The Time to Rethink Energy Procurement Is Now

Energy procurement requires a comprehensive strategy to maximize savings and minimize risk, and now is the time to get started


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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