How Waste Raises the Price of Energy

Industrial energy users unwittingly raise the price of the fuel they consume. After accounting for waste, the price paid per unit of energy available to do work can be as much as two-thirds higher than the price of delivered fuel. This phenomenon is illustrated below.

For a variety of reasons, many industrial decision-makers react to rising energy costs by focusing on the price they pay for fuel and power. A “price-centric” approach seeks lower prices for the same fuel, or if possible, a switch to a different, lower-cost fuel. This is not a bad idea, but it recognizes only one side of the expense equation:

EXPENSE = PRICE times QUANTITY

Of course, any reduction in energy waste will reduce the total quantity of energy consumed. Companies that understand this concept are purposely changing the way they consume energy. Other companies—especially those which focus only on prices—fail to grasp this opportunity.

Here is how industrial facilities inflate their own fuel costs. Purchased fuel must be converted several times in succession before it does the work for which it is intended. For example, consider steam systems, which consume over half of total fossil fuel purchases by the industrial sector of the U.S. economy. Almost all manufacturing processes require heat, and steam is an effective medium for heat supply. Steam systems convert fuel to heat in several stages:

Each stage of conversion allows some energy to be lost. The volume of loss depends on the quality of technology, procedures, and behavior applied by the facility and its staff. The U.S. Department of Energy’s Energy Use, Loss and Opportunities report describes the overall industry average energy losses incurred at each stage of the energy conversion process. While these figures vary across and within industries, it’s useful to use aggregate industry measures:

In other words, only about 60 percent of industry’s energy purchases performs the work for which it is intended. The other 40 percent includes waste that can potentially (and economically) be avoided.

How does energy waste “impact” fuel prices? An example facility shows how it works. This facility purchases 100,000 units of natural gas (units are million Btu, or MMBtu). The price per MMBtu is $8.00, for a total annual outlay of $800,000. Here is how fuel is put to work, beginning with its delivery to the facility:

This facility effectively spent $800,000 for 60,000 MMBtu available for actual use. Or, in other words, it spent $13.33 per available MMBtu.

Another way to look at it: Energy changes hands several times after it is delivered to the facility. At each step in the conversion sequence, the handler incurs energy waste which effectively "marks up" the price of the energy that is eventually applied to do useful work. Based on the data shown above, the average steam-using facility effectively marks up the price of its purchased energy by 67 percent.

Naturally, some conversion loss is thermodynamically unavoidable. However, the U.S. Department of Energy recognizes that at least a third of conversion losses can be economically recaptured through the implementation of best-practice technologies, procedures, and behaviors. Virtually all industrial facilities have the potential—through reduced energy waste—to improve their energy expense performance.

Edward A. Reid, Jr.
3.13.07

At 60% availability for useful work, industrial customers are doing far better than the electric utility industry, according to the latest EIA AER.

(http://www.eia.doe.gov/emeu/aer/diagram5.html) Electric utility primary energy consumption is ~40% of total US energy consumption. Electric utilities ship only 33% of their input energy over the fence as net power and then dissipate another 7-10% of that net power in transmission and distribution losses.

Joseph Somsel
3.15.07

You're ignoring energy "quality." This makes most BTU-to-BTU comparisons meaningless or worst.

Capital expenditures to reduce energy purchase expenses need a rigorous analysis to see if:

1) quantify the internal rate of return and

2) compare to other possible investment opportunities available.

The latter is necessary since a firm typically has a capital budget that has to be allocated to the highest return investments.

This sort of analysis has resulted in the wholesale electrification of industrial processes over the last century.