Energy management's outsource option

March 29, 2003
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Utility deregulation and supply disruptions are creating energy uncertainty, prompting food processors to consider a variety of energy management options



Energy management used to mean conservation programs and usage audits to cut the kilowatts of electricity or cubic feet of gas pouring through a food plant's meter each month. Today, the focus has shifted to purchasing efficiencies that can yield significantly greater savings.

Natural gas deregulation taught manufacturers that free-market pricing meant both the opportunity for cost-cutting and the danger of sky-high utility bills. Hedge contracts and other risk-management tools are becoming critical in controlling commodity costs, and rolling blackouts are forcing utility customers to deal with availability issues as never before. Add to that the arcane nature of tariff laws and distribution deals, and it's understandable that many food processors are taking a hard look at hooking up with an energy service provider (ESP).

More efficient lighting and refrigeration upgrades involving absorption chillers have never been easy sells with food company budgeters, and competition for capital today makes it even less likely firms will plow money into engineering solutions to curb consumption. Payback calculations are complicated by the uncertain value of the energy saved. For example, natural gas sold for $4.50 per cubic foot in late June. The wholesale price could reach $5 by fall. Last January, it went for $2. Uncertainty over what figure to use in ROI calculations can permanently stall an equipment-upgrade decision.

According to the Energy Information Administration, food manufacturers buy three times as many Btus of gas power as electricity, but spending on utilities often is skewed toward electricity, and price volatility is even more extreme for electricity than it is for gas (see chart). Hundred-fold wholesale price swings can occur, and manufacturers are nervously watching those swings as electric deregulation phases in state by state.

"Corporations hate uncertainty," observes Michael L. Cagley, senior buyer for the Pillsbury Co., Minneapolis. Two years ago Pillsbury reduced utility pricing uncertainty by contracting with Summit Energy Services Inc. to manage energy needs at 42 plants. By outsourcing the function, he says, the company shifted from a utility buyer to an energy purchaser.

"Outsourcing the energy infrastructure enabled us to focus on what we do best: make quality products for our customers to enjoy," adds Tripta Sarin, manufacturing vice president at Ocean Spray Cranberries Inc., Lakeland, Mo. The juice maker signed a 10-year, $116 million outsourcing deal for 12 plants with Enron Energy Services in early 1999. Says Sarin: "Outsourcing certain functions enables us to run a more efficient operation and reinvest cost savings into other areas of the business."

Many major utility companies have set up ESP units in recent years, joining a cadre of independent consultants vying to be the outsource solution for manufacturers. Now petroleum corporations are staking a claim in the ESP business: Amerada Hess Corp. recently acquired Alexandria, Va.-based Statoil Energy, which counts wholesale baker Northeast Foods and Rocco Inc. among its clients. Chevron Corp. is acquiring San Francisco's PG&E Energy Services, which works with Pepsi-Cola General Bottlers of Chicago, J.M. Smucker Co. and other food clients.

The most recent federal statistics on food plant energy use suggest processors are expending more energy per unit of output than they did a decade ago, reflecting a deemphasis on conservation. "You can save more money by locking in a price without any capital investment than you can with energy audits and engineering upgrades," believes Jerry Hancock, operations manager of environmental affairs at Flowers Industries Inc., Thomasville, Ga., which uses Summit to manage commodity buying for 24 bakeries.

Some fuel managers dispute claims of declining efficiency. They maintain improved productivity has meant reducing head counts by increasing automation, which means kilowatts, not people, provide the production muscle. Regardless, food companies want to get the supply side of their utilities house in order, and many are concluding that market complexity dictates outsourcing procurement.

"Within Pillsbury, the outsource option has long been established as the preferred option" - Michael L. Cagley, Pillsbury Co.

The Pillsbury experience

A four-man energy team consisting of Cagley, the chief electrical engineer, a commodity buyer and a finance department representative was assembled at Pillsbury to hash out an energy strategy. The group quickly ascertained the initial focus needed to be on the supply side, not equipment upgrades, and that required an ESP's expertise. Several Pillsbury suppliers already used Louisville, Ky.-based Summit, so the Minneapolis bakery got candid assessments of the ESP's expertise before signing a three-year deal.

Economic savings accrued in areas where Pillsbury management did not realize there were opportunities, including more favorable rates for long-distance and local gas distribution. Savings of 3 to 12 percent are easily attainable, Cagley believes. Group purchases with other manufacturing clients of Summit presented new economies: a small plant using 26,000 decatherms of gas pooled its purchase with third-party facilities using 500,000 decatherms, resulting in a 12 percent price reduction. And ESP review of monthly invoices uncovered numerous instances where waivers from state utility taxes were not being granted on the energy used by cookers, fryers and other equipment.

Interruptible power plans make many food executives queasy, but both Pillsbury and Flowers have deployed Summit's strategy for coping with those rate plans. In a Jacksonville, Fla., plant, Flowers installed a second meter. The primary meter draws electricity under a pilot rate program with an interruptible element, and the secondary meter operates under a guaranteed buy-through provision to draw power at market price in times of short supply. "The savings were almost immediate," Hancock reports.

Summit, like other independent ESPs, trumpets its arms-length relationship with power companies. The firm manages about $1 billion in annual utility spending. Dairy Farmers of America became its first food client in 1993 when it outsourced the energy budget for 35 plants. The arrangement saved DFA $100,000 the first year.

"Energy management consists mostly of knowing how the game is played," says Mark K. Boyer, Summit's executive vice president. "We've negotiated thousands of utility contracts, and we know the questions to ask, where hidden costs are and how to negotiate fairly and tough."

One of the food industry's biggest outsourcing deals went into effect in December when Suiza Foods Corp. turned over responsibility for 84 plants to Houston neighbor Enron. The deal helped boost the annual value of Enron's ESP portfolio to $800 million a year, a figure the firm expects to double this year.

While the long-term contracts offered by Enron give pause to some, the breadth of services dictate an extended relationship. Besides negotiating contracts and managing payments, Enron also invests in equipment upgrades and energy audits; new refrigeration equipment, steam traps and condensate return lines are among the improvements made at Ocean Spray. A Suiza spokeswoman notes that most of the firm's 17 acquisitions last year involved family dairies where any available capital went into production equipment. Boilers, chillers and compressors were often neglected, and Suiza wanted a partnership that dealt with those needs as well as energy price control.

The partnership extends to water treatment practices. For example, cottage cheese production produces a sludge that often is dumped. The ESP recommended a sludge press to turn that byproduct into a revenue-generating cake.

Unlike independent consultants, which typically collect a monthly service fee, Enron and other ESPs tied to power companies promise to absorb energy expenses that exceed a set level. If a manufacturer spends $10 million for gas and electric annually, Enron may cap costs at $9 million, betting it can more than recoup the discount through efficiency improvements and shrewd price negotiation.

"Energy management has been around a long time," observes Craig Sutter, Enron vice president, but "it's a less mature market when you enter manufacturing because it's hard to delineate when energy management ends and process begins." If power is viewed only as a commodity to be consumed, there is no impetus to make process-neutral changes in the name of cost control. And because responsibility is delegated to plant-level personnel, companies end up with a few very efficient units and many inefficient plants. "Institution of best practices is critical," says Sutter, and that requires centralized management.

Consolidation is possible in system maintenance, he believes. A plant might allocate a fifth of the cost of a 10-person engineering and maintenance staff to the power system, but in reality the processing system gets the attention until the power system fails. "We can do things like labor clustering," suggests Sutter, with two of those engineers joining the Enron payroll and providing preventive maintenance to multiple clients' plants.

However the staffing issues play out, food manufacturers see merit in separating energy-infrastructure maintenance. "Engineers who were worrying about energy part time are now focusing on manufacturing full time," reports Ocean Spray's Sarin. The company believes outsourcing also will result in more reliable power supplies, an acute issue in the Northeast where rolling blackouts and voluntary manufacturing shutdowns are becoming more frequent.

Electricity: The most volatile fuel source

Cogeneration: Not dead yet

Enron, Duke Energy Services and other power company affiliates aren't alone in expanding the breadth of energy services they provide; independents also have in-house engineering expertise or liaisons with specialists who can help food companies curb consumption. Renewable resources are one option (see related story); another is cogeneration, the thermal-plus-electricity process primarily employed by five industries, including food.

After the Public Utility Regulatory Policies Act of 1978 forced utilities to buy excess electrical generation from cogenerators, the process enjoyed a four-fold increase in capacity (see chart). Now market rates are trending down and are subject to boom-and-bust cycles, leaving cogen's outlook murky at best. A pessimistic Department of Energy forecasts 7.7 percent growth in industrial cogen capacity over the next 20 years; many see cogen as a dead issue.

There's still significant interest in this energy source, however, particularly as an outsourced operation. Golden, Colo.'s Coors Brewing Co. was inundated with more than 40 bids when it put its 40-megawatt cogen plant on the block five years ago. The winning bid of $22 million by Trigen Energy Corp. not only enriched Coors's coffers, it also produced a more efficient plant.

Because Trigen's plant produces electricity as a byproduct of steam generation, efficiency exceeds 60 percent, compared to 32 percent average efficiency for electric plants. Steam is used to power the absorption chillers that serve the brewery's refrigeration system, as well as support malt processing, heating and cleaning operations and other functions.

"In any operation, there are inefficiencies, and Trigen helped wring them out," a Coors spokesman says, noting that 20 percent of capacity was freed up for new uses. Several of the efficiency ideas came from three former Coors engineers who moved over to Trigen with the sale. "Because we are focused on energy efficiency and conversion, we're receptive to making changes," reasons Charles Abbott, plant general manager.

An unconventional cogen facility with potential for the food industry is being built in Harrisonburg, Va., in a partnership between turkey processor Rocco Inc., Harmony Products Inc. and DukeSolutions, the engineering arm of Duke Power. The $7 million facility will use a Waterwide gasification system to convert 10 tons of turkey litter per hour into heat for fertilizer drying, in the process yielding a phosphorous and potassium ash devoid of nitrogen. The 60,000-sq.-ft. facility will open at year end.

While the plant, which will generate up to 15 million Btus per hour, has the potential to provide thermal energy to Rocco's processing plants, it is the waste handling aspect that holds the greatest potential, suggests Scott Keele, director of business development at Charlotte, N.C.-based Duke. State regulators are cracking down on excessive nitrogen runoff into Chesapeake Bay and other watersheds. Restrictions on animal waste as fertilizer may not only affect turkey processors but hog operations and others by choking off expansion plans, Keele says. "This project has significant ramifications."

Whether the issue is utility cost control, equipment upgrades or cogeneration, outsourcing is playing a bigger role in energy management solutions. And outsourcing can be a contentious issue for manufacturers.

Forging a corporate approach

One energy manager, who requested anonymity, says he uses the services of ESPs on a plant-specific basis, but he views the arrangement as a short-term solution. "The ante has been upped with deregulation and the volatility of gas and electric prices," he allows, "and it will take nonintensive users awhile to catch up. In the long run, though, I think they'll find they can do the job better themselves." He compared energy with telecommunications and computers: companies used specialists until markets normalized, then moved management back in house.

Working with an ESP has increased his knowledge of tariffs and cost-savings opportunities, but Pillsbury's Cagley doesn't foresee a return to in-house energy management. "Within Pillsbury, the outsource option has long been established as the preferred option," he points out.

There are more energy management options today than ever before. Bob Merlo, utility affairs manager for Anheuser-Busch, in 1998 predicted the market would normalize in two years; instead, it is more volatile today. He foresees greater reliance on outside experts in managing energy for the beer giant, not less.

However companies choose to deal with it, energy management has emerged as a controllable cost issue. How they control it will be as varied as the options available.

Photovolatic panels blanket Fetzer Vineyard's administration building and generate 55,000 kW of electrical power a year, most of the office's needs.

Sidebar: Green power converts grapes into wine

Earth-friendly policies are well and good, but unless they make economic sense, food companies can't afford to adopt them. That is management's position at Fetzer Vineyards, and the financial case for electricity from renewable resources was strong enough for the Mendocino County (Calif.) winery to convert to green power last year.

"A project has to be good for the people, good for the environment and also good for the bottom line, or we don't do it,"explains Patrick Healy, environmental coordinator at the Hopland, Calif., subsidiary of spirits giant Brown Forman Corp.

Purchasing, not marketing, took the green power initiative at Fetzer. Manufacturers in seven states now have the option of contracting for electricity from wind farms, geothermal plants and other renewable energy sources, though none can match California, where 12 percent of electricity is so-called green power. Contracts with Fetzer and other program participants are aggregated by commodity buyers when contracting for electricity from renewable sources; the actual electrons running through Fetzer's meter more likely come from a nuclear plant than biomass.

The business case for green power rests with the winery's overall goals of self-sufficiency. Conservation efforts get top priority: an upgrade to glycol cycling for Fetzer's refrigeration system is expected to cut 170,000 kW from the company's annual electrical consumption, and the firm has invested heavily in cogeneration and solar energy. "We're demonstrating that companies can reduce their impact on the environment while improving their bottom line," says Paul Dolan, president.

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