Gathering Low Hanging Fruit is Not Enough to Green Industry
Gathering Low Hanging Fruit is Not Enough to Green Industry
This is the fourth in a Rocky Mountain Institute series on the steps business leaders can take to seize the economic and competitive opportunities outlined in Reinventing Fire: Bold Business Solutions for the New Energy Era.
America's industrial sector generates more than 40 percent of the country's GDP and employs almost 20 million people in refineries, paper mills, chemical plants, smelters and countless other facilities. This mighty engine consumed one-quarter of all U.S. energy in 2010 -- 91 percent of which came from fossil fuels -- in many diverse segments, in a dizzying array of complex processes.
If we are to move off of fossil fuels, U.S. industry must lead with investment and innovation. This is not only possible, but critical to capturing durable competitive advantage, according to Rocky Mountain Institute's Reinventing Fire -- a blueprint to a 2050 U.S. economy powered by efficiency and renewable sources of energy.
Eliminating the use of fossil fuels will result in a healthier environment by reducing toxic air and water pollution while stabilizing CO2 emissions at levels that avoid the most damaging impacts of climate change. In addition to improving the environment and stabilizing the climate, Reinventing Fire is also an enormous business opportunity.
Firms that lead this transition will benefit from reduced operating costs, improved profits and product quality, reduced fuel price volatility and supply risks, the creation of new markets and a competitive edge at home and abroad. While the work is not easy, one key technique can help industry make fast strides: energy management systems.
To capture energy savings in industry, it is not enough to merely gather up low-hanging fruit either when capital is available or cost-cutting is required. Leading firms are attaining dramatic results by pushing far past that opportunistic paradigm, establishing a continuous improvement mindset to monitor and manage their energy use in good times and bad.
For example, Frito-Lay cut its electricity energy intensity by 25 percent, natural gas intensity by 33 percent and water by 41 percent from 1999 to 2008. These energy savings investments not only brought a financial benefit, with an IRR of 25 percent and $55 million added to the bottom line, but they also reduce risk. These investments have even generated marketing benefits, especially as consumers get more savvy about where their products come from and how they are made. The installation of solar thermal power at Frito-Lay's Modesto, Calif., plant enabled the use of the tagline "Sun Chips are now made from the sun."
The key to Frito-Lay's success was not some breakthrough manufacturing innovation, but simple, fundamental business strategies applied to energy use. The energy management strategy could be implemented in a number of ways, but all methods can be boiled down into a simple "plan, do, check, act" structure. To execute effectively, several key elements must be in place:
- A measurement and reporting structure will accurately assess energy use at the scale required, whether that be the plant, process or equipment level, and will clearly report that use in consistent terms that management can track across different facilities.
- The right organizational structure must align stakeholders from the boardroom to the shop floor. Creating cross-functional teams tasked with saving energy can help a production manager see how energy-saving projects could boost productivity and not add risk, or help a maintenance manager understand how a steam leak harms the bottom line.
- Leadership must set bold goals and provide necessary resources. The goals should be aggressive to unlock innovation. If it is already clear how to achieve them, the goals are probably not strong enough. Energy performance should be a component of employees' performance reviews both to reward good work and create a culture of shared responsibility. Capital should be dedicated to efficiency projects -- perhaps each year's savings can be reallocated to create a self-sustaining funding source -- so they don't compete with fundamentally different types of projects.
The fundamental steps used within an energy management system also happen to be the tenets of good management in general. It is not surprising, then, that instituting an energy management structure would have spillover benefits into product quality, productivity, innovation, risk reduction, brand health and human capital value. The firms best known for their energy management accomplishments -- Dow Chemical, Toyota, Nucor, Pepsi Co. -- also happen to be leaders in their market segments.
While the implementation details of an energy management plan might look very different at a Dow Chemical, where energy is 16 percent of costs, than it would at Pepsi where it is 2.5 percent, all industries and firms can benefit from applying an energy management system.
Each plan must be tailored to the unique culture and operating requirements of each company, but plenty of resources can help customize your own structure. The EPA's ENERGY STAR program has a set of guidelines. The DOE's Superior Energy Performance (SEP) program provides resources and pilot programs to plants across the country. The SEP program has also supported the development of the international ISO 50001 energy management standard released in June 2011.
Like 9001 for quality and 14001 for environmental management, ISO 50001 will provide independent verification of energy management practices that can be communicated to customers, suppliers, governments and the public.
The drumbeat of plant closings and outsourcing might create the impression that U.S. industry, facing low-cost overseas competition and ever-tightening regulation, is doomed to an eventual extinction. But this sector still accounts for 40 percent of U.S. GDP and employs 20 million people.
It is true that production of many lower-value products have moved to low-wage countries, but this recent past is not destined to be our future. Industry thrives in places such as Germany and Japan with high wages, high energy costs and strict environmental standards. It can continue to thrive in the U.S., too, particularly if we are able leverage one of our country's greatest assets: innovation.
Aggressively deploying energy management structures can harness this innovation to save energy and costs -- and help industry become more productive, make better products, become a better neighbor and create jobs.
Manufacturing photo via Shutterstock.