Turning Green into A Source of Competitive Advantage National Energy Efficiency Conference 2012 September 20, Singapore
Energy prices are rising rapidly… …leading to globally increasing Rapidly rising oil prices… electricity prices $/barrel (Real terms in 2009 $) U.S. cent/KWh, real 6.0-8.0 110 3.7 60-120% 100 5.0-7.0 3.6 90 40-100% 80 4.0-5.0 3.5 10-40% 70 +2% p.a. 60 3.5-4.5 2.6 30-70% 50 6.0-10.0 40 170-350% 2.2 30 20 2.4 2.0-2.6 ±20% 10 1.5-2.5 30-130% 1.1 0 1995 2000 2005 2010 2015 2020 2025 2006 2015 SOURCE: McKinsey; EIA – Reference case; McKinsey Global Power Model 1
… imposing a significant cost challenge across industries … Top 10 industries with the highest share of energy costs Absolute annual global energy costs, Industry Percent of total costs, % US$ bil Aluminium 32 245 Steel 30 482 Cement 30 123 Coal mining 24 62 Metal ores mining 15 59 Chemicals 1 15 428 Paper & Pulp 12 86 Glass 10 17 Oil refining 7 131 Food and beverage 5 185 1 Based on US basic chemicals plants. Costs may vary by region and nature of chemical SOURCE: Global Insights; Mining Association of Canada; AME; EPA McKinsey analysis; Need.org; EIA glass report; CIPEC;CPBIS; UNIDO 2011, UN 2
Impact achieved Min Max … at the same time a major profit improvement opportunity Percent of total energy cost Improvement Range of energy savings with payback of up to three years Industry potential, sector 0 10 20 30 40 50 US$ billion Aluminum 73-86 Steel 24-72 Cement 25-31 Coal mining 3-9 Metal ores 6-9 mining Chemicals 43-128 Pulp and 9-13 paper Glass 5-7 Oil refining 13-20 Food and 9-93 beverage Average 10-15% ~340 SOURCE: McKinsey, UNIDO 2011, Global Insights 3
… for an average oil refinery this could be a game changer … EXAMPLE Solomon’s Energy Intensity Index (EII) 50 Quartile 1 1 60 Reducing energy costs 70 by US$1 per barrel … Reliance Jamnagar 80 Refinery 90 (most energy efficient refinery WW) 100 … would translate 110 into a Solomon’s Q1 120 position Quartile 4 1 130 “Mediocre” Refinery 140 150 1 Limits of Quartile 1 approximate as actual limit changes with every survey 2 In 2010 Shell Malaysia reported an annual cost of sales of $3.3 billion. Assuming energy cost to be 7% of annual cost of sales and that Shell can reduce energy cost by 40% to move up to Quartile 1 SOURCE: Solomon Associates, Annual reports 2010 – Shell Refining Company Malaysia, Reliance Industries, McKinsey 4
However, Green improvements are hard to sustain, with 90% of transformations failing after 4 years… Cost reduction sustainability among the S&P 500 Percent of companies 100 90% of all transformation efforts fail to sustain improvement after 4 years 57 18 15 10 Year 0 Year 1 Year 2 Year 3 Year 4+ Initiated cost Failed to Sustained Failed to achieve cost reduction maintain Improvement improvement improvement SOURCE: Bloomberg; Factiva; Transformation Compendium; Beer and Nohria; Conference Board report (Fortune 500 interviews) 5
…mostly because of lacking focus on “soft” issues… Typical reasons Factors contributing to failures “… leadership mindset…” Miscellaneous 14% 14% Insufficient Resources “… capabilities to sustain …” Management ~33% behaviour “… accountability …” ~70% Employee ~39% resistance “… misaligned aspirations …” SOURCE: McKinsey research 6
… in response McKinsey has developed an integrated system to enable sustainable energy efficiency transformations People Management system (PS) system (MS) Technical system (TS) 7
Best practice technical toolkit: Identify & Quantify TS Energy value chain Current state Theoretical limit T1 T2 T3 analysis Map and quantify Identify minimum Create energy energy as it flows level of energy consumption baseline through system consumption along energy value chain Energy loss Load curve Process parameter T4 T5 T6 framework analysis Quantify operational losses (distillation Quantify losses due to Identify energy losses sub-optimal control of column as example) key para-meters (furnace as example) Pinch analysis Network loss Motor analysis T7 T8 T9 analysis Quantify losses due to Quantify losses due to sub-optimal reuse of Quantify losses in inefficiencies in distribution networks heat (heating network motors and their as example) (compressed air applications system as example) Cost curve Energy sourcing Contracts T12 T10 T11 Quantify losses due to Determine right Structure and energy demand- sourcing strategy optimize contracts supply mismatch (cooling systems as example) SOURCE: McKinsey 8
Proprietary Loss Framework: “The 9 energy losses” TS Losses 1. Sub optimal energy source IN 2. Sub optimal raw material 3. Conversion inefficiency 4. Transfer loss SYSTEM 5. Energy intensive downtime 6. Excessive Storage 7. Over processing 8. Re processing OUT 9. Low recovery SOURCE: McKinsey 9
RedE database system: Identify and drive execution of TS energy levers RedE Resource Efficiency Deployment Engine (Web-based system) Proprietary database of energy saving levers Instant estimation of energy and CO 2 savings Detailed explanation on how to execute lever End-to-end project management of initiative SOURCE: McKinsey 10
Best practice management toolkit: Track & Implement MS Transformation design Energy performance M1 M2 review Understand overall Develop insights on transformation framework: management and people technical, management and system diagnostics people systems Implementation road Performance monitoring M3 M4 map Design effective KPIs, Prioritize and sequence targets and performance initiatives to draw up dashboards transformation workplan Performance dialogues M5 Develop system and practice coaching employees SOURCE: McKinsey 11
Target Real-time performance dashboard MS Actual Energy index of plant Energy efficiency of equipment Percentage of process target in control Energy consumption Furnace efficiency Oxygen level Energy/distillate (t SRF/100 t-crude) Energy output/energy input (%) Percentage of excess O 2 (%) Time Time Time Heat exchanger performance Flue gas outlet temperature Heater inlet temperate ( C) C Energy performance dashboard Soot blower Plant: Heat exchanger broken cleaning Date: Time Time Responsible: Quality of distillate Gas oil flash point ( C) Time 12
Best practice people toolkit: Mindset to Sustain PS P1 P2 Root cause problem Conflict management P2: Conflict management In all interactions, we need to be cautious of two forms of solving potential conflicts – overt and covert Practice resolving Four forms of interaction: Diagnose key drivers and High conflicts Passive – Assertive – “ I don ’ t really matter ” “ Take control of your own life ” ▪ Don ’ t express needs, opinions or feelings ▪ Respect needs, opinions, and feelings of develop solutions ▪ Don ’ t speak up even as others violate others their rights ▪ Maintain rights of both parties whenever Positive ▪ Avoid conflict even at own discomfort possible relationship, ▪ Deal with conflict in healthy ways no conflict May turn Constructive passive-aggressive debate Degree of cooperation Passive aggressive – Aggressive – by others “ I don ’ t know what matters ” “ You don ’ t really matter ” ▪ Deal with needs, opinions and feelings by ▪ Don ’ t respect needs, opinions or feelings Important to not dealing with them of others recognize and ▪ Respect rights of others but dislike it, ▪ Have tendency of violating others ’ right prepare for both covert often secretly sabotaging process ▪ Willing to risk conflict to address and overt ▪ Avoid conflict but quietly resents others personal discomfort conflicts Covert conflict Overt conflict Low Low High Acknowledge of conflict by others SOURCE: McKinsey 30 P3 P4 Communication and Continuous influencing techniques improvement Learn storytelling and Learn best practices in influence model to sustaining ongoing motivate organization transformation impact SOURCE: McKinsey 13
Green accreditation program PS Green Architect 36+ months Sr. Expert 18-36 months Green ▪ Architecting Expert ▪ Design ▪ Maintaining integrated Green 6-18 months ▪ Mentor larger people and Practitioner transformation group of ▪ Teaching 0-6 months experts and programs ▪ Coach others maintain without knowledge ▪ Practicing leading ▪ Learn by doing following an expert SOURCE: McKinsey 14
As adults learn best through learning-by- doing… Knowledge retained from different learning approaches Pilot for a lean Shop floor Simulations transformation training Books and and games 65% 65% PowerPoint 32% Knowledge 10% Adults retained learn best through learning- by doing Learning by Hearing Seeing Doing Doing Theory understood Concept experienced Transformation executed Experience gained SOURCE: McKinsey 15
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