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Misplaced energy Featured

12:49pm EDT July 18, 2002

After labor, energy consumption is the most expensive budget line item in the production and manufacturing process.

Sixty percent of the energy used in the United States is derived from fossil fuel -- a nonrenewable resource -- meaning there will always be a premium placed upon it. As the nation's attention remains focused on the energy crisis on the West Coast, a series of rate hikes in Ohio's utility market have left many business owners at the mercy of what is quickly turning into a nasty storm.

With the onslaught of deregulation in Ohio and across the nation, market factors that affect the supply side of the utility industry are coming into clearer focus. Transition costs -- used to recoup investments in such as things as nuclear power plants -- and other unforeseen supply issues have created an unstable market, but all is not lost, according to Craig Kasper of K & H Energy Services.

Your best bet is not to play the market in search of today's lowest available prices for your business, Kasper says. Instead, develop a long-range strategic plan to significantly reduce energy consumption.

The remainder of Ohio's deregulation plan went into effect earlier this year, removing restrictions from the supply side of the industry. Unlike California's plan, Ohio's targets the retail and wholesale markets with the intent that a competitive market will lead to lower consumer prices.

Good intentions notwithstanding, cold winters, fuel shortages and increased summer spending have pushed energy prices up to some of the highest rates ever seen. In response, many manufacturers and other high energy users are beginning to worry.

What it all means

As a result of deregulation, utility costs are now unbundled. Instead of a single charge per kilowatt hour, energy bills reflect different charges for generation, transmission, distribution and transition. Previously, all of those were combined into one rate on the bill.

Transition costs are the most controversial. They constitute the stranded assets left to the public utilities companies by such projects as construction of power plants -- many of which are outdated and shut down. But under an agreement reached by the Ohio Legislature and the utilities, the act of recouping those costs has been spread out over several years to reflect only moderate rate hikes for consumers, the largest group of which is high energy using manufacturers.

Because the utilities spent in excess of several billion dollars on those investments, experts predict a five- to seven-year period before all the stranded costs are recouped. After that, consumers are expected to see real supply costs for the first time.

In layman's terms, that means the high cost of running a manufacturing plant -- which has increased drastically in recent years -- is likely to remain that way for quite a while. For owners of other types of businesses, if you're using a lot of energy, for now expect prices to stay high.

Supply vs. demand

It's been said that with adversity comes enlightenment. In light of a changing market and increased costs, business owners, especially small- and mid-sized manufacturers, need to re-evaluate their energy usage and its relation to overall product cost.

Ironically, as with many complex business issues, it's the smaller companies that have to expend otherwise nonexistent in-house resources to develop solutions that larger competitors can develop much quicker.

Kasper says that despite this, it's time to accept the inevitable and begin to approach the problem with an eye toward the future.

Business owners must ask themselves, "What can I do to improve my energy use so I can save money?"

"It is more of an awareness issue because the price of electricity is going up and the question is, what can I do (as a business owner) to hedge against it," Kasper explains.

In the game of supply and demand, he estimates that customers without high usage contracts will find themselves at the mercy of the market and save only 5 to 7 percent while the market is adjusting to transition costs.

But on the demand side of the equation, if you look at how your company uses energy and devise a plan to maximize its use, the savings can be between 10 and 20 percent.

Develop an energy strategy

Kasper suggests evaluating bills from the last 12 months to establish an average energy cost.

"That tells you how your energy costs are being derived," he says. "Are you paying any penalties, and what are your major cost drivers?"

From there, pinpoint where your business is using the most energy and why. At that point, it's a matter of devising a proactive plan to bring down those costs.

One of the first things that must be determined is your company's load profile. The load profile determines the tariff or rate a business pays for its utilities and is determined in part by peak demand. Higher demand often translates into a higher charge per kilowatt hour.

"If you have a high demand, where you might be paying demand charges, that is the highest amount of energy you are using in a given month," explains Kasper.

That means that in some cases, a business can actually use a low rate of electricity overall in a given month, but if there are peaks at a higher rate, even once a month, the higher rate is charged for the entire month's energy usage. Kasper says high demand rates have been know to constitute anywhere from 50 to 100 percent of a bill.

For manufacturers, that peak may come from short periods of time when high energy sucking equipment is running.

"Look for ways to eliminate that demand," Kasper suggests. "Rather than let it peak, have a generator pick up that load. Or, instead of turning on all of that equipment, stagger it."

Staggering equipment use is an effective way to keep consumption lower. While overall energy use remains the same, there are no high usage charges tacked on the bill.

Get the most out of your usage

One of the simplest ways to achieve higher energy efficiency is to replace old equipment, lighting and HVAC systems with new energy saving counterparts. While that may mean you'll incur some upfront costs, in the long run, it's an investment you'll get a strong return on.

Shifting high demand times from on-peak to off-peak hours is another means of saving. It varies from business to business, but on-peak hours usually fall between the hours of 8 a.m. and 8 p.m.

Because of higher demand during those hours, the utility charges users a higher rate. The idea is to create penalties for using large amounts of energy during high demand times and incentives to use energy during lower demand hours. Kasper suggest running equipment at night or adding a third shift to offset costs.

Other options

If prices remain as high as they have been -- or spike upward due to a colder-than-average winter -- alternative methods of energy will become the norm rather than the exception. Kasper predicts that co-generation will become a larger part of energy management.

Co-generation is the process of using local gas wells, landfill gas, waste product incineration or waste heat to augment or even replace traditional energy sources. Experts say it can improve energy efficiency by up to 70 percent.

In the end, the issue is about more than simply the rising price of energy and how it affects your business. It's about how your business uses or, in some cases, misuses, energy, and the effect it has on your company's bottom line.

Kasper, who has spent 38 years in the utility industry, suggests looking at energy costs not just as a means to save money in this highly volatile market, but as a way to improve profitability.

"Look at your (energy) cost (in relation) to your cost of product," he says. "That cost is where you might want to look to lower the cost of the product out the door. That is where the savings is going to affect the bottom line."

And while no one can predict what the future of utility deregulation will bring, unlike California's poorly thought out policy, Ohio's is one that other states can follow. If both sides follow through on what's expected of them, competition will increase, prices will eventually fall and business owners will change the way they look at their energy costs.

"Make a strategic commitment to develop a plan." Kasper says. "From a competition standpoint, if you aren't doing it, your competitors will be." How to reach: K & H Energy Services, 440-519-2570

Kim Palmer (kpalmer@sbnnet.com) is managing editor of SBN Magazine.

Deregulation terms

PUCO -- Public Utilities Commission

FERC -- Federal Energy Regulation Commission

LDC -- Local distribution company

Supply/Generation -- Source of the utility, unregulated portion of utility

Transmission -- Process by which utility is transported from source to the LDC. Transmission is regulated by the FERC.

Distribution -- The final stop before utilities reach the consumer. Distribution is regulated by PUCO.

Unbundling -- The separation of generation, transmission and distribution charges

Tariff -- The rate of the utility

Stranded assets -- Unrecovered costs of utility development

Transition costs -- Monthly charge as a result of stranded assets, assessed in utility bill

On-peak/Off-peak -- Respective terms for high and low energy usage periods

Market development period -- The five- to seven-year period when transition cost will be assessed

Co-generation -- Creation of energy from alternative sources, ie. waste heat and on-site natural gas wells