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How utilities can revitalize industry.

By linking energy efficiency and economic competitiveness, utilities can help businesses lower operating costs and upgrade their technologies.

During the first weeks of his presidency, Bill Clinton asserted that the nation's industries must modernize if Americans are to enjoy a rising standard of living. He noted that inadequate knowledge about new production technologies and inadequate capital for plant improvements were making it hard for manufacturers, particularly small and mid-sized firms, to improve their productivity and economic competitiveness. And though he said his administration would stress the benefits of government research, technology transfer, and financial assistance, President Clinton acknowledged that Washington needs new partners to help modernize U.S. industrial processes. Electric utilities are likely candidates. They have considerable technical expertise and access to large sums of capital that could help industry improve its productivity. Fortuitously, power companies also would benefit by such a partnership stimulating local economic activity and better managing electricity demands.

For many years, utilities, which are guaranteed a rate of return on their investments by public utility commissions, had an incentive to expand. But today, the high economic and environmental costs of building more power plants have convinced utility executives and state regulators of the benefits of adjusting demand for electricity. By helping customers become more efficient consumers, and by lowering extreme peaks in demand, utilities can forestall the expense of constructing new generating capacity or buying power from other producers.

Although many utilities pursue so-called demand-side management programs for their commercial and residential customers, most have not focused much attention on the industrial sector, in part because achieving industrial energy efficiency requires more specialized expertise than do routine energy audits to improve the insulation and lighting of homes and commercial buildings. Yet the reasons to target industry are compelling: Industrial firms consume more than 35 percent of the electricity in the United States, and investment in retooling manufacturing operations with energy-efficient and productive equipment could help spur economic revitalization.

Most demand-side management initiatives are designed to reduce a utility's peak demand and avoid the construction of new power plants. Economic development factors are typically neglected. In fact, if saving energy is the sole goal, the loss of manufacturing operations theoretically would be considered a positive outcome. But when companies cannot compete and shut down, the fixed costs of providing electricity shift to fewer customers, and rates go up. Employees who lose jobs also have difficulty paying personal energy bills. The result can be a downward economic spiral that few, especially utilities, would argue is desirable.

Utilities and their regulators, therefore, have recently begun to take a fresh approach to local energy policy, one that recognizes that manufacturers are less interested in energy efficiency than they are in productivity. By linking energy efficiency and competitiveness strategies, utilities can help lower businesses' operating costs and upgrade their process technologies. Pilot programs in a few states, in which utilities have assessed the potential for improving manufacturing efficiency and helped finance the purchase of more energy-efficient and technically advanced equipment, have markedly increased the competitiveness of local firms.

Diffusing technology

It has been well documented that technology is the key to improved productivity. Yet many manufacturers need technical and financial assistance to maintain peak productivity, because technologies evolve constantly and competitiveness is a quality that either improves or erodes. Improved productivity requires not only better manufacturing technology, but also know-how in using equipment, organizing work, and managing people.

Foreign companies, especially those in Japan, have invested more heavily in technological improvements than their U.S. counterparts for many years. Japan also has an extensive national network of free technology-extension services for small and mid-sized firms, whereas the U.S. government supports only a handful of recently created Manufacturing Technology Centers. The combined resources of state and federal industrial extension programs reach fewer than 2 percent of the small manufacturing firms each year. For other companies, exposure to new technologies is haphazard at best or is simply beyond their technical and financial means. The result of this disparity is that small and mid-sized U.S. manufacturers lag in the adoption of new production technologies.

U.S. utilities are, theoretically, in a good position to help bridge this gap by encouraging production-process efficiency. First, power companies employ engineers who understand technologies, and given their close contacts with industrial customers, they often engender more trust from business executives as technology transfer agents than do government agencies. Second, utilities can acquire funds for investment at lower rates than most small manufacturers, because they often request large amounts of money and are viewed as better risks; consequently, they can get good deals. Third, the National Energy Policy Act of 1992 encourages utilities to be more aggressive in helping customers improve efficiency.

To help maintain industrial competitiveness, state and local officials should create long-term stable partnerships with utilities to promote efficiency, productivity, and waste minimization. Properly structured and targeted, these partnerships can become a key element in a community's economic development and revitalization strategy, with benefits to several parties. For manufacturers, working with utilities will provide a mechanism to build a long-term strategy linking energy efficiency and business competitiveness, by lowering operating costs and by shifting capital savings to other uses. Such partnerships also provide a new vehicle for local officials and economic development agencies. They can be a valuable tool in attracting new businesses, retaining existing ones, and sparking industrial modernization. Moreover, the partnerships can be linked with existing technology transfer efforts--stimulating new investment, saving or creating jobs, and enhancing industrial competitiveness.

A few utilities are beginning to take an active role. Wisconsin Electric Power, for instance, has loaned money for the purchase of major energy-efficient equipment to its industrial customers, which repay the loans over three to five years, largely from the savings on energy expenses made possible by the new equipment, and it also offers rebates of up to 50 percent to industrial customers for energy-efficiency initiatives. Its biggest project involved a Milwaukee steelmaker, Charter Manufacturing, which wanted to install a new melting system. The utility paid $750,000 of the $1.5-million cost of the new technology. Even though Wisconsin Electric spent what seems like a lot of money, the utility determined that the investment in reducing demand and improving load management was cost-effective; it otherwise would have been pushed closer to building new generation capacity, a much more expensive proposition.

Iowa's Osage Municipal Utility has helped a variety of businesses in its service territory become more competitive. Fox River Mills, a knitting mill and Osage's largest employer, was receiving overtures from another state to relocate, but it stayed and financed a $2-million plant renovation and production-line reorganization in 1989 following recommendations of the utility's energy-efficiency audit and a subsequent productivity evaluation. Assessors recommended the replacement of old motors and installation of a more modern, efficient drying process. The improvements allowed the mill owner to lower the amount of energy needed to turn out a dozen pair of socks (his production benchmark) from 48 cents to 30 cents--a 37 percent cut. The company reduced wholesale prices, increased sales, and reinvested its higher profits to help pay for a plant expansion. These efforts created more than 50 new jobs--a major boost for a town of less than 4,000 people and a grand achievement for the "dying" U.S. textile industry.

Somerset Rural Electric Cooperative provided energy-efficiency and productivity audits and also paid a portion of interest on loans for the Poorbaugh Lumber Company in Somerset, Pennsylvania. Based on the audit, Poorbaugh undertook a $2.9-million modernization project that included the construction of a new lumber mill and the renovation of the old mill, including improvements to electric, heating, lighting, and boiler systems. The new equipment, in addition to reducing energy costs, cut maintenance expenses and improved product quality. As a result, Poorbaugh was able to diversify from its sole business of rough-cut lumber into hard-wood veneer production. Demand for quality veneers is growing steadily, and the company has identified markets worldwide for its new product.

Overcoming barriers

A report done for the Electric Power Research Institute (EPRI), the research arm of the U.S. utility industry, concludes that industrial demand-side management programs are generally less expensive per kilowatt-hour saved than commercial or residential programs, and that the technical potential of industrial energy-efficiency improvements could displace 24 to 38 percent of forecasted industrial electricity use in the year 2000. EPRI, however, asserts that conventional demand-side management programs will save only about 5 percent because few utilities are designing programs that meet industry needs to enhance production processes.

Most industrial energy efficiency programs that utilities do promote focus mainly on lighting, heating and cooling equipment, building improvements, and in some cases more efficient motors. Although reductions in energy usage are predictable in these areas, process equipment and manufacturing configuration account for a whopping 90 percent of a typical industrial firm's overall energy use. Yet unlike simple residential and commercial programs that can be implemented by utility employees, a process-oriented industrial program requires highly specialized experts. Many utilities hesitate to invest the time and energy required to locate trained assessors who are capable of evaluating different types of manufacturing operations and are available to work on a consulting basis.

More experts must be found. There is indeed a slowly growing pool of capable assessors at engineering firms, universities, and consulting companies. Utilities such as those mentioned earlier have successfully brought in such experts from around the country, even from Europe. Though there is no clearing house to find these people, EPRI is a place to start. It also seems a good opportunity for the Department of Energy and the federal labs to become more active in this area, as they redefine their roles.

Public utility commissions (PUCs) present another potential obstacle. Since they tend to favor overall energy savings, regulators may reject substantial utility investment in industrial-process efficiency, because if firms cut energy use per unit of output, improve their competitive position, expand markets, and produce more goods, they might end up increasing energy demand. Although most commissions allow economic development provisions that reduce rates to attract new businesses, regulators usually fail to link those provisions with their efficiency efforts. Needed is an appreciation for the distinction between reducing total electricity demand in the residential and commercial sectors and increasing the efficiency of electricity use among industries.

Devising effective partnerships

To carry out successful programs, a utility must first try to understand its constituent industries and find assessors whose expertise matches them. Once it performs an assessment, the utility must then find ways to help finance recommended changes. And in the meantime, it must work with the PUC so that it is allowed to recover some costs of the program.

At the outset of a new program, a utility must tailor its assessment approach to industrial customers' priorities. If a manufacturer is concerned primarily with environmental problems, the assessment should highlight that aspect. If it wants help cutting energy costs per unit of output, that aspect should be given priority. The assessor, however, should suggest other opportunities for cost savings at the same time.

The assessors must be knowledgeable professionals to ensure that suggestions will be accurate and reflect the state of the art in each industry. In some cases, teams of professionals with different types of technical expertise will be needed to evaluate waste streams, energy usage, productivity, and quality control. Note that, by hiring contractors, a utility can obtain the needed expertise as well as distance itself from the assessment, making it more credible. Outside advice also may allay concerns of business owners about the assessors' technology recommendations that favor one energy form over another.

The utility should try to share the costs of detailed assessments. Although local business owners are not likely to pay for professional assessments on their own and probably would not know where to find a good assessor, they should pay part of the cost to ensure that they take the assessment seriously and commit themselves to the process. With a shared approach, the firm is more likely to follow through on recommendations.

Selling the assessment presents a challenge for the utility. Some industrialists may not permit assessors in their plants because of concerns about proprietary rights and confidentiality. Yet several utilities, including Wisconsin Electric, have overcome this problem by signing nondisclosure agreements with participating companies. Successful marketing of assessments depends on a utility's history of cooperation with its industrial customers. If the power company regularly calls on its manufacturers and has developed a working relationship, its suggestion of an assessment will be welcomed and trusted.

Finding the money

Once an assessment takes place, the focus turns to the availability of affordable financing to implement the recommended improvements. Ultimately, financing determines whether the utility-business-public sector partnership flourishes. Many regions of the country are experiencing shortages of investment capital, and public resources have grown scarce. The situation is particularly severe for small businesses, especially manufacturers.

Utilities can leverage considerable private investment at little cost to themselves. Four major financing options exist: grants and rebates, loans, loan guarantees, and interest subsidies. Grants and rebates provide direct cash for desired projects. They are the easiest form of financial support to offer, and they are unfettered by the need to meet the underwriting standards of private lenders. They can be targeted to meet specific needs not easily financed through other mechanisms. Utilities, however, should recognize that grants or rebates are usually the most costly financing approach.

Loans can be structured in a variety of ways. One of the most popular is the revolving loan fund, a pool of money often compiled from several sources, including public funds, private contributions, repayments of loans made through other public programs, and investments from private institutions. To avoid credit underwriting, utilities can provide capital to a bank or community development organization to administer as a loan fund. Revolving loan funds have the advantages of flexibility and simplicity. For example, a program targeted to technology enhancements could finance facility reorganization or production-line modernization. As the loans are repaid, the money is made available to other firms.

Loan guarantees help minimize the risks that often make private financial institutions hesitant to lend to small businesses. They are based on a pledge to cover most or all of the outstanding balance of a loan made by a private lending institution in the event the borrower defaults. Since loan guarantees lower the risk of lending, they increase the availability of capital and often reduce the cost of borrowing. Loan guarantees do not require as much staff expertise as direct loans because most or all of the loan processing, risk assessment, and credit analysis is performed by the private lender. Like public agencies that administer guarantees, utility officials will want to define eligibility standards, an application review process, and procedures to follow in the event of default.

Interest subsidies have emerged as an attractive alternative to direct loans or guarantees. Basically, this incentive encourages private financiers to make loans to businesses at terms the lender can accept and the borrower can afford, with the utility paying the difference; if a local bank can offer a loan at no less than, say, 8 percent, and a local manufacturer cannot afford to pay more than 6 percent, the utility can bridge the gap. Interest subsidies, sometimes known as interest buydowns, make loans more affordable to business borrowers by reducing their carrying charges. In exchange for rates being several points below the prevailing market rate, the utility, as program sponsor, can stipulate eligible uses or outcomes--such as the type or location of investment--for the proceeds of the subsidized loan. Another advantage is the ease of administering an interest-subsidy program. Unlike loans or loan guarantees, the utility partner can rely totally on private lenders to conduct credit analyses, assess risks, and make the loans.

Utilities would be more enthusiastic about industrial efficiency and productivity programs if they were allowed a return (or profit) on their investments, or at least simple recovery of their costs. PUCs are therefore the key to implementing such programs. They must authorize utilities to make loans and to include the cost of industrial demand-side management expenditures in the rate base.

Federal incentives

A little-noticed provision of the National Energy Policy Act of 1992 offers a timely and low-cost opportunity to engage utilities, industries, and state governments in a partnership that links productivity and efficiency. An authorization bill, the legislation makes way for grants to states that encourage power companies to provide technology assistance to local industries.

Championed by then-Senator Albert Gore, Senator James Jeffords (R-Vt.), Representatives Edward Markey (D-Mass.), Howard Wolpe (D-Mich.), and Dean Gallo (R-N.J.), the federal program could leverage billions of dollars in investments into the modernization of this nation's basic manufacturing facilities. It sanctions federal grants to states that allow utilities to recover the cost of industrial assessments that evaluate energy efficiency, waste minimization, and productivity. The new law encourages state public utility commissions to evaluate industrial efficiency as energy use per unit of output, rather than by the traditional measure of reduced demand. States could use the federal grant money for three purposes: to promote the commercialization and local availability of energy-efficiency technologies; to establish programs to train professional assessors on an industry-by-industry basis; and to help utilities in developing, testing, and evaluating energy-efficiency programs and technologies for industrial customers.

Further assistance in these three areas could come from state manufacturing-modernization programs, which see their mission as technology transfer. The National Institute of Standards and Technology also could help by making utility-industry partnerships a priority.

The concept of utility-industry-government partnerships meets several of the Clinton-Gore administration's goals. It links concerns for environmental quality and economic development, builds government partnerships with the private sector, and spurs the modernization of manufacturing technology in order to advance the nation's living standards. It is hoped that President Clinton's budget proposal will request an adequate appropriation of funds ($80 million to $100 million) for the partnership provision in the National Energy Policy Act. Utilities have two strong allies: Vice President Gore, who proposed the legislation, and Secretary of Energy Hazel O'Leary, who understands the approach well; her former employer, Northern States Power, worked closely with Minnesota's troubled taconite industry to enhance its efficiency and productivity.

Diane De Vaul is director of policy and Charles Bartsch is a senior policy analyst at the Northeast-Midwest Institute in Washington, D.C. They are the authors of Utilities and Industries: New Partnerships for Rural Development (Aspen Institute, 1992).
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Title Annotation:Issues in Focus: Getting Down to Business; electric utilities
Author:De Vaul, Diane; Bartsch, Charles
Publication:Issues in Science and Technology
Date:Mar 22, 1993
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