Quarries use a large amount of energy in the form of explosives, diesel and electricity and managing and reducing energy costs is critical to increasing profitability. With energy costs increasing rapidly over the last few years the profitability of quarries is being squeezed and the ability to get a return on growth projects is being hampered.
Quarries do not have to be a victim of the traditional three-yearly retail price competitive process. Quarry owners can take back control of their energy spend, reduce their costs, grow profits and reinvest for further growth.
This article provides a framework that quarries can follow to take back that control.
So what is happening with energy costs, or more specifically, electricity costs in Australia at the moment? Every day we are bombarded by media stories about the energy cost crisis and everyone seems to be pointing fingers in different directions. The situation is even worse in South Australia and we will use South Australia as an example in this article.
Let’s have a look at what has happened with electricity prices over the last two decades in South Australia.
This chart shows a 12-month moving average of the wholesale electricity price in South Australia. This price is the result of matching competing generator bids with state demand on a half-hourly basis. This is not the price that you are likely paying. You would ordinarily pay a fixed retail price that is a whole lot of risk premiums and retailer margins on top of this price and set for a few years.
When your procurement team go out to the market for competitive pricing, this wholesale market price and the futures market linked to it is the reference price that all of the retailers are basing their offers on. They are all using the same cost price to base their competitive offers on.
So let’s look at the trend. When the market was deregulated for large customers 20-years ago, initial wholesale prices were very low. Retail prices though remained high. In the 2007 drought caused a reduction in hydro output and some water-cooled coal generators shut down operations. This caused prices to increase nationally.
Prices dropped back down when the drought eased but the introduction of the carbon tax in 2012-2014 pushed prices back up. When the tax was repealed, prices dropped but not by as much as they had increased. But that was just a speed bump on the way to where we are now.
In 2016 we started to see the giant LNG plants in Gladstone start to be commissioned, sucking out natural gas from the broader gas market and pushing prices up and so pushing electricity prices up. Quite often, gas-fired generation sets the market price and so if their costs go up their bid prices usually increase to reflect their increased costs.
To compound that issue, Alinta decided to bring forward the closure of the Port Augusta power station, surprising the market and causing the South Australian market price to skyrocket until the previously mothballed Pelican Point gas-fired plant was reopened.
But then, just as prices began to fall again, Engie decided to also bring forward the closure of the Victorian Hazelwood power station, once again surprising the market and sending prices much higher nationally, but it was particularly felt in South Australia and Victoria.
So where do we think the market is heading now? Will it keep going up, will it stabilise, will it slowly drop-down or will they plummet? The futures market seems to think that it will start to drop a bit but not plummet, but who really knows? Will more coal plants close, will there be gas shortages or will renewable wind and solar push prices down?
So if you can’t control energy market prices, what can you do to manage your costs?
This next chart is called a Marimekko chart and is a visualisation of a typical electricity bill. It breaks the components of the bill into energy charges, network charges, environmental charges and whether they are fixed or variable.
As you can see, the energy component of this example bill is only 50% of the total.
So when your procurement people go out to the market to negotiate competitive retail prices, they are only seeking competitive prices in 50% of the cost, and even then, as we have seen, all the retailers base their competitive prices on the same wholesale market price. So competitive processes for retail prices only shave a small piece off the total cost.
Network charges have a fixed and a variable component to them. Together they make up 39% of this particular bill. Many people think of network charges as fixed costs that are simply passed through from the network owner by the retailer. However, network charges are an area where substantial savings can be made.
This can be done at any time, it does not require the approval of the retailer and doesn’t affect the supply contract at all.
Finally, environmental charges for the large scale and small scale renewable energy certificates make up 11%. This is expected to decrease over the next decade but there are options to generate your own or get the certificates cheaper.
So understanding how the market works and understanding your bill are two important steps for identifying electricity cost-saving opportunities. The next step is understanding your own operations. It is important to understand where you use your electricity, when and how much in terms of both consumption and demand.
In a quarry, there are three forms of energy used. Chemical energy, fossil fuels and electricity and they each have an impact on the other. This mind map shows the potential users of energy.
Chemical energy in the form of explosives is much cheaper than electrical energy and so drilling and blasting should be optimised to reduce electricity consumption at the crushers. Diesel is more expensive than electricity so opportunities may exist to reduce diesel use and replace with electricity. For example, in-pit conveyors.
You should understand the electricity consumption and load profile of your crushers, screens, conveyors, fans and pumps to identify efficiency savings or network savings. You should also conduct an energy efficiency audit of your operations.
We saw in the Marimekko chart that there was a variable component to the network charges. The environmental charges were also variable. So the variable cost is much higher than just the retail energy part of the bill.
When searching for efficiency cost savings you need to consider the total variable costs and you will find that the payback of the projects is much faster.
So how do we use this information to allow you to take back control of your electricity costs and boost your profits?
I’ve put together a 9-step framework that I have used very successfully to reduce energy costs in a wide range of businesses including quarries.
At the centre of the framework is what we are aiming to achieve. We take back control by increasing your energy expertise, by increasing the number of options that you have and then reducing your costs. This is done by building your energy intelligence, doing operations analysis and by embracing innovation.
Let’s step through the cost reduction framework.
First, we need to commit to actually having a plan with clear objectives as to what we want to achieve.
Second, we should seek to improve our electricity market knowledge to understand the state of the market, the trends and the opportunities.
Third, we need to understand the levers that we have in our bills. We saw those levers in the Marimekko chart.
The fourth step is to analyse our operations. Where and when are you using electricity, how much, does it vary a lot? Does it spike? Is there a time-of-day, day-of-week, month-of-year pattern, Has the maximum demand changed over time? Has it increased, decreased, stayed the same, or displayed an unusual pattern?
This is also the step where you should do an energy efficiency audit. A standardised audit carried out by a trained auditor can yield some very important information about inefficiencies that you will be largely oblivious to.
Some examples of things that an auditor might find are that you are often running equipment unloaded or under-loaded, that your lights are of an old inefficient type and they stay on during the daytime because a timer isn’t working anymore. If you need to operate pumps you might have an inefficient recirculation control or pump during more expensive times of the day. They will find compressed air leaks that are king of wasted electricity and motors that are of an older less efficient type or incorrect size.
Once you have a strategic objective, understand how the market works, understand your bill and understand your operations you can tie it all together to identify cost-saving opportunities.
The fifth step is to identify where you can reduce network costs. This will largely involve reducing your Apparent Power maximum demand in kVA. You may be able to do this by improving your power factor, by shifting some loads to different parts of the day, replacing equipment, staggering equipment starts and by identifying spikes in demand and reducing or eliminating the causes.
The sixth step is to reduce energy costs. This is done in two ways. One is to achieve lower energy unit prices and the other is to use less (Step 7). For lower energy unit prices, we can use our newfound energy market knowledge to negotiate more competitive prices, go to the market at the right time, and, my favourite, buying electricity at wholesale prices rather than the risk premium laden retail prices.
The next three steps involve innovation, doing things differently to the rest of the crowd.
Step 7 is implementing the energy efficiency initiatives that you identified in Step 4. The cheapest electricity is the electricity that you don’t use, so implementing the energy efficiency initiatives that you identified will reduce your energy spend, your network costs and your environmental costs. Often, but not always this will require capital, so your original strategic objectives identified in step 1 can be used to determine the amount and payback threshold of the capital spend.
The 8th step seems to be the most controversial. And that is embracing the renewable energy revolution.
The fact is that renewable energy generation, even after accounting for the upfront capital costs is now by far, the cheapest form of electricity generation. We all know that gas prices have gone up but coal prices have also increased substantially as well.
A quarry can reduce its electricity costs by investing in their own behind-the-meter solar generation, which is the best option or by indirectly getting exposure to renewables through renewable power purchasing agreements with developers.
There are quite a few quarries and mines that have implemented solar projects around Australia and many more that are planning to.
The final step is continual monitoring and management. There are many examples of cost reduction initiatives that have stopped delivering those savings over time.
It is important to regularly monitor your electricity usage on a daily/weekly/monthly basis to ensure that your cost-saving initiatives are sticking and to check that no unusual patterns or behaviours that have crept in.
Don’t just click “approve” on your electricity invoices. Make sure that they are checked and verified. It’s amazing the dollar value of errors that can occur over time.
That is the 9-step framework. If you follow this framework in your operations you will significantly reduce energy costs and boost your profits.
Finally, energy cost reduction has been a passion of mine and I’ve been so passionate that I’ve written and published a book called Power Profits that explains this cost reduction framework in more detail.