Energy price volatility and supply disruption can cause havoc in manufacturing. The disruptions to the North American natural gas supplies caused by Hurricane Katrina have abated, but the memory remains.

European manufacturers were not subject to the storm-related infrastructure shutdowns. However, they received an eye-opening shock of their own in January 2006 when the gas-pricing dispute between Russia and Ukraine threatened a temporary interruption to European gas supplies, which originate in Russia and are transported to Europe via Ukraine. The quick resolution of this dispute prevented any serious supply problems, but the incident itself pointed out the high dependence western European gas consumers have developed on supplies from the East.

In both cases, industrial energy consumers clearly see the benefit of reducing energy consumption and increasing the diversity of their energy supplies. Depending upon constraints imposed by the manufacturing processes and energy markets in any region, energy diversity may seem an impossible-to-reach goal. On the other hand, reducing consumption per unit of production is an operational improvement that fits perfectly into existing continuous improvement programs.

The first step in coping with energy price increases is to refine the existing energy measurements within a manufacturing operation. Improvement programs consist of validating the existing measurements, and then of adding a further layer of depth to these measurements. The purpose of new measurements is to tie energy consumption data closer to actual manufacturing operations. Most plants have been constructed with a view of energy being provided to manufacturing operations as part of centralized utilities. The metering and sub-metering of these utilities is often outdated for today’s higher prices, and by the many changes in plant configuration that occur over time.

While the cost of natural gas or steam flow measurement has not decreased substantially, new and less-expensive technologies for electric-power measurement using wireless mesh networks should be on the market in the near future. Wireless sub-metering of electric power consumption is already becoming popular in the residential building segment, and industrial suppliers are likely to respond with new products as well. Electrical power metering points tend to be clustered at distribution and motor control centers. Wireless meters added to these points can be powered by the circuits they monitor.

Making choices

 As better measurement ties electric energy consumption to specific operations, manufacturers must make choices about how they schedule their operations with respect to the daily on-peak/off-peak schedule of electricity prices imposed by the electricity tariffs in their locales. Certainly, wholesale rescheduling of production operations is not often feasible, since these involve people as well as equipment. Options such as additional thermal storage capacity can shift on-peak power consumption to off-peak hours.

Another common strategy for success is careful management of energy-related capital expenditure programs. Some companies evaluate the energy impact of all their capital expenditure proposals, and re-evaluate these proposals on a regular basis to keep the energy information up to date. That way, as prices evolve in the market, companies can rapidly deploy programs that already have been shown to be economically attractive at given energy price points.
Finally, manufacturers can to some degree manage the way they purchase energy. The regulatory environments governing energy utilities vary widely, but in many cases, utilities are subject to “prudence reviews” by regulators. These reviews constrain them to take only limited risks with respect to hedging against future price spikes.

Consequently, in many cases, energy utilities have no regulatory incentive to manage their own risk position aggressively. This situation leaves energy-intensive manufacturers to devise and execute their own strategies for hedging their future energy supplies and costs.

Harry Forbes, hforbes@arcweb.com, is Senior Analyst, Automation, at ARC Advisory Group Inc., Dedham, Mass.