In medium or large organizations, “Power” is an important item of cost, be it in Manufacturing or Services Industry. Over the years, I had the opportunity to achieve savings in this area, and wish to share 5 of such instances, for the benefit of Controllers responsible for monitoring Operating Costs, Accountants engaged in MIS reporting, or Internal Auditors who wish to report on cost saving measures. It goes beyond common initiatives like display of boards in work places to save energy, switch of lights, fans or air conditioners when not in use etc.
Power can be Purchased Power or Self Generated Power. These instances cover both the types.
1. Yield per Unit in the case of Self Generation:
This incident is more than 30 years old, but is still relevant. Power is an important cost in piston manufacturing. The plant was able to procure 50% of its required power from the State Electricity Board quota, and the balance 50% was through self generation. It had a generator set of 1000 kva capacity, and 3 small sets of 250 kva each. Those days diesel used to cost Rs 3.80 per liter. Each of the small 250 kva generators were giving yield of 1 unit per liter of diesel consumed. The bigger generator of 1000 kva capacity was new and more efficient. Its yield was 3.8 units per liter, making the effective cost per unit of power generated as Re 1. Based on our recommendation, the 3 old generators of 250 kva each were replaced by a new generator of 1000 kva. It meant significant savings in power generation, and the payback period for the investment in the new set was just 3 months!
2. Power Consumption:
In the same manufacturing process, Aluminum alloy is kept in molten condition at high temperatures in the foundry. At most of the furnaces in the foundry, production is in 2 shift basis of 8 hours. Night shift was avoided because it involved additional payments to the workmen in the form of allowances. Keeping the molten metal at high temperatures for long hours in idle condition was actually costing more in terms of power consumption, melt loss and consumption of indirect materials like fluxes. Based on our findings, number of furnaces in foundry were reduced and night shift operation was introduced on all of them to achieve over all savings.
3. Demand Charge vs Consumption Charge:
In the case of Purchased Power, when you see the Electricity Bill, you note two types of charges. One is called Demand Charge and the other is called Consumption Charge. The latter refers to number of Units consumed and is most commonly understood, as it is found in the bills of residential category as well. In the case of industrial Consumers, Demand Charge is a significant component of the power bill, and refers to maximum load that is drawn at any given point of time. While consumption charge depends on the quantum of power drawn over a period of time, the billing cycle, demand refers to highest quantum of power drawn at any given point of time, during the same billing period. While seeking sanction for power connection, what we call HT Consumers, namely Industrial Organizations, seek approval for a Demand limit, which is usually the maximum connected load, when all their machinery is put to use at the same time. Some organizations seek much higher “Demand Limit” than what they actually need for their current capacity, in anticipation of growth in requirement, since such a limit may not be available later. Electricity Authorities, sometimes charge for “Demand” or a % of the Contracted Limit, though not actually drawn by the consumer. In one of such instances, one organization was paying for high Demand Charges, though their usage was much lower, and there was no possibility for their need for connected load to go up. Once highlighted by us,immediate action was taken to surrender a part of their sanctioned load. Demand Charges, and consequently Effective Rate Unit (total electricity charge divided by number of Units consumed) has come down.
4. LT Connection vs HT Connection:
Usually Commercial Establishments go for HT Connection, and LT is mainly meant for residential use. Tariff is different for both these types of connections, and if an LT consumer’s consumption goes high, the power bill goes significantly high. In an Office Premises taken on hire by an organization with sizable capacity, an LT connection was available. Land Lord agreed in writing that he would get it converted into HT connection and given the premises on lease. As the Effective Rate per Unit was going high, compared with other Leased Offices in the country, on investigation, we noticed the failed commitment of the Land Lord, and recovered a few lacs of rupees, as excess cost incurred by the company.
5. Others:
Leakages are common, particularly in Diesel Purchase. Where we were monitoring daily yield for Diesel Consumed with power generated, there was significant variation from day to day, with yield going down, immediately after each receipt of Diesel. Subsequently it was established that actual purchased quantity was not reaching the organization, and the admin assistant was obtaining manipulated bills from the Diesel Supplier.
In one instance of a proposed lease of a premises, which was a workshop building converted into Office space, high roof level meant high power costs because so much volume needs to get cooled. The proposal was dropped.
Conclusion:
a. Do we understand our Power Costs, whether Purchased Power or Self Generated power or a combination of both and can we attempt to choose the best combination?
b. Do we know how to read the Electricity Bill?
c. Where Self Generation is high, are there physical controls in place to ensure that exact quantity of Diesel purchased is received, stored, issued for consumption and related to production output?
d. Can we employ KPIs (Key Performance Indicators) like Yield of Units per liter of Diesel Consumed, Effective Rate per Unit of Power whether Purchased or Self Generated, Power Cost per Output, or in the case of an Office Premises, Power Cost per Sq.ft of Area to help in monitoring this important item of cost and include them in our MIS Reports?
Thank you for your attention.
For some more articles from me, and to know about my book “Translating Operations into Money” please visit www.operationstomoney.com
Tulasi S Sastri
FCA., CISA
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