savings in energy National Energy Efficiency Conference Singapore - - PowerPoint PPT Presentation

Integrated Energy Strategy: How to capture 20%-30% savings in energy

National Energy Efficiency Conference Singapore September 19, 2012 Singapore

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Industrial companies’ cost base is shifting from ‘variable cost’ to ‘fixed cost’, largely driven by rising energy prices

50 25 10 Fixed Variable (energy, etc) China 2010 550 90 Western world 2010 600 75 Western world 2000 300 50 Clients’ cost structure is shifting dramatically Example: steel production cost, percent, USD/ton 50 100 150 200 250 300 20112 1980 1940 1900

1 Based on arithmetic average of 4 commodity sub-indices of food, non-food agricultural items, metals and energy 2 2011 prices based on average of first eight months of 2011 SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organization for Economic Cooperation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; Upstream or downstream? Future value creation in basic industries, BM EMEA Knowledge Day, July 8, 2011; team analysis

A century’s productivity erased in a decade McKinsey Commodity Price Index (1999–2001=100)1 ~10% reduction in energy in China equals elimination of fixed cost!

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2016 2014 2012 2010 2018 2020

Context of case example: The energy cost is expected to double over the next 5 years driven largely by rising prices

Power consumption Energy cost Annual consumption Nominal increase

Avg price

2,500 +84 % 2016 Price increase 900 Volume growth 300 2010 1,300 Spot 45 19

Energy demand

Fixed contracts 26 21

SOURCE: Disguised client example

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The energy strategy laid out a roadmap to reduce the future cost base by 20-30% through sourcing and efficiency levers

Total 4 Energy sourcing 15-18 Energy efficiency 9-13 24-30 Profitable own generation 2-4 Eliminations for double counting Coordinated energy efficiency and new build effort

• 6-(-8)

Percent of cost base

SOURCE: Disguised client example

1

Identify and analyze technical energy improvement

• pportunities

2

”De-mystify” the energy consumption for operators by introducing relevant KPIs

3

Introduce energy losses into performance management dialogue and benchmark sites

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A comprehensive approach covering technical, management and people systems is required for successful execution of energy strategy

The technical processes, decision support tools, systems and resources that create value Technical system The formal performance management tools and systems supported by the right

• rganization structure to drive results

Management system The right people with the right skills, mindsets, behaviors and ownership, both individually and collectively People system McKinsey transformation approach

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Energy was measured and managed in a rather rudimentary way

SOURCE: Disguised client example

DISGUISED CLIENT EXAMPLE

50 60 70 80 90 100 20 40 60 80 100 120

Energiutfall

Specific energy consumption kWh/tonnes Hourly data points Tonnes/hour

EXAMPLE WEEK IN DECEMBER

Specific energy consumption kWh/tonnes Production Tonnes/hour

50 100 150 200 250 300 350 400 450 500 100 200 300 400 500 Produktionstakt (ton pellets / timme) Energiförbrukning (kWh/ton) Energiutfall 2010

Typical starting point: Time series provide limited understanding as energy consumption depend strongly on, e.g., production level Best practice: Analysis of energy intensity vs main intensity drivers, e.g., production level, to enable appropriate target setting w/ dynamic energy targets

ENERGY PER HOUR 2010

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We have developed an approach analogous to OEE

Actual

• utput

Quality Utilization Availability Maximum

• utput

Theoretical limit Technical losses Planning losses Operational losses Actual resource efficiency OEE - Established productivity metric Percent New Energy Loss metric Percent

▪ Comparable across operations ▪ Directly indicates point to root cause and levers ▪ Performance metric cascades additively

OEE Energy losses

▪ Efficiency of

equipment (e.g., motors, pumps)

▪ Maintenance ▪ Variation in

production flow

▪ Production

speed

▪ Operators

capabilities

▪ Quality of SOPs ▪ Technology in

the truck fleet

▪ Maintenance

practices

▪ Route and flow

planning

▪ Dispatch

• ptimization

▪ Driver behavior ▪ Support

functions (e.g., cruise control) Process industry Logistics

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A system of KPIs for energy can be designed fully analogously with the ‘OEE’ concept for manufacturing processes

Example – energy loss curve for a kiln kWh/ton 1 2

EXAMPLE

SOURCE: Disguised client example Hourly data point Best performance current technology

3

Best performance with BAT

20 40 60 80 100 120 140 160 180 Production Ton per hour Definition of losses Indexed (Percent) 1 2 3 43 18 10 29 100 Operational losses Actual intensity Best achievable performance Technical losses Planning losses Measuring energy losses allows:

▪ Action oriented synthesis of performance ▪ Additive cascading KPIs ▪ Comparability across business units

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In this particular example, energy consumption was reduced by 15% in just a few weeks by empowering the operators

Disguised case example

107 95 84 85 85 86 82 81 W47 W45 W46 W51 W50 W49 W52 W48 7 14 W52 W51 W50 W49 W48 W47 W46 W45 6 5 1 1 1 1 1

Operational losses Load losses

• 16%

Weekly energy consumption kWh/ton, 2011

Target Introduction

• f KPIs

Weekly energy losses kWh/ton, 2011 Introduction of KPIs create new transparency on losses Reduction of losses drive improvement Key operational changes include

▪

Introduction of losses into morning meeting reports

▪

Improved capacity planning across value chain

▪

SOPs updated to include e.g., lower temperature settings, fewer burners running, lower fan pressures

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The energy strategy laid out a roadmap to reduce the future cost base by 20-30% through sourcing and efficiency levers

Energy sourcing 15-18 Energy efficiency 9-13 Total 24-30 Eliminations for double counting

• 6-(-8)

Coordinated energy efficiency and new build effort 2-4 Profitable own generation 4

Percent of cost base

SOURCE: Disguised client example

1

Create transparency of value creation opportunities through contracting

2

Make a fact-based market model

3

Thoroughly prepare for supplier negotiations

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10

Three key elements of an integrated energy-sourcing approach

Source: McKinsey

• 1. Create transparency of

value creation

• 2. Make a fact-based market

model

• 3. Thoroughly prepare for

supplier negotiations

▪ Establish consumption

baseline and current contractual conditions

▪ Map and quantify demand

side flexibilities

▪ Assess efficiency

• pportunities

▪ Build a “cost curve” for the

utility market

▪ Map exposure and share of

wallet for each supplier

▪ Establish economics of

adding new capacity (own generation)

▪ Architect decision tree for

contractual setup to enable tactical direction changes

▪ Sequence supplier

interactions to maximize chances for “best outcome”

▪ Follow prepared process

with tailored agenda for each supplier

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| 11 Value at stake for utilities

Ensuring a high demand in the Nordpool electricity market creates tremendous value for utilities

Base load price 10 000 20 000 30 000 40 000 50 000 200 50 Nordpool Marginal Cost curve 2025 – Central scenario EUR/MWh 60 000 Average available capacity GW Peak price 100 150 Average price

Source: McKinsey analysis, Middle case Practice scenario runs Note: Nordpool includes Norway, Sweden, Denmark and Finland

Operating interval

▪

Can SMT influence the supply/demand balance to reach the low price level?

▪

Is there an opportunity to create a structural disconnect between industry players and the broader spot market through smart negotiations?

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A Total Cost of Ownership approach supports maximum potential savings with negotiation related tactics offering highest value-add

SOURCE: McKinsey Purchasing practice

Transport Warehousing Innovation level Delivery errors Order mgmt # of SKUs Warranties Features Quality Time to delivery Administration Purchase price Specifications Total Cost of Ownership (TCO) Example levers (not all levers valid in all cases) Savings (%) Supplier management 1 i. Outsmart suppliers – Know what drives current/potential suppliers and create a viable alternative/threat, e.g., Statoil, EON, RWE ii. Consolidate spend – reduce supplier fragmentation to capture volume discounts wherever possible iii. Utilize the market – Consider moving from full service contracts to traded assets, either with outside support or building an in-house trading arm iv. Become a player - Develop own energy related assets 1 - 5 1 - 5 5 - 10 5 - 10 Demand management 2 i. Optimize demand flexibility –Maximize load-shift to off-peak power and gas demand and ensure full optimization of buffers ii. Improve technical system – Ensure best available technology and technical solution iii. Operational management – Continuous improvement practices and improved mindset & behaviour 2 - 5 5 - 10 Process management 3 i. Reduce maverick spend – ensure compliance with preferred vendors and demand management policies ii. Track savings capture – implement tracking tools and reporting to ensure savings flow to the bottom-line iii. Manage payables – optimize payment cycle to optimize reduction in unit prices vs. carrying cost TBD 5 - 10

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The energy strategy laid out a roadmap to reduce the future cost base by 20-30% through sourcing and efficiency levers

4 Energy sourcing 15-18 Profitable own generation 9-13 Energy efficiency Coordinated energy efficiency and new build effort

• 6-(-8)

Eliminations for double counting 2-4 24-30 Total

Percent of cost base

SOURCE: Disguised client example

1

Identify flexibility

• pportunities and match with

intermittency of supply

2

Model cost distributions instead of point estimates of total cost of energy

3

Review specific conditions in detail for investment, don’t rely on ‘typical cost estimates’

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Almost 50% of energy use was not critical for the core processes

48 16 45 85 176 234 294 310 330 442 26 119 296 5 12 441 Locos 17 Total 2.440 1.982 Other Surface area Conveyors Winders Winches Fridges Fans Plant Pumps Loaders Leakages Rock drills Surface vehicles LHDs

Compressed Air (electricity) Electricity (less air) Fuel SOURCE: Client example; On-site diagnostic Non-core

Baseline breakdown for an underground mining operation TJ p.a. Share of electricity use Percent

37 23 40

Core Non-core

23

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Simulations suggests that wind in many cases could become an attractive alternative to CCGT

SOURCE: Energy Information Administration; Annual Energy Outlook 2011, December 2010, DOE/EIA-0383(2010); Wikipedia; team analysis

Probability distribution of LCE for plants coming online by 2016; USD (2009) per MegaWattHour

INDICATIVE Wind has a wider spread due to high uncertainty of capacity and capital costs CCGT has a fat high tail due to potential price spike in gas prices

Key assumptions: Capacity factor (Wind 34% +10%, -5%) (CCGT 87%, +/- 2%); Capital cost (Wind 83.9 USD +5%, -33%), (CCGT 17.5 USD +/-5%); Variable O&M (e.g., fuel price) (Wind 0 N/A), (CCGT 45.6 USD, +50%, -20%)

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Eliminations for double counting Energy sourcing Profitable own generation Total Energy efficiency Coordinated energy efficiency and new build effort

16

Questions

Percent of cost base

Thomas_Koch_Blank@McKinsey.com

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APPENDIX

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We help our clients achieve a step-change in sophistication and mindset

… To From …

▪ Clearly defined loss categories

with associated operational KPIs

▪ Well defined breakdowns of

losses into actionable, quantified, improvement levers

▪ No clear view of underlying

drivers

▪ Low understanding of root

causes Understand

▪ Loss categories cascaded to

all levels

▪ Integrated performance

discussions on energy and

• perational KPIs

▪ Energy metrics not cascaded to

shop floor

▪ Energy consumption drivers not

measured / followed up Measure

▪ External and internal benchmark

• n all loss categories

▪ Targets informed by stringent

analysis

▪ Targets on all energy losses ▪ Energy performance impossible

to compare

▪ Targets set arbitrarily ▪ Improvements only target

technical (capex) solutions Set targets

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Starting point: Tracking of energy consumption is measured but with limited ability to explain variation in intensity

50 60 70 80 90 100 20 40 60 80 100 120

Energiutfall

Specific energy consumption kWh/ton Hourly data points Specific energy consumption; kWh per ton

EXAMPLE WEEK IN DECEMBER

SOURCE: Disguised client example

±20% from average

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However, sorting of the data indicates a clear connection between energy consumption and load

Specific energy consumption kWh/ton Throughput Ton/hour

50 100 150 200 250 300 350 400 450 500 100 200 300 400 500 Produktionstakt (ton pellets / timme) Energiförbrukning (kWh/ton) Energiutfall 2010

SOURCE: Disguised client example

Energy load curve; kWh per ton; 2010

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The energy loss concept is applicable and relevant across industries (examples)

SOURCE: McKinsey

Technical losses 3 Planning losses 2 Operational losses 1 Process industry

▪ Efficiency of equipment

(motors, pumps, etc)

▪ System setup ▪ Maintenance practices ▪ Variation in production flow ▪ Variability of process ▪ The operators’ ability to run

the process efficiently

▪ Quality of SOPs

Logistics

▪ Technology in the truck fleet ▪ Maintenance practices ▪ Route and flow planning ▪ Dispatch optimization ▪ Driver behavior ▪ Support functions (cruise

control, etc)

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Fast reduction of energy usage possible beyond the “standard” technical levers

• 16 %

Weekly energy consumption kWh/ton, 2011 Weekly energy losses kWh/ton, 2011

w45 w46 w47 w48 w49 w50 w51 w52 w45 w46 w47 w48 w49 w50 w51 w52 Planning loss Operational loss

Target

Immediate reduction of >15% achieved

Key operational changes include

▪

Improved capacity planning across value chain

▪

SOPs updated to include e.g., lower temperature settings, fewer burners running, lower fan pressures Introduction of KPIs create new transparency on losses Reduction of losses drive improvement

Significant shift in mind-set of facility From… …to

▪ Considering Energy

to be non- comparable

▪ Poor understanding

• f root causes and

drivers

▪ Managing only on

highest level kWh/t for each unit

▪ No improvement or

performance targets and a loosely managed capex portfolio

▪ Benchmarking

performance across production lines

▪ Direct transparency

• f root causes from

clear KPIs

▪ Cascades KPIs to

each level in company

▪ Specific targets

beyond technical levers and a robust portfolio management process

SOURCE: Client Case Example