a replacement. That’s because the house won’t be leaking three times the normal volume of air.

Life-Cycle Cost: The Challenge for Industrial Energy Managers

This post describes the life-cycle cost concept and its application to energy management.

“Life-cycle cost” describes the total cost of ownership for any asset placed in service by a business organization. This is more than just the “catalogue” or acquisition price. There are costs incurred for research prior to purchase, the cost of the asset itself, financing and installation fees, insurance, then the costs of maintenance, operating inputs (especially energy), and the asset’s eventual disposal. Energy-saving industrial hardware is usually described in terms of the life-cycle cost benefits that they provide. These benefits are relevant to an organization that seeks to minimize its operating costs over time.

Here’s the problem: organizations are made up of individuals with different responsibilities and therefore very different time horizons. There’s usually no one person who is responsible for maximizing value at all stages of an asset’s utilization.

First costs—meaning the initial cost of buying an asset—are the sole focus of most procurement directors. The procurement director's neck is on the line for minimizing costs today. In most cases, he couldn’t care less if the lowest-cost assets actually lead to excessive energy or maintenance expenses for years to come. Those costs simply become an operating manager's problem. The procurement director makes his bonus today by keeping first costs to a minimum.

Similar constraints impact finance directors. Corporations usually impose annual or even quarterly earnings targets on production facilities. At the same time, production depends on assets that slowly wear out over time or are made obsolete by the advent of newer, more efficient alternatives. Finance directors are always tempted to coax more life out of old equipment rather than investing in upgrades. This approach will artificially boost this quarter’s earnings. Finance directors can hit their short-term targets and run, while the problems associated with eventual asset failure and escalating operating costs will hopefully accrue later, to the next manager.

Most major assets have significant ancillary needs such as lubricants, tools, filters, and other consumables. These items are also subject to procurement from the lowest bidders—supposedly ensuring that the company’s out-of-pocket expenditure is minimized. Unfortunately, the “cheapest” selection is not always the most durable. That which wears out faster is replaced more frequently. Another complication may be the structure of vendor relationships, which blend service with the supply of components dictated by the vendor.

Operations staff present a different perspective. These people are focused on production schedules. Time is a valuable commodity in operations, to the point where other factors, including energy, may be readily sacrificed in order to save time. For operations staff, job risk is related to production goals, not energy waste. Allowing machines to run without work in progress is of no consequence to machine operators neither see nor pay the utility bill.

Organizations pay a premium—in the form of energy purchased and wasted—for failing to minimize life cycle costs. This premium is value waiting to be captured. The advocate for this is an energy manager. In practice, the energy manager seeks a balance among financial, technical, and operational criteria. It should be clear now that energy cost control is as much people-oriented as it is technical. Communication and persuasion are crucial to the task. Execution of this agenda becomes more urgent as the price of energy rises.