How to achieve energy efficiency transformations

Global energy demand will continue to accelerate, growing 2.2 per cent annually to 2020 – significantly faster than previously – putting pressure on costs and the environment. Rapidly growing developing countries will account for an overwhelming 85 per cent of demand growth.

McKinsey’s research shows, however, that by using energy more productively it is possible to reduce demand and reduce greenhouse gas emissions. Energy efficiency is becoming a strategic imperative for companies. It offers huge potential cost savings, together with a vital reduction in global greenhouse emissions.

Our experience working with companies in Singapore and across Asia has led us to conclude that optimizing energy use now represents one of the greatest opportunities manufacturers have to improve their production efficiency. That’s because, although companies have focused attention on boosting labor productivity, reducing materials costs, and bringing capital expenditures into line, they have done relatively little about energy.

McKinsey has developed a unique energy efficiency transformation approach to not only capture savings potential but also sustain improvements. This involves looking at driving energy efficiency through three key areas: a company’s technical system, management system, and people system.

Extracting that value, however, will require companies to think differently. Many companies believe energy efficiency is a function of the technical departments (e.g. engineering, maintenance and utilities etc.) and start looking for technical tool kit and many cases involving high capex solutions (e.g., metering, better efficient motors and pumps and drives etc.).

In fact there are many low hanging ideas, which are low or no capex requirement that can be easily captured in the first wave without technical solutions - mostly behavioral improvement. While many firms have honed methods for dealing with lean transformations, few have established any overarching performance management tools for energy management. In many cases, site engineers do not have a good basic understanding of plant infrastructure, such as air compression or venting systems, and they lack the experience and expertise needed to make improvements in these areas. Workers are generally not tasked with energy efficiency priorities.

To capture this value, McKinsey has developed a unique energy efficiency transformation approach to not only capture savings potential but also sustain improvements. This involves looking at driving energy efficiency through three key areas: a company’s technical system, management system, and people system.

  1. Technical system: Companies can usually adapt many lean transformation techniques (e.g., “from lean waste to green waste”) to more comprehensively address energy efficiency, and to provide support with new tools that focus on specific energy issues. These include a combined analysis of energy costs, total cost of ownership, and energy consumption; an energy lifecycle analysis; capacity balancing; and a machine flexibility and load analysis.
  2. Management system: From a management perspective, leaders should work to create energy cost transparency that extends down to the shop floor. Doing so requires the development of an energy cost matrix. Outlining an energy footprint for the company’s production facilities requires the development of a site-level energy flow and balance map. Managers should also develop a process for setting actionable energy targets.
  3. People system: The methods used for rapidly training large numbers of people and positively changing their mindsets and behaviors are well-established aspects of operational transformations. Companies can readily adapt these approaches to boost company-wide energy management campaigns. For instance, frontline workers, engineers, and managers can benefit from cascading capability-building sessions that focus on energy management and are supported by expert instruction and coaching.

By combining these three elements into a single, integrated approach, companies can drive effective and sustainable energy transformation. The McKinsey Green Campus in Singapore provides expert support for companies seeking to build their capabilities in this area.

Raja Pillai is a senior expert and Harsh Choudhry is a specialist in McKinsey’s Green Campus in Singapore. McKinsey is supporting the National Energy Efficiency Conference (NEEC) 2013 as a speaker this October 9 to 10 at Max Atria at the Singapore Expo.

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