Build your portfolio

May 16, 2007
Is energy efficiency an engineering project or a management process? Contributing Editor Christopher Russell answers that question in this month's Energy Saver column.

What does it take to become energy-efficient? Is it a capital investment project, or a management process? For your retirement plan, do you randomly invest exclusively in high-risk equities, or do you make small, regular investments in a diversified portfolio? If you understand investment portfolios and dollar cost averaging, you understand what an organization-wide energy management program can accomplish.

Almost every discussion of industrial energy cost control focuses on projects. Projects, as one-time, capital investments, fail to address energy waste attributable to work habits, maintenance procedures, and a lack of best-practices. The potential impact of expensive, new hardware is compromised if improperly used. Companies can successfully address these “human” shortcomings through goals, targets, and discipline — the essence of energy management.

Energy efficiency, from a technical perspective, is a progressive reduction in energy consumed per unit of production, hour of operation, or square foot of floor space. A facility can lose energy in a myriad of ways: inefficient combustion, motor drives left running when there’s no material in production, and from heating or cooling unoccupied spaces. These practices compromise the value of energy projects. Unfortunately, there always seems to be a sharp-penciled financial director ready to doubt a project’s payback projection. Such doubts are warranted. Facilities that install new, big assets without addressing wasteful practices are putting them at risk.

Classic energy projects include new boilers, cooling towers, or other significant hardware. The logic behind it is straightforward: plug in a new black box, flick the switch and get back to business-as-usual. The new hardware is expected to save energy. Sometimes it does. However, there are a lot of black boxes bypassed and collecting dust, because those who could get the most from them have been reassigned, laid-off, improperly trained, or simply not held accountable for energy performance.

The classic perception of the economics of projects is: 1) they require capital investment; 2) approvals (rightfully) hinge on financial payback projections; and 3) they often don’t provide a rate of return competitive with “core business” investment opportunities. Organizations that see energy efficiency as a project are taking an all-or-nothing approach to controlling energy costs — and are often disappointed by the results.

Why should energy efficiency be more than a project? Think about advice from a good financial advisor. That person would first ask you to set financial goals. Get spending under control. Then build a portfolio of diversified securities, mixing growth-oriented equities with stable, income-producing bonds. To reach your goal, make regular contributions. Quarterly performance summaries demonstrate current rates of return. Investment risk is mitigated by diversification of assets and dollar cost averaging.

Don’t confuse an “energy portfolio” with a procurement portfolio of fuel and power purchase contracts. Instead, it’s activities and investments that either reduce energy waste or redirect energy into more productive uses. While energy procurement portfolios are a good idea and are becoming increasingly common, forward-thinkers also use a portfolio strategy to develop multi-year energy improvement programs.

They will establish separate capital budgeting tracks to support energy improvements. That way, energy projects don’t have to compete with non-energy projects for capital support. They start by setting energy performance goals. Next, they boost energy awareness by training staff to ensure that energy-smart decisions are part of standard operating procedures (to get spending under control). Then, they develop strong portfolios that combine capital projects (equities) with best-practice maintenance discipline (bonds). They maintain momentum (make regular contributions over time) by continually communicating results to top management and staff to sustain support. Performance metrics and accountabilities (documented rates of return) keep people focused on results. This is how to create a durable, risk-managed program for continuous energy improvement.

An energy management portfolio — like any financial portfolio — derives value from the mix of its components. To rely on any one component in isolation is to accept tremendous risk. This is why investing in people skills and energy-smart procedures offsets the risk of capital projects. By having a strong foundation of energy-smart skills and procedures — as well as the performance metrics that provide a pulse on energy use — an organization is better prepared to implement new equipment. DuPont, Merck & Co., Kimberly-Clark, Frito-Lay, Unilever HPC, and many others use this approach (see

Energy management is as much a communications effort as an engineering pursuit. It’s ongoing because technologies evolve, labor turns over, and production costs change. The energy manger, the steward of an energy portfolio that builds organizational wealth, needs to coordinate this effort.

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