Cover Story: State Of The Industry

November 14, 2016 No Comments
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How the state of manufacturing industry is impacted by energy

By Todd VanWambeke

toc_features50pxAs everyone in the industry knows, manufacturing is the lifeblood of the American economy. Manufacturers provide jobs for hard-working American families and help increase U.S. competitiveness in the global marketplace.

But 2016 has been a challenging year across the board, primarily driven by:

  • Weaker domestic economy and sales for products to U.S. customers.
  • Weaker global growth and slower exports.
  • A stronger U.S. dollar relative to other currencies.
  • Unfavorable business climate (taxes and regulation).
  • Rising health care and insurance costs and federally-mandated wage increases.

Industrial Use Of Energy

In 2015, the industrial sector consumed about one-third of all the energy used in the United States. That’s understandable because every product on which we rely – from gasoline and automobiles to food, buildings, machinery, and appliances – takes energy to produce.

The industrial sector uses energy in many ways. One major application involves process heating, which involves raising the temperature of components in the manufacturing process. Refining crude oil, where heat is used to separate various distillates, is an example of this. Another common use of energy in industry is heating a boiler that generates steam or hot water.

A few industries use a very large share of energy in the industrial sector. Petroleum refining is the principal consumer, and the chemical industry is a close second. Those users, plus the paper and metal industries, account for 78 percent of total industrial energy use, which when broken down, looks like this:

  • 30 percent: Natural gas.
  • 26 percent: Petroleum and other liquids.
  • 10 percent: Electricity.
  • Remaining: Coal, renewables, biofuels.

Industrial energy needs are projected to grow during the next 25 years, at which point they will account for about 38 percent of the total U.S. consumption. Part of this increase may occur because some manufacturing activities formerly located overseas are returning to the United States, in response to a recent trend toward lower natural gas prices prompted by increases in domestic production.

While industrial energy efficiency has increased over the past three decades, there still are tremendous opportunities for energy savings, as well as the potential to become more efficient with energy use and consumption. Most end users have found value in making an investment in energy efficiency programs. This has proved to be a useful mitigation tool in reducing energy costs, while also reducing greenhouse gas emissions.

As 2016 winds down and we look forward to 2017, it’s encouraging to see stronger consumer confidence and increased consumer spending as a counterpoint to the flat business environment this year.

The Federal Reserve Board was equally mixed in its assessments in its monthly “Beige Book.” Perhaps the best illustration of the current climate was this description of how the various Federal Reserve districts describe manufacturing activity in their regions: “Activity in the manufacturing sector was flat to slightly up in general.” That mostly speaks to the mood among manufacturers, who remain cautious in their outlook, even as demand and production have improved somewhat over weaknesses earlier in the year.


Assessing 2016 Clean Power Plan

In February of 2016, the current administration and EPA released the final version of the “Clean Power Plan.” It establishes state-by-state targets for carbon emissions reductions, and it offers a flexible framework under which states may meet those targets. The rule would reduce national electricity sector emissions by an estimated 32 percent below 2005 levels by 2030.

While the plan may limit a rush to natural gas, it does create a framework for a less risky and more contained role as the United States shifts toward a cleaner energy transition. The options for cutting emissions include: expanding investments in renewable energy, increasing energy efficiency, and increasing the use of natural gas and nuclear power in an effort to shift away from coal-fired plants.

Structural Changes

Over the last decade, we have seen a structural change largely led by the dependence on coal shifting toward natural gas and other renewable energy sources. The growing recognition of the need for energy efficiency can be supported in that natural gas is a low cost resource and investments in energy efficiency continue to grow. The International Energy Agency estimates that more than $300 billion is being invested in energy efficiency.

As the economy expands and grows, demand will increase for natural gas and other renewable energy sources. While energy growth remains flat, it should be noted that most growth seen in this sector largely has been driven by warmer weather throughout the United States. Energy consumption has been a leading indicator of economic strength for Commercial and Industrial (C&I). Over the next several decades, the trend for natural production and other renewable energy sources is expected to increase to support the growing supply and demand.

Natural Gas

A new study done in May of 2016 from IHS Economics and the National Association of Manufacturers (NAM) reveals how natural gas has strengthened the manufacturing sector, encouraged U.S. manufacturing growth and employment, and highlights the positive impact to communities around the United States.

Key highlights of the study include:

  • Created 1.9 million jobs in 2015.
  • Shale gas gave an extra $1,337 back to the average American family.
  • New natural gas transmission lines meant more than 347,000 jobs, with 60,000 in manufacturing.
  • Total natural gas demand is poised to increase by 40 percent over the next decade.
  • Because energy innovation is lowering production costs, IHS expects energy intensive industries such as chemicals, metals, food and refining to outperform the U.S. economy as a whole through 2025.

Natural Gas Records in 2015

  • Domestic Annual Production 27.1TcF (Trillion Cubic Feet).
  • Proved Reserves (inventory not yet drilled) 368 TcF.
  • Undiscovered Gas Resources 2,500 TcF.
  • Domestic Natural Gas Consumption 27.4 TcF.
  • Natural Gas Consumed for Power Generation 9.4 TcF.
  • Working Gas in Underground Storage 4,009 BcF (Billion Cubic Feet).


When considering energy costs, a good place to start is:

  • Coal cost between 7 and 14 cents per kWh.
  • Natural gas cost between 7 and 10 cents per kWh.
  • Wind between 4 and 9 cents per kWh.
  • New nuclear, some estimates put its price at 15 cents per kWh, or more.

Then, break down the billing from average to peak and off-peak. In doing so, it will allow a starting point to help prioritize energy management strategies in an effort to target the most effective opportunities.

A review of historical billing information brings about an understanding of the trend and where annual escalations have been related to overall energy costs. If the trends have been climbing year over year, this should be given a higher priority in energy management and procurement strategies.

Gas procurement and energy management companies like U.S. Energy are good sources as well. They provide gas procurement and can help customers get the lowest rates based on their overall volume. They also can provide hedging strategies.

In most cases, companies and end users can seek out an introductory evaluation at no cost allowing for a risk free way to investigate.

A building commission is also a critical step to manage a company’s load profile to minimize energy consumption and demand charges, often based on the highest peak during any 15-minute period each month. This could lead to changing lightbulbs, adding sensors, automation technology, and other updates to provide more efficiency and shift loads.

It’s eye opening for energy managers to split up their fees to in an effort to better understand their peak and off-peak charges, especially if they have a time of use (TOU) structure in their tariff. This means if demand charges are only assessed Monday – Friday, from noon to 8:00 p.m., the demand charges on the bill should be laid over the kWh used during those hours only, not across the board as an average.

After auditing a facility with a building commissioning consulting firm, adding onsite power could be another viable next step in reducing energy costs.

Alternative Energy Sources

Solar, wind, and Combined Heat and Power (CHP) are examples of distributed generation that could make sense for C&I customers. There are two options: own, operate, and maintain on their own; or find an Independent Power Producer (IPP) who will use a Power Purchase Agreement (PPA) and sell them power as it’s generated.

In Minnesota, buying into solar gardens is becoming a popular path for C&I customers. There are many solar IPPs in this space. CHP is a good fit for C&I customers with large and continuous thermal loads. Self-generation isn’t for everyone, but can make sense when considering 15-year utility pricing.

Combined Heat And Power (CHP)

Combined Heat and Power (CHP) is an energy efficient method of generating both electricity and useful thermal energy. In a recent report, the American Council for an Energy-Efficient Economy (ACEEE) found that more than 68 million megawatt-hours (MWh) of electricity could be saved nationwide by the year 2030 from installing new CHP, representing approximately 18 gigawatts (GW). The energy savings not only would cut carbon dioxide emissions, but also likely would offset the need for 36 coal-fired power plants.

In doing so, CHP certainly can play a vital role as an efficient energy source while also reducing carbon dioxide gases. CHP should not be classified as an exclusive energy source but, rather, as a new opportunity and cost-reducing strategy to consider implementing among the manufacturing sector. Facilities with substantial thermal loads (hot water, steam, drying and/or cooling), as well as those with electric demand on a continuous basis, can benefit from a CHP system. The use of a CHP system still would require dependence on sourcing energy from the grid; however, it’s a step in a new direction that requires less energy to be taken from the grid, while implementing energy onsite and increasing efficiency by providing an opportunity to realize substantial cost savings related to electrical and gas costs.

Spark spread calculation is the defined cost of electricity from the grid less cost of electricity from CHP. If the spark spread is negative, then it’s typically cheaper to buy electricity from the grid. If it’s positive, then it’s advisable to run the CHP system. CHP works really well in areas where spark spread is 3 or greater. Since Minnesota’s spark spread is over 4, the state is a viable place to explore CHP projects.

IPPs like DG Edison (Saint Paul) provide power purchase agreements for combined heat and power, which results in little to no capital upfront. In exchange, the end user executes a PPA that usually runs for 15 years. Both service and maintenance costs are handled by the IPP. At the end of the PPA, the equipment can be sold to the end user or decommissioned.

Common questions when determining whether or not CHP could be a viable energy cost savings solution include:

  • Who’s your current electric provider?
  • Do you know what tariff you’re on?
  • What’s your average power demand during operation (kW)?
  • What’s your average thermal demand (MMBtu/hr)?
  • What’s your average cost of electricity?
  • What’s your base electric load?
  • What’s your peak electric load?
  • Do you know your monthly or annual gas volume?
  • What’s their all-in gas rate?
  • What’s their base thermal load?
  • Is it hot water or steam?

Looking To 2017

As we look forward into 2017, energy costs and their overall impact on the environment will continue to surface as a concern in the marketplace. Energy, along with energy infrastructure, will continue to play a critical role for U.S. manufacturers. Having access to alternative, affordable, and abundant energy sources provides the ability for U.S. manufacturers to compete, while supporting further growth and employment.pm_endmarkblue-e1320337140493

Sources Cited

1). Energy.Gov

2). U.S Energy Information Services

3). The Federal Reserve Board Beige Book, July 2016

4). Assessing the Final Clean Power Plan: “Energy Market Impacts. Center for Strategic and International Studies and Rhodium Group, May 2016

5). Union of Concerned Scientists 2013:

6). American Council for an Energy-Efficient Economy

7). IHS Economics and the National Association of Manufacturers (NAM) Outlook Survey, May 2016

8). Combined Heat and Power CHP: Energy.Gov

9). Combined Heat and Power CHP: Patrick McDonell, COO DG Edison, LLC

Todd VanWambeke is vice president-commercial lending for 21st Century Bank. He can be reached at or 612-372-4340.

Copyright © 2016 Minnesota Precision Manufacturing Association. For permission to use or reprint this article please contact Nancy Huddleston, publications manager for Precision Manufacturing Journal.

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