ENERGY COST CONTROL STRATEGIES:
What Do Large Energy Consumers Do, and Why?

By Christopher Russell , Senior Program Manager, Alliance to Save Energy

ABSTRACT
What are the most common energy management strategies? The Alliance to Save Energy discovered the results from a small industry sample. This article shares some insight on the pros and cons of each strategy.

INTRODUCTION
Large energy consumers took a blow to the chin in the wake of the 2005 hurricane season. Fuel shortages and the resulting price spikes forced many companies to think seriously about reducing their energy consumption. State, federal, and non-governmental (NGO) organizations stepped up their provision of information and assistance programs.

The most comprehensive assistance effort is the U.S. Department of Energy's Save Energy Now initiative. Facility managers were encouraged to obtain energy assessments that track their energy consumption and outline potential improvements. Websites allow visitors to download “how-to” information about the technologies and procedures that reduce energy waste. But this begs the question: How do companies currently manage their energy costs?

The Alliance to Save Energy asked this question in an Internet survey conducted in November 2005. The Alliance ( www.ase.org ) is a non-profit coalition of business, government, consumer, and environmental leaders that promotes energy efficiency world-wide to benefit the economy, environment, and energy security. The Alliance translates energy efficiency into opportunities to improve business performance.

A SURVEY OF LARGE ENERGY USERS
The Alliance survey posed the following question: “Which of the following best describes the energy cost-reduction strategy taken by your organization (or the organizations you observe)? Please choose one selection only.”

•  Pay the fuel bill on time to avoid late fees [Do Nothing];

•  Price-shop for the lowest fuel prices available [Price Shop];

•  Pursue occasional, low-cost (non-capital) projects when time and resources permit [OPEX projects];

•  Select strategic, capital (hardware) projects that improve plant performance [CAPEX projects]; or

•  Follow a multi-year business plan that budgets for projects and staff training, and identifies energy-smart standard operating procedures [Business Plan].

Some interesting observations about current energy management practices emerge from the survey:

•  Eighty-six percent of end users indicate the use of proactive strategies-- that is, doing more than just shopping for low cost fuel.

•  Passive cost control strategies—just paying the fuel bill on time, fuel switching, or shopping for a lower-priced fuel—are far more likely to be pursued by institutional end users (e.g., campuses, healthcare, museums, etc.; 26%) than by manufacturing end users (9%).

Note that the survey was not scientific in that it was not based on a random sample of the total population of industrial facilities. The sample frame was limited to the ~4,000 readers of the Alliance 's industrial information newsletter (www.steamingahead.org), which implies that the average respondent's interest in energy efficiency is somewhat greater than that of a representative from the broader population of industry. One-hundred large energy-user responses were compiled. The vast majority were from the U.S. The results are presented in Table 1 (continued next page).

SOURCE: Alliance to Save Energy, unscientific Internet survey conducted November 2005
1. The vast majority of respondents have no functional relationship with the Alliance to Save Energy other than being the recipient of a semi-monthly email newsletter that provides energy management information.

One question (unanswered here) regards the potential difference in the survey outcome if finance, administrative, or other personnel from the same facilities were to respond to this survey.

This survey's results suggest that most companies with an interest in energy cost containment pursue a strategy that is more proactive than simply switching fuels or shopping for the lowest price. Specifically, 86 percent of survey respondents seek to proactively control their energy consumption and waste. How do these companies prefer to achieve those savings? Responses are almost equally split among three basic approaches: (1) occasional low-cost projects, (2) strategic capital investments, and (3) multi-year business plans that organize people, procedures, and investments. The merits of those strategies are discussed on the Alliance 's website: www.ase.org/section/topic/industry/strategies .

DIFFERENT COMPANIES, DIFFERENT STRATEGIES: WHY?
Mike White, V.P. of operations for Sunoco Chemicals, offers a very succinct theory about organizational ability to manage energy costs. Specifically, energy management capability reflects the attributes of an organization's people and management systems :

Ideal “People” attributes:

• Strong technical skills in engineering, finance, and data management
• A can-do work ethic with an ability and willingness to learn and change
• The capability to communicate in business terms

Ideal “Systems” attributes:

• Multi-year, organization-wide planning discipline
• Performance benchmarks, goals, and staff accountabilities
• Focused, ongoing leadership support for goal attainment
• Information systems for collecting and communicating performance metrics
• Protocols for cross-departmental communication and fiscal coordination

Taken together, “people” and “systems” attributes determine an organization's operational style, as depicted in Figure 1 (next page). These styles tend to shape the energy management strategies that organizations develop (see Figure 2). Strategies determine the quality of energy management outcomes.

In general, strong “people” attributes allow an organization at least to initiate energy projects on an episodic basis. Strong “systems” allow energy management to become a durable process that gives ongoing support to the organization's core business agenda.

FIGURE 1: Organizational Attributes Characterize Operational Style

FIGURE 2: Energy Management Strategies Reflect Organizational Attributes

Bottom line: Energy management outcomes depend on strategy; strategy depends on operational style; style depends on organizational attributes.

CONCLUSION
The pinch of today's high energy costs prompts many manufacturers to investigate energy management options more thoroughly. Some strategies focus on price control, some pursue capital investment projects and others seek savings through changes in procedure and behavior. It is possible to combine all of these strategies. The Alliance to Save Energy's research has identified the range of typical energy management strategies practiced by industry today. These strategies are as follows:

Do nothing. This may be acceptable if the company is extremely profitable and its earnings targets are not threatened by energy costs. Meanwhile, companies with management turmoil may have no choice but to do nothing about energy expense.

Price shopping prevails when energy expenditures are perceived strictly as a price-driven issue. Short tenures allow managers to deny or ignore energy waste if the consequences are expected to accrue to the succeeding manager.

Occasional low-cost, non-capital projects. Quick, easy, cheap projects can be pursued in-house by a resourceful, do-it-yourself crew. However, the gains are temporary if energy discipline is not a documented part of standard operating procedure.

Capital projects. Well-chosen capital projects can save operating expenses. The financial risk of these is reduced if staff skills and operating procedures are improved in concert.

Sustained energy management. Continuous energy improvement helps to identify, justify, implement, and sustain the most savings potential. Ongoing progress reports demonstrate energy management's support for core business objectives.

What financial results can a company expect from energy management? 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 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 from a number of sources: (1) reduced fuel use; (2) reconciliation of errors in utility bills; (3) using consumption information to negotiate better fuel purchase contracts; and (4) reduced waste of raw materials, 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.