Outsourcing Energy Management

Saving Energy and Carbon through Partnering

Steven Fawkes

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317084549
• Edition: 1
• Topic: Tecnología e ingeniería
• Subtopic: Recursos energéticos

This book describes energy management outsourcing as a way of addressing the current energy challenges facing all organizations, namely high and volatile energy prices, the need to mitigate climate change and potential supply constraints as oil production peaks. These problems are likely to intensify in the coming years, yet most organizations have reduced in-house capability to address them, thus outsourcing is increasingly seen as an essential part of any strategy to reduce energy use and carbon emissions. The author describes the basic processes of energy management and how to outsource them in a strategic way to achieve maximum results. The process is based on a new model of energy management looking at total costs, which is presented in the book. The book offers a comprehensive guide to outsourcing energy management, discussing the risks and benefits and taking managers through the process of deciding whether to outsource or not, and finding and assessing an outsourcing partner. Managers looking to reduce energy consumption and carbon emissions through the use of external service providers will find Outsourcing Energy Management an ideal 'how to do it' guide.

PART 1

The Importance of Energy

INTRODUCTION

Energy is a quantifiable state function of every physical system. Energy allows one to predict how much work a physical system could be made to do, or how much heat it can exchange.

Brainy Encyclopaedia.com

This introductory section sets out the reasons why managers of companies and other organisations, and, in fact, why all of us should have considerable concern about the issues of energy supply and demand. It outlines the UK and global energy situations without attempting to be a technical work (as with the rest of this book it is designed to be read by non-energy professionals), because understanding the context of the energy issue is important both in order to guide and motivate informed decision making. Sometimes, to the annoyance of energy professionals, energy demand decisions that ultimately drive supply decisions are taken by many diverse groups and individuals and are not driven by energy issues, but rather by many other technological, economic, social and emotional factors. For instance:

• Do we invest in a more efficient boiler when we have three other projects competing for scarce capital that will increase sales or improve quality?

• We need a new building quickly, and energy is only a small proportion of total costs; why should we bother about its energy efficiency?

• Does reducing carbon emissions really matter, compared to making a profit?

This book is based firmly in the reality of the knowledge that these kinds of questions that have to be answered every day in organisations. I believe they can only be answered optimally with a good understanding of the UK and global energy context.

The large-scale use of energy, fuel and electricity is literally the lifeblood of modern society. Without it we cannot manufacture goods, we cannot travel or transport goods, we cannot grow food in the quantities and at the prices we are used to, and ultimately we cannot survive in environments outside a narrow band of temperatures.

Society is facing a number of challenges over the coming decades that include international terrorism, the proliferation of nuclear weapons and how to bring the developing world up to a standard of living comparable to that of developed countries. All of these have direct links to energy supply and demand. They are also all taking place in the context of what may turn out to be the largest problem – global climate change caused by human activities. We cannot develop the world such that a global population of ten billion has the benefit of the energy use that the developed world currently enjoys using the existing fossil fuel-based energy systems. Fossil fuels would quickly be depleted and the effects on the global climate would be far larger than anything seen so far, possibly catastrophic. Even without considering the development issue, the continued use of fossil fuels is ultimately unsustainable due to their finite nature.

The section is divided into three chapters dealing with the three main concerns that make energy an important issue, irrespective of the price of energy.

First, we deal with the issue of the finite nature of fossil fuels, the lifeblood of our industrial and post-industrial society. This is considered by most to be a long-term problem, but as we will see there are those analysts who consider it very much a short-term problem. As the source of most of our fossil fuel is from potentially unstable regions of the world, particularly the Middle East, and there is the ever-present threat of terrorism on a large scale, fossil fuel supplies could be constrained at any time by geopolitical events, irrespective of the physical availability of oil and gas in the ground.

Second, we deal with the threat of climate change, a threat that is driving policy in many countries. Climate change can be considered a medium-term concern that demands attention now.

Third, we deal with the existing, and foreseeable, legislative and regulatory pressures that have been added to by the first two concerns. These can be considered short-term concerns because the laws and regulations discussed are already in existence or are coming soon. Non-compliance is not an option for any organisation.

In addition to these issues, organisations of all types have been facing greatly increased energy prices and energy price volatility. Since 2002 energy prices for some customers in the industrial market have risen between 50 and 100 per cent. Short-term spikes in gas prices have been particularly extreme. This sudden and extreme price increase has put energy and the control of energy costs firmly back on the agenda for directors and senior managers of most organisations. For some energy intensive manufacturers, the increased prices are threatening competitiveness and even their survival with a growing number of sites being closed or suspending operations due to high energy prices. Several companies in the UK linked the rise in energy prices to reduced profits in their annual general meetings. This is the immediate problem facing managers of all organisations today.

This confluence of problems, combined with increasing and more volatile energy prices, the ageing energy infrastructure within many organisations and the decline in capacity to manage energy which occurred during the period of low and stable energy prices, means that there is a massive need for a re-allocation of resources in favour of improving energy efficiency and implementing cleaner, low carbon energy solutions. This re-allocation of resources will have to come from all energy users, energy suppliers and financial institutions.

Energy users can have three responses to the energy problems discussed above:

1. do nothing;

2. implement programmes focused purely on cost saving;

3. view the problems as a strategic opportunity and respond accordingly.

The scale and nature of the problems suggests that doing nothing is not really an option for credible companies interested in a long-term future. If energy prices do not force such companies out of business surely customer demands and increasing regulations will do so. For many organisations the proper response will be to implement a programme focused on energy cost saving, and this book outlines methods and techniques that will allow maximum savings to be achieved. For some organisations, and the number is growing, the response to the energy and environmental problems will be to see them as a strategic opportunity to differentiate themselves in a crowded marketplace. Such organisations are likely to implement programmes that go beyond pure cost saving and move into carbon management and projects such as renewable energy, which may not yet be fully economic. They believe that the indirect benefits such as corporate social responsibility reputation and improved risk management elements of these projects outweigh simple project economics.

For organisations choosing either a cost-saving response or a strategic opportunity response, the problems will include accessing sufficient capital, human and technical resources. This is where outsourcing of some or all of the energy management process can be a useful tool.

CHAPTER 1

Oil Peaking and the Decline of Fossil Fuels

The fifth revolution will come when we have spent the stores of coal and oil that have been accumulating in the earth during hundreds of millions of years… It is to be hoped that before then other sources of energy will have been developed… Whether a convenient substitute for the present fuels is found or not, there can be no doubt that there will have to be a great change in ways of life. This change may justly be called a revolution, but it differs from all the preceding ones in that there is no likelihood of its leading to increases of population, but even perhaps to the reverse.

Sir Charles Galton Darwin, 1952

Oil has become more and more necessary to everyone. At first it was used for medicine, for lamps, and for lubrication. Now, if the supply of oil were cut off, our manner of living would change completely until something to take its place was found.

Maud and Miska Petersham, 1935 (when the world used 3.5 million barrels of oil each day compared to the 80 million barrels of oil used each day in 2004)

Energy will be one of the defining issues of this century, and one thing is clear: the era of easy oil is over.

Chevron website, 2006 (www.willyoujoinus.com/vision/)

[T]he ‘hidden cost’ of a gallon of imported oil is now between $5.28 and $5.55. When added to the nominal pump price of unleaded gasoline, this yields a total of between $8.26 and $8.53 per gallon… the total ‘hidden cost’ of our oil import dependence now totals between $524.9 billion and $532.6 billion annually – over 2.5 times what we have spent on the war in Iraq.

National Defense Council Foundation USA website, 2005 (www.ndcf.org/reports/AlaskasStrandedGas.pdf)

INTRODUCTION

Before considering the supply of fossil fuels (oil, gas and coal), we need to remind ourselves just how dependent modern society is on fossil fuel usage. Industrial society’s use of fossil fuels began in the 1800s with the use of coal. Starting at the beginning of the twentieth century there was a shift to oil rather than coal, initially prompted by naval use of oil for military ships as it enabled longer range and reduced labour forces. This geopolitical motivation quickly led to a rapid expansion of the oil industry up to and after World War II, with polices predicated on cheap oil, mostly supplied by the Middle East. Currently fossil fuels provide 88 per cent of the world energy consumption, with nuclear and hydroelectric accounting for 6 per cent each, with solar and biomass accounting for less than 1 per cent, while in the UK coal, oil and natural gas account for 89 per cent of total energy use (DTI, 2006).

There has been strong growth in primary energy consumption since 1979. In 2004 global primary energy consumption recorded the strongest incremental growth ever, rising by 4.3 per cent. Growth was above the ten-year average in all regions and for all fuels (BP, 2005). In the UK primary energy consumption grew by 13 per cent between 1970 and 2001, and by 11 per cent between 1990 and 2001, and growth has continued since then.

Global society is now totally dependent on the large-scale industrial use of fuels and electricity and the global energy business is huge. The energy industry is the world’s largest industrial activity with revenues of $8 to $9 trillion (Simmons, 2006). In the UK total expenditure on energy (excluding transport) in 2004 was £23 billion, a figure which has probably increased by 50 per cent since then due to energy price increases (DTI, 2006).

Despite the enormous scale of global energy use, the majority of the world’s population of six billion people do not yet benefit from industrial energy use. Ensuring that they, and the expected future population of ten billion, do so but without environmental catastrophe or armed conflict is one of the major challenges facing humanity in for the twenty-first century.

Given the dependence of global society on fossil fuels, and particularly oil, a fundamental issue is how long the available sources of oil will last.

HUBBERT’S CURVE

There will always be debate about the amount of oil and gas resources left on the planet but there are two inescapable facts about oil and all other fossil fuels: there is a limited supply and if demand continues to increase, at some point demand will outstrip production.

Box 1.1 Fossil fuels: quantification and definitions

While oil is the most ubiquitous form of fossil fuel, coal and natural gas can be similarly categorised. All three forms of fossil fuel can be quantified in terms of barrels of oil equivalent (BOE). One BOE equals 6000 cubic feet of natural gas. For coal, one BOE equals 0.2 (hard coal) to 0.4 (light coal) tonnes. Current estimates of known reserves for these three forms of hydrocarbons are:

Oil: 1.213 trillion barrels

Gas: 885 billion BOE

Coal: 3.2 trillion BOE

Between these fossil fuels the world consumes 61.7 billion BOE per year, which is 88 per cent of the total energy consumption of 70.4 billion BOE per year.

Source: Guinness Atkinson Funds (2004). Investment Research Series. The Future of Energy. Woodland Hills, CA

The best-known tool for predicting the remaining lifetime of fossil fuel reserves is the Hubbert curve. Dr M. King Hubbert was a geologist who worked for Shell and, in 1956, using a simple bell-shaped or logistical curve to look at fossil fuel use and resource life for the United States, predicted that US oil production would peak in 1970. The Hubbert curve was widely criticised but it proved to be remarkably effective. US oil production peaked in 1970–1971, although it was several years before this was acknowledged and Hubbert’s work was fully recognised.

The Hubbert curve has subsequently been applied to global oil supplies, and although still controversial, the idea of ‘oil peaking’ being a major problem in the short term is becoming widely accepted. It is important to be clear that oil peaking is not about ‘running out’ of oil. Peak output is the point at which maximum volume is produced, after which the peak production declines. As new fields are found these fields will be exploited as fast as possible to meet increasing demand. Peak production occurs when half the reserves have been used and therefore even in the pessimistic scenarios oil will be expected to be available for another 50 to 75 years; the questions are ‘how easily can it be found and extracted?’ and ‘at what price?’

Because oil prices have been relatively high for the past decade, oil companies have conducted extensive exploration over that period, but the results have been disappointing. Annual oil discoveries have been less than annual consumption since 1982 (Aleklett and Campbell, 2002) and it is clear that we are moving from a long period in which additions to reserves were much greater than consumption, to an era i...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Figures
• List of Tables
• List of Boxes
• List of Abbreviations
• Acknowledgements
• Preface
• PART I THE IMPORTANCE OF ENERGY
• PART II THE ENERGY MANAGEMENT PROCESS
• PART III OUTSOURCING ENERGY MANAGEMENT
• PART IV ENERGY SERVICE COMPANIES
• Overall Summary
• Resources
• References and Further Reading
• Index