The Time to Rethink Energy Procurement Is Now

By Andrew K. Reese

Projections from the U.S. Government for energy prices over the next year-and-a-half offer a mixed picture. (See Figure 1.) On the one hand, prices are set to rise as the global economy recovers and demand for energy sources ticks upwards. However, costs for most energy sources are not forecast to return to their pre-recession levels, at least for the next 18 months. Except, that is, for electricity, which saw a small increase this year but is projected to resume a more aggressive increase pattern next year.

The ups and downs of energy prices track well with the rise and fall of corporate initiatives for energy efficiency, says Peter Franolic, director of the energy practice at Pittsburgh-based consulting firm Greybeard Advisors. "Interest in energy management is cyclical," he says, "and people tend to fall asleep because it's not the crisis of the moment." The problem with this "on-again/off-again" approach to energy management, Franolic adds, is that when the cost of energy does spike again, it may be too late for companies to respond effectively if they have not already put in place a comprehensive energy strategy.

Opportunities for Improvement

Senior management does appear to have energy management on their radar, according to a study conducted last year by Moskowitz Jacobs, Inc., for Environmental Systems Inc. (ESI), a provider of energy efficiency solutions. In interviews with 450 CEOs, chief financial officers and other senior management, the study found that nearly nine in 10 top executives (87 percent) said they "have room to improve on energy management," while three-quarters (74 percent) said they "do not have a handle on energy cost."

"What we believe they're really telling us, based on our experience, is that they don't have a clear picture of how much of their energy spend is controllable, and how much is just the cost of doing business," says Paul Oswald, president of ESI, which is based in Brookfield, Wis. Franolic, who has 30 years of experience managing all aspects of energy procurement and risk management in both regulated and deregulated markets, agrees with that assessment. "In many instances, companies don't know what they don't know," he says.

Research cited by ESI suggests that the opportunity for achieving savings is significant. Oswald's company points to a study last year by the consultancy McKinsey & Co., which asserted that the United States as a whole could cut its energy costs by $1.2 trillion over the next ten years by investing $50 billion per year in energy efficiency. "Considering that each one dollar of overhead savings is equivalent to three dollars of new revenue, companies clearly need to look at ways to reduce their operating costs, especially given the current economic climate," ESI notes.

Attacking Consumption

Energy experts like Oswald and Franolic talk about attacking two sides of the energy equation, consumption and procurement. On the former, Oswald says that every facility presents its own unique opportunities for savings, "but to cite industry statistics, you can generally look for savings of 10-30 percent on your energy and your maintenance and operational spending, depending on how aggressive you are."

When it engages with a client, ESI offers three levels of analysis aimed at identifying opportunities for energy savings in a facility. A Level 1 analysis might comprise a relatively inexpensive cursory walk-through of the facility, gathering obvious data points on the facility, reviewing the utility bills and formulating some high-level recommendations on the potential for energy savings opportunities. Level 2 encompasses a more intensive review and inspection of equipment, resulting in recommendations for what to do with specific pieces of equipment. Level 3 is a thorough review of a facility, for example, a complete energy modeling of a warehouse and comprehensive recommendations for improvements. All three levels provide a roadmap for how to start down to the road toward savings.

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The energy-saving steps could be as simple as educating a facility's operating personnel on the correct procedure for the energy efficient operation of equipment, or as complex as retrofitting or re-commissioning a building, implementing solar pipes or daylighting, or installing "smart meters" to measure — and improve — energy usage. Oswald says that about two years or less is the norm in terms of payback on these types of projects, but he notes that the ROI can come more immediately in many cases. He cites manufacturing facilities that have gone through motor efficiency upgrades and saved up to $450,000 a year; a large multi-tenant warehouse facility that is saving $220,000 a year after putting in energy metering and performing energy analysis and retro-commissioning; and a $6,000 investment in retro-commissioning a major piece of equipment that yielded almost $20,000 in energy savings in the first three months.

The Procurement Side

On the procurement side of the equation, Greybeard recommends that companies take a cross-functional approach to energy, involving not only purchasing but also operations, regulatory, engineering and sustainability as part of a comprehensive energy management team. Procurement does not have a long history of involvement in energy management, since, prior to natural gas deregulation in the 1980s, companies really had no option but to pay the regulated price for supplies from the local utility. Today, with the ability to select among providers in many markets, procurement's role in energy management has become more important, given the function's expertise in contracts and markets, as well as its risk management perspective.

Greybeard also urges companies to adopt a comprehensive energy management approach that addresses not only energy procurement — from vendor selection and contract negotiation to price and supply risk management — but also consumption management, sustainability and alignment with corporate social responsibility goals, and regulatory or legislative affairs.

Ted Eichenlaub, a senior advisor at Greybeard with lengthy experience around energy in the steel industry, says that, at a minimum, procurement professionals working with energy must have a degree of technical expertise to be effective on an energy management team. "You need to be able to talk with your counterparts within the company, so you need to understand the acronyms and have a basic understanding of what the consumption of energy is all about." At companies for which energy comprises a significant amount of the total spend — say, for an energy-intensive process manufacturer — procurement must be able to bring deeper insights to the table, including expert knowledge of markets and the relevant vendors, and the ability to apply hedging strategies. For less energy-intensive companies, Eichenlaub adds, it might be more cost effective to tap outside expertise on a project basis rather than investing in developing internal subject matter experts.

Franolic says that the opportunities for savings on the procurement side of energy management can be significant, and he cites an example of one company Greybeard worked with that was able to generate more than $1 million in annual benefits by taking advantage of the way that certain regulations were written, and another company that saw substantial savings from improving the electric supply agreements for its dozen facilities. The savings can be a magnitude smaller, too, Eichenlaub notes, for companies that consume less energy, but can still add up to a large percentage of an organization's total energy spend.

With the U.S. Government projecting worldwide energy consumption to increase by nearly 50 percent between 2007 and 2035, including by 14 percent in developed nations, the business case for engaging in comprehensive energy management is becoming ever stronger. And pressures to "go green" will only add more ammunition to the business case. As Franolic says, the time for companies to start thinking about energy management is now, and enterprises that fail to engage with an energy strategy now may find themselves at a competitive disadvantage in the wake of the next spike in oil prices or the next disruption in supply.

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