Energy: From fixed cost to pressing concernEnergy: From fixed cost to pressing concern

Shock. That is the reaction of many plastics processors upon opening their monthly electricity bills. Energy costs, once an afterthought, are now among the highest concerns of processors. MP takes a region-by-region worldwide look at the issues and challenges.

As natural gas and electricity expenses keep escalating, they are eating into the already razor-thin bottom lines of the United States plastics industry, where profit margins hover around 4%.

"Businesses have heard for a while now how they need to explore alternative sources of energy," says Kimberley Wallace, marketing manager, Clarus Energy Partners, L.P., a San Diego-based provider of electricity and thermal energy. "We find that facilities are taking more and more control over their energy."

Plastics processors have seen their energy costs rise dramatically as a result of skyrocketing electricity bills. Energy, once considered a fixed cost, is now a variable expense representing 5 to 15% of overhead, according to industry estimates. Expenses vary by company, depending on such factors as location, plant size, amount of power consumed, and the number and type of machines operated.

The Society of the Plastics Industry (SPI) is attacking the energy crisis on the legislative front. It is lobbying federal lawmakers to address runaway natural gas prices, which have increased six-fold in the last few years, an unprecedented rate of change. Since natural gas is a primary source for electric power generation, molders are consequently seeing electricity rates go through the roof—many of the increases are in double-digit percentages.

"For the first time in modern history, natural gas prices are higher in the U.S. than Europe, Brazil, and even China," notes Maureen Healey, SPI''s vice president of government affairs. "We are definitely seeing facilities close their doors permanently, or move offshore, with energy costs being one of the main reasons."

California-based molders, who have suffered through rotating electrical outages, have been particularly hard hit. An SPI survey of 113 member companies released last year found that energy costs jumped an average of 51%, with some firms incurring 300% spikes. The situation is linked to a 2001 decision by the California Public Utilities Commission to approve a staggering set of electricity-rate increases—as high as 80% for some energy hogs—in a bid to narrow the gap between retail rates and soaring wholesale prices.

"When we first determined this [energy] issue as a top priority two years ago, our members in California told us they were bleeding, suffering from increased utility rates," Healey says. "We determined that something had to be done to offset the horrific cost increases our members in California were facing."

Some industry members believe the rate hike, which affected customers of Pacific Gas & Electric (PG&E), California''s largest utility, and Southern California Edison (SCE), drove several processors either out of the Golden State or out of business altogether.

"Injection molders that are my size—a single, family-owned operation—are just about gone now," reports Steve Dowling, vice president of operations at Universal Plastic Molding Inc. (UPM), a Baldwin Park, CA-based custom molder. UPM operates 26 injection molding machines ranging in capacity from 200 to 2000 tons.

Bomatic Inc., an Ontario, CA blowmolder, is moving one of its two facilities to Utah, where electricity prices are 15 to 20% less. "Last year we paid $100,000 a month for electricity compared to $30,000 a couple of years earlier," says Kjeld Hestehave, president. "We''re barely making any money." He estimates power represents 10% of Bomatic''s overhead, a figure that has more than doubled since 2001.

Observers say more processors are re-evaluating their operations and exploring energy-saving measures. They are taking a hard look at total monthly energy use on each machine as well as on lighting, heating, cooling, and drying.

Older machines often lack the efficiency offered by modern tools. Realizing this, UPM recently purchased two electric injection molding machines and retrofitted existing units to minimize electrical costs. The modernized units consume 10 to 50% less energy, while the new machines are significantly more energy efficient, Dowling says.

Neither should processors underestimate the significance of simple cost-saving measures, such as turning off machines and heaters that are not in use, insulating equipment to prevent heat loss, and implementing methods that improve cooling.

Beyond machinery and lighting efficiencies, there are other options available, from owning a power plant to hiring a third party to operate it.

Clarus claims on-site power generation gives electrical-intensive businesses tangible monthly savings while hedging against uncertainties like rate hikes and supply outages. The company provides electricity and thermal energy by using dedicated, on-site gas-powered generators. "A facility can save anywhere between 10 to 20% through on-site generation," Wallace contends.

Electrical utilities offer energy efficiency programs to help customers reduce energy consumption and save money. For example, SCE says business customers who purchase qualifying equipment to generate their own power may be eligible for rebates through a self-generation incentive program. The program pays for up to 50% of the cost of new, environmentally friendly electric generating equipment utilizing solar and wind energy. Fuel cells, microturbines, and internal combustion engines that use natural gas or renewable digester gas are also eligible.

Bomatic''s Ontario plant runs on a self-generation system, but Hestehave notes it is expensive. "There''s a $1.8-million one-time charge for equipment and then you have to buy fuel," he points out. Before enrolling in self-generation incentive programs, he cautions processors to ask about hidden costs, which may make it cost prohibitive.

Processors not inclined to generate their own power can go beyond their local utility to get better pricing, depending on locale. For example, UPM has a long-term contract with Strategic Energy Ltd. (Pittsburgh, PA), a provider of energy in deregulated states, allowing it to pay a fixed rate for electricity. Dowling estimates the company saved $300,000 in annual energy costs until SCE zapped the firm with a $.027 surcharge on every kWh of electricity purchased from a competitive utility.

"That was a $200,000-a-year hit and we couldn''t pass it on to anyone," he says. "It''s a never-ending deal unless I go back to Edison and pay their rates." In a recent development, SCE dropped electricity rates 8 to 19%, a move Dowling says could make it worthwhile for UPM to re-sign with the utility.

Says Clarus'' Wallace: "Energy intensive businesses need to continue to explore alternatives to the utility and know that they have options in the market to accomplish their goals."

German processors suffer under energy market oligopoly

Five years after liberalization of Germany''s electricity market, the only thing plastics processors see going up are power prices. Billed in 1999 as a revolution away from state-controlled monopolies, the initial free-for-all turned to consolidation, creating a market where 80% of all capacity is now in the hands of four producers. Germany''s two largest power providers just reported very strong half-year earnings—a 49% increase by E.ON and a 35% jump at RWE.

In the last 12 months the German Federal Assn. of Energy Users (VEA; Hanover) says power prices for plastics processors have jumped 20%. Some of the blame, says Volker Stuke, VEA managing director, is due to additional "green" taxes levied since January on power use, intended to promote renewable energy use and electricity conservation. These taxes increased 241% from .36 to 1.23 € cents/kWh. Overall, processors in the new German states (the former East Germany) are paying higher fees (an average of 7.53 € cents/kWh) than western competitors, who pay on average 6.91 € cents/kWh, Stuke says, due to the way the big four energy suppliers bill grid use.

According to Roland Schmied, spokesman for the Industrial Energy Assn. (VIK), which represents small- and medium-sized (SME) industrial power users, recent statistics show German processors pay the second-highest prices for electricity in Europe, second only to Italy (see chart).

Strength in Numbers

What alternatives do processors in high-cost-energy countries in Western Europe have? One possibility is to join a power-buying consortium to obtain a better bargaining position for energy needs. Another alternative is to source power from an energy contractor—which is often an energy supplier subsidiary, but can also be an independent company.

One such independent is Okotec Energiemanagement (Berlin) which specializes in energy contracting for SMEs, including 10 plastics processing operations. The processor hands over administration of energy needs (power and lighting, heat, chilled air, compressed air, and waste water) to an outside contractor. Two models are offered in Germany, says Okotec spokesperson Isabelle Henkel. In both cases the processor operations are evaluated to determine where savings are possible. With Energy Supply Contracting, the project-based costs are divided into a basic fee, which reflects costs that are independent from energy consumption, and a working charge that includes the actual usage costs.

Energy Saving Contracting, on the other hand, is offered for processors with high energy use, but only if they agree to modernize operations to help maximize savings. The contractor invests in plant energy technology to reduce costs and to achieve pre-calculated savings. He provides a fixed guarantee of savings and offers the processor the option of reaping savings at the start of the contract. Any additional savings go to the contractor to fund the implemented technology. Remuneration depends on energy savings achieved and the program''s success. If the contractor falls short of its goals, it bears the costs.

Hochhuth GmbH (Wiesbaden, Germany) offers a Europe-wide energy management system for energy data collection, evaluation, and billing. The company''s remote energy meter reading system, used at the Kalle-Albert Industrial Park, a former Hoechst site, is helping plastics processors like Mitsubishi Polyester Film and Kalle, blown film processor of sausage skins, to control energy costs. Collected data is displayed on the companies'' PCs and employees can intervene during peak energy-use times to balance supply and take advantage of cheaper rates. Peter Hochhuth, president, says the object is to allow each processor to obtain a lasting reduction of energy costs of up to 20% through transparency in energy distribution and supply control. He says the amortization generally takes one to two years.

Asian economic growth taxes power grids

Rapid economic growth in China is straining the mainland''s power grid as industry fights for its share of electricity with richer consumers who are straining the system with the purchase of air conditioners. While the government is rushing to add capacity, blackouts are still common in many Chinese cities and analysts estimate the shortage will not be alleviated until 2005.

The situation in China, however, differs from region to region. Shenzhen, a city bordering Hong Kong in Southern China, no longer suffers from power outages, according to one Japanese supplier of all-electric machines active in the area. "Three to four years ago, it was the norm to install backup generators." The downside in Shenzhen is that electricity prices are the highest in China.

In the nearby industrial city of Dongguan, Guangdong Province, however, some processors reportedly work on Sundays to ensure access to power, and take Monday off.

"In some regions, the supply of power will be relatively tight during the peak summer period," says Zhao Xizheng, general manager of the State Grid Corp., "while the supply-and-demand situation for the full year will even be more severe than in 2002,"

Zhao reports that there are currently power plants under construction that, when operational, could produce as much as 88,400 MW of power annually; these plants will provide a net increase of 17,000 MW in the country''s installed capacity, bringing it up to 370,000 MW by the end of the year. However, that will still be about 14,000 MW short of the capacity required by demand, Zhao says.

Power shortages in some provinces started to emerge late last year as strong manufacturing growth pushed electricity consumption far above what China''s planners had originally forecast. Poor links among provincial and regional power grids have also limited power companies'' ability to send electricity to areas with higher demand.

The shortages have continued this year, with electricity consumption shooting up 17% in the first quarter. Thus, they could have some upside for the nation''s power companies, like Huaneng Power International Inc. (HNP), by creating new opportunities to develop new projects and keep electricity prices high.

"We continue to believe strong demand and tight supply will result in little room for further cuts in on-grid tariffs," wrote Alice Hui, an analyst for London-based investment bank UBS Warburg, in a recent note to clients.

The Philippines, meanwhile, needs to add considerable capacity if it wants to avoid a shortage in 2006. The country experienced one in the late 1980s, when many processors were forced to install backup generators as insurance. The government might find it difficult to attract foreign investment to upgrade the power grid, however, as many independent power provider (IPP) contracts signed by the previous administration are under review due to claims of corruption, and if offshore investors suffer, they may turn their backs on The Philippines

Filipino processors complain of high costs that are second only to Japan and Hong Kong in Asia. Alex Teng, general manager of Altech Packaging Corp. (Caloocan City) and VP of the Philippine Plastics Industry Assn. (Manila), says that when the government requested utilities to cut power tariffs, they did, but then added numerous charges to their bills, including system loss charges, distribution charges, and environmental fund charges.

Newer processors in the Philippines like Iomni Precision Inc. (Calamba) have not installed backup generators, but plant manager German Collantes says the company keeps an extra day''s inventory on hand in case of outages.

"Outages are becoming a rarity, and we''re more concerned about supply stability, which is why we have three transformers on site for power regulation," he says. Recently, at least one industrial park in the Philippines signed a contract with an IPP that guarantees energy quality. This is attractive to processors with sensitive injection molding machines, says Collantes.

Indonesia could be the first Asian nation to experience a severe power shortage, possibly as early as 2004. The government is also moving to remove subsidies, which will push prices up. Processors in industrial parks, however, are commonly supplied directly by the park operator, so they may be spared from significant outages. Tony Hambali, president of Dynaplast (Jakarta) says supply is generally stable at 380V, +5%, but generators are installed at plants outside of industrial parks as backup.

Deregulation in Singapore has opened up opportunities for processor savings. Subject to minimum usage requirements, they can now tap directly into high-voltage supplies and enjoy off-peak rates. One mid-size processor invested about $600,000 in transformers to handle the higher voltage and has cut its bill by 20%.

Japan faced blackouts in the Tokyo region during the summer. Regional utility Tepco was forced to shut down all its nuclear reactors due to falsified maintenance reports and only some have since been restarted. Some major manufacturers like Honda have rescheduled production to use more off-peak electricity, prompting suppliers who deliver JIT to reschedule their operations.

Longer term, the government is pushing for more use of small-scale co-generation systems, but Ginzoh Nakatsuka, president of processor Alon Co. (Nagano), says that although this could be warranted for molders who spend $10,000/month on electricity, they are unlikely to warm to the idea unless there are incentives. Alon also runs a plant in Thailand, where Nakatsuka says power supply is generally stable, save for three to four outages a year due to lightening strikes.

In South America, droughts drive new efficiencies

In 2001, an extended drought prompted acute energy shortages in Brazil, forcing the federal government to institute an energy-rationing program that lasted eight months. The plastics industry was required to cut energy consumption by 20% during this period or risk stiff fines and having power supplies cut. While the energy-rationing program was disastrous for Brazil''s economy and for the plastics industry in particular—production dropped to 1999 levels—there was a silver lining.

"The industry did not return to pre-rationing levels of consumption after the program ended," says Paulo Dacolina, the director of Brazil''s National Plastics Institute. "During energy rationing, many companies realized how much money they were wasting with their electric bills," he added. After the rationing ended in February 2002, the industry maintained many of the same energy-saving programs.

While there is currently no threat of energy rationing in the medium term, plastics processors continue to work toward decreasing energy consumption. Recently, the National Plastics Institute began a program focused on reducing energy costs in the industry. The program, which is being developed in conjunction with the Ministry of Development, seeks to help producers reduce energy consumption by replacing outdated machinery. According to Mr. Dacolina, the average age of Brazil''s plastic injection molding machines is 20 years. "Old machinery was not built to be energy efficient, and therefore uses as much as 50% more power than the latest machinery," he adds.

The Plastics Institute will present a plan to the Ministry of Development to offer low-interest loans to companies interested in buying new machinery. "Because most Brazilian plastics transformers are small and medium-sized companies, it is difficult for them to acquire machinery without government loans," he added. The goal of the program is to bring the average age of Brazil''s injection molding machines down to five years over the next several years.

In addition to improving the quality of machinery, other plastics manufacturers are taking advantage of Brazil''s wholesale energy market to acquire electric power. Dixie Toga, Brazil''s largest producer of flexible packaging, recently began a program to supply one of its new plants with power through wholesale purchases. In July, Dixie Toga signed a contract to acquire 2.5 MW from state-owned energy generation company Furnas Centrais Elétricas. The energy can be used over the next eight years and generally provides a discount of around 10% compared to the current market price.

According to Thomas Gruber, director of Dixie Toga, the company plans to continue to take advantage of the wholesale market. "So far we have only made purchases via the wholesale market for one of our plants, but we plan to continue to buy energy this way when possible," he says. While Dixie Toga rules out the possibility of an energy shortage in the medium term in Southern Brazil, where most of the company''s plants are located, Gruber expresses some concern about the company''s plants in Northeastern Brazil, where recent droughts have prompted some concern about future energy supply. "In the case of the Northeast, we have developed programs to supply our plants in the case of a shortage," he adds.

While Brazil is at least temporarily out of danger for electric energy shortages, Chile could face power shortages before 2005, according to analysts. The shortages will depend on whether Chile''s economic growth exceeds 5.5%, and on the amount of rain the country receives. Energy shortages would be a blow to Chile''s plastic processing industry, which has grown quickly in recent years. Demand for polypropylene in Chile has increased significantly in recent years, according to the director of Petroquim, Marcos Segal. The growth has been fueled by increased fruit and vegetable exports, which require large volumes of plastics packaging. The recent trade agreements signed with the United States and the European Union are expected to further increase Chilean exports, boosting the demand for thermoplastic resins.

Greg Valero in the United States, [email protected]; Robert Colvin in Germany, [email protected]; Stephen Moore in Singapore, [email protected]; Elizabeth Johnson in Brazil, [email protected]