The Midwest is one of the most industrial and manufacturing intensive regions in the United States. Indiana, in fact, is the most industrial state in the country. We have been fortunate to be able to attract, keep and expand industry and manufacturing for many years.
One of the principal reasons that Indiana has been so effective is that electricity has been relatively inexpensive. Industrial and manufacturing facilities are power intensive, meaning that they use a lot of electricity, so they will generally locate where they can keep their operating expenses down.
Unfortunately, inexpensive electricity is a thing of the past.
Hoosier State electricity prices have been low because of our reliance upon coal, an abundant and relatively low priced fuel used to produce electricity. In 2010, 85 percent of Indiana’s electricity was generated by coal plants, with a gradual reduction to 76 percent in 2013. Nationally, 39 percent of electricity is generated by coal-fired plants.
These Indiana coal plants are old and most are fully depreciated. These older plants are being retired because the economics is not there to justify the investments necessary to meet new (and costly) environmental standards. Consequently, new expensive plants are being built to replace lost capacity. In addition, heavy investment is being required for upgrading transmission and distribution assets, which in many instances are 30 to 60 years old. In the near future, there will be further capital commitments to enhance grid security.
All of this boils down to higher electric rates for ratepayers.
In Indiana, for instance, industrial electric rates were the 5th lowest in the country in 2003. In 2013, the industrial electric rates were the 29th lowest and price forecasts suggest that Indiana is going in the wrong direction. It its last report, the Indiana State Utility Forecasting Group projected a 34 percent increase in electric rates in the near term. The Midcontinent Independent System Operator, who manages the electric grid, has raised concerns over the reliability of our power supply.
Simply put, we are losing our competitive edge in attracting and retaining industry and manufacturing facilities.
Unfortunately this is not the end of the story. Another big cost to the industrial customer is municipal utility services: water and sewer. Municipal water and wastewater systems are extremely energy-intensive, often one of the biggest customers of an electric utility within their assigned service area. Energy can be as much as 30 percent to 40 percent of a municipal utility’s operating expenses.
On top of the steep increases in operating costs, there are enormous capital commitments that are being required of cities to upgrade water and wastewater systems that were installed in in the 1940s, 50s and 60s. Water and wastewater systems are one of the most, if not the most, capital-intensive industries in terms of required/invested capital into plant per dollar of revenue generated. Indiana’s water and wastewater infrastructure needs are estimated to total $14 billion over the next 20 years. Some communities are seeing municipal utility rates increase as much as 100 percent to 300 percent over the course of several years.
This does not bode well for increasing local economic development. One of the first things a manufacturer looks at in its decision to locate a new facility, or expand an existing facility, is the cost of electricity, water and sewer services. Municipalities and utilities often use the pricing of utility services as economic development tools offering discounted rates and other incentives.
As the cost of providing these services continues to climb, however, municipalities and electric utilities are seeking ways to reduce the cost of utility services.
One approach is the on-site generation of electricity at industrial and municipal utility facilities through “combined heat and power” (CHP) technologies. Often, industrial, manufacturing, and municipal utility facilities require not only electricity, but also steam, hot water, or simply heat for processes, such as powering equipment, drying, rinsing product or heating digesters.
On-site CHP allows for the generation of electricity and thermal energy from a single fuel source, far increasing efficiencies and lowering costs. In the case of a municipal wastewater treatment facility, wasted methane gas is used as fuel for the generation of electricity, while the heat from generating the electricity is recovered and used to heat the digesters, reducing the costs of natural gas. Furthermore, CHP is reliable low-risk technology that has been utilized for many years, and is capable of significantly reducing costs for industrial and municipal utility facilities.
CHP also enhances reliability and resiliency at institutional facilities that provide critical public health and safety functions that cannot be interrupted, such as hospitals, research and data centers, and universities.
Cooperation with the electric utility serving a facility is essential. There may be grid interconnection issues, or arrangements to provide standby power when a facility’s CHP installation is scheduled for maintenance. There have been instances of electric utility reluctance because of lost revenues under the conventional regulated monopoly business model.
These are issues that can be resolved. CHP can actually benefit the electric utility by deferring the need for expensive new power plants and transmission and distribution lines, enhancing the reliability of the grid, and using the significant increases in efficiency as direct compliance measures for costly environmental regulations.
Businesses and municipalities need to work with their respective legislators and regulators to let them know of the benefits of industrial energy efficiency initiatives, the need for large customers and the electric utilities to work together, and the opportunities that exist if we can get beyond this artificial “meter barrier” and leverage expertise and financial resources.
The Bingham Greenebaum Doll LLP Economic Development practice group works with its industrial, manufacturing and municipal clients in: finding ways to reduce operating and capital costs; mitigating the impact of rising electric rates; resolving issues with local electric utilities; working with our elected and public officials in advancing supportive policies; and, structuring economic development incentives that works for both business and municipalities. BGD has the experience and expertise to seize the opportunities that come with the restructuring energy markets as we make the transition to smarter energy economy.