Integrated Energy Strategy: How to capture 20%-30% savings in energy National Energy Efficiency Conference Singapore Singapore September 19, 2012 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
Industrial companies’ cost base is shifting from ‘variable cost’ to ‘fixed cost ’, largely driven by rising energy prices Last Modified 2012-09-19 11:08 W. Europe Standard Time A century’s productivity erased in a decade Clients’ cost structure is shifting dramatically McKinsey Commodity Price Index (1999 – 2001=100) 1 Example: steel production cost, percent, USD/ton 300 600 550 300 250 Variable (energy, 50 200 etc) 75 90 150 100 Printed 2/16/2012 1:45:29 PM Fixed 50 50 25 10 0 2011 2 1900 1940 1980 Western Western China 2010 world 2000 world 2010 ~10% reduction in energy in China equals elimination of fixed cost! 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 | 1 Cooperation and Development statistics; UN Food and Agriculture Organization; UN Comtrade; Upstream or McKinsey & Company downstream? Future value creation in basic industries, BM EMEA Knowledge Day, July 8, 2011; team analysis
Context of case example: The energy cost is expected to double over the next 5 years driven largely by rising prices Last Modified 2012-09-19 11:08 W. Europe Standard Time Power consumption Energy cost Annual consumption Avg price Nominal increase Energy demand +84 % 2,500 900 45 Spot 300 1,300 Printed 2/16/2012 1:45:29 PM Fixed contracts 19 21 26 2010 2012 2014 2016 2018 2020 2010 Volume Price 2016 growth increase | 2 SOURCE: Disguised client example McKinsey & Company
The energy strategy laid out a roadmap to reduce the future cost base by 20-30% through sourcing and efficiency levers Percent of cost base Last Modified 2012-09-19 11:08 W. Europe Standard Time Energy efficiency 9-13 Identify and analyze technical 1 energy improvement Energy sourcing 15-18 opportunities Profitable own 4 ”De -mystify ” the energy generation 2 consumption for operators by Coordinated energy Printed 2/16/2012 1:45:29 PM introducing relevant KPIs efficiency and new 2-4 build effort Eliminations for Introduce energy losses into 3 -6-(-8) double counting performance management dialogue and benchmark sites Total 24-30 | 3 SOURCE: Disguised client example McKinsey & Company
A comprehensive approach covering technical, management and people systems is required for successful execution of energy strategy Last Modified 2012-09-19 11:08 W. Europe Standard Time Technical system The technical processes, decision support McKinsey transformation approach tools, systems and resources that create value Management system The formal performance management tools and systems supported by the right organization structure to drive results Printed 2/16/2012 1:45:29 PM People system The right people with the right skills, mindsets, behaviors and ownership, both individually and collectively | 4 McKinsey & Company
Energy was measured and managed in a rather rudimentary way DISGUISED CLIENT EXAMPLE Last Modified 2012-09-19 11:08 W. Europe Standard Time Typical starting point: Time series provide limited Best practice: Analysis of energy intensity vs main understanding as energy consumption depend intensity drivers, e.g., production level, to enable strongly on, e.g., production level appropriate target setting w/ dynamic energy targets Specific energy consumption Specific energy consumption EXAMPLE WEEK ENERGY PER kWh/tonnes kWh/tonnes IN DECEMBER HOUR 2010 100 500 450 Energiutfall Energiutfall 2010 Energiförbrukning (kWh/ton) 90 400 350 Printed 2/16/2012 1:45:29 PM 80 300 250 70 200 150 60 100 50 50 0 0 20 40 60 80 100 120 0 100 200 300 400 500 Hourly data points Produktionstakt (ton pellets / timme) Production Tonnes/hour Tonnes/hour | 5 SOURCE: Disguised client example McKinsey & Company
We have developed an approach analogous to OEE OEE - Established Last Modified 2012-09-19 11:08 W. Europe Standard Time productivity metric New Energy Loss metric Process Percent Percent Logistics industry Actual ▪ Driver behavior ▪ Operators Maximum resource ▪ Support output capabilities efficiency ▪ Quality of SOPs functions (e.g., Operational cruise control) Availability losses ▪ Route and flow ▪ Variation in planning production flow Planning Utilization ▪ Dispatch ▪ Production losses optimization speed Technical ▪ Technology in ▪ Efficiency of Printed 2/16/2012 1:45:29 PM Quality losses the truck fleet equipment (e.g., ▪ Maintenance motors, pumps) Actual Theoretical OEE ▪ Maintenance practices output limit Energy losses ▪ Comparable across operations ▪ Directly indicates point to root cause and levers ▪ Performance metric cascades additively | 6 McKinsey & Company
A system of KPIs for energy can be designed fully analogously EXAMPLE with the ‘OEE’ concept for manufacturing processes Last Modified 2012-09-19 11:08 W. Europe Standard Time Example – energy loss curve for a kiln Definition of losses kWh/ton Indexed (Percent) Hourly data point Actual 100 intensity Best performance current technology 180 1 Operational Best performance 29 with BAT losses 160 140 2 Planning 10 losses 120 100 3 Technical Printed 2/16/2012 1:45:29 PM 18 1 losses 80 2 60 Best achievable 3 43 performance 40 20 Measuring energy losses allows: ▪ Action oriented synthesis of performance 0 ▪ Additive cascading KPIs Production ▪ Comparability across business units Ton per hour | 7 SOURCE: Disguised client example McKinsey & Company
In this particular example, energy consumption was reduced by 15% in just a few weeks by empowering the operators Disguised case example Last Modified 2012-09-19 11:08 W. Europe Standard Time Weekly energy consumption Weekly energy losses kWh/ton, 2011 kWh/ton, 2011 Introduction Target Load losses of KPIs Operational losses Introduction of KPIs create new transparency on losses -16% 14 107 95 Reduction of losses 86 85 85 84 82 81 6 drive improvement Printed 2/16/2012 1:45:29 PM 7 5 1 1 1 1 1 0 0 0 0 0 0 0 W45 W46 W47 W48 W49 W50 W51 W52 W45 W46 W47 W48 W49 W50 W51 W52 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 | 8 McKinsey & Company
The energy strategy laid out a roadmap to reduce the future cost base by 20-30% through sourcing and efficiency levers Percent of cost base Last Modified 2012-09-19 11:08 W. Europe Standard Time Energy efficiency 9-13 Create transparency of value 1 creation opportunities through Energy sourcing 15-18 contracting Profitable own 4 generation Make a fact-based market 2 model Coordinated energy Printed 2/16/2012 1:45:29 PM efficiency and new 2-4 build effort Eliminations for Thoroughly prepare for 3 -6-(-8) double counting supplier negotiations Total 24-30 | 9 SOURCE: Disguised client example McKinsey & Company
Three key elements of an integrated energy-sourcing approach Last Modified 2012-09-19 11:08 W. Europe Standard Time 1. Create transparency of 2. Make a fact-based market 3. Thoroughly prepare for value creation model supplier negotiations ▪ Establish consumption ▪ Build a “cost curve” for the ▪ Architect decision tree for Printed 2/16/2012 1:45:29 PM baseline and current utility market contractual setup to enable ▪ Map exposure and share of contractual conditions tactical direction changes ▪ Map and quantify demand ▪ Sequence supplier wallet for each supplier ▪ Establish economics of side flexibilities interactions to maximize ▪ Assess efficiency chances for “best outcome” adding new capacity (own ▪ Follow prepared process opportunities generation) with tailored agenda for each supplier | 10 Source: McKinsey McKinsey & Company 10
Ensuring a high demand in the Nordpool electricity market creates tremendous value for utilities Last Modified 2012-09-19 11:08 W. Europe Standard Time Operating Nordpool Marginal Cost curve 2025 – Central scenario interval EUR/MWh 200 150 Peak price 100 Value at stake for utilities 50 Average price Printed 2/16/2012 1:45:29 PM Base load price 0 0 10 000 20 000 30 000 40 000 50 000 60 000 Average available capacity GW ▪ 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? Note: Nordpool includes Norway, Sweden, Denmark and Finland | 11 McKinsey & Company Source: McKinsey analysis, Middle case Practice scenario runs
Recommend
More recommend
