Navigating the manufacturing energy equation

Manufacturing cost comprises of various components including labour, raw
materials, distribution and energy. While energy has traditionally been one of
the smaller components of the total cost in manufacturing, some sectors of
manufacturing can be particularly energy intensive. Additionally, the
increasing environmental awareness means that companies need to adopt an
innovative approach to energy and utilities, not only for commercial reasons
but also to meet corporate sustainability goals.

Technological advances are changing the dynamics of the cost makeup for
many manufacturers. As manufacturers implement higher levels of automation,
digital manufacturing and robotics, the cost proportion of the labour component
in manufacturing will continue to decrease and that of energy will increase.
This relative cost shift presents increasing opportunity to review energy
demand and intensity in all parts of the manufacturing process.

Simultaneously, the energy landscape is changing rapidly, driven by
human behaviour, increased environmental awareness, and energy policy settings.

Having experienced an almost 80% increase in energy prices since 2009, Australian
businesses are concerned about what they can do to rein in rampant escalating
costs.

The first step is to understand the macro issues impacting the energy
industry, followed by how these issues superimpose on the specific business and
energy profile of the manufacturer.

There has been a shift in the Australian energy landscape in recent
years through the impact of increasingly competitive decentralised generation
forms such as solar energy. Load growth at a network level is currently flat or
declining in some locations with very limited growth forecast in generation
demand.

However, despite this stagnation in growth, prices continue to increase.
The move by electricity distribution companies to recover margins in an
environment where volumes are static or falling is likely to drive further price
rise. Additionally, gas prices are expected to continue increasing to compete
with international demand pricing.

Meanwhile, there is a new player in the market – decentralised
generation, especially rooftop solar.

One industry expert recently referred to rooftop solar as a ‘new
electricity market entrant’ with growth figures reported to be in the tens of
megawatts of new generation being installed per month. This underscores changes
in the energy landscape, where users at all scales, including the manufacturing
sector, are looking at decentralised generation to respond to widespread cost
efficiency programmes.

The rising energy cost is being offset by decreasing technology costs
for decentralised generation, particularly solar. In the right places, solar
now competes with, and beats many traditional forms of electricity procurement
on a long run marginal cost basis, even without subsidies. Many manufacturers
are looking at ways to offset energy costs by producing their own, or
capitalising a valuable waste stream into energy.

The energy sector is complex with changing policies at governmental
levels, deregulation, moving goal posts with respect to carbon pricing and new
technologies. Manufacturers are typically able to deal well with issues that
are within their control. But where there are such a myriad of macro issues at
hand, working out an optimum best value solution can be difficult.

A productive navigation path to effectively manage energy costs for any
manufacturer, regardless of industry, would involve looking at the process in
detail; identifying when and where energy is used in a smart energy sense;
finding alternate energy storage solutions; aiming for possible energy
reductions through more efficient control or equipment; and identifying the full
spectrum of available energy generation solutions.

The transition to a high-tech future will depend upon the willingness of
manufacturers to adapt their commercial strategies to the new environment.
Successfully navigating the energy equation will be essential in any adaptation
strategy.

By John Szmalko, Power Transmission and Distribution Leader at Aurecon