Not Magic: Less is More Energy Contracting – a Deal that Generates Cost Savings and Protects the Environment

Financial scope was being squeezed long before the current financial crisis arose: Trade, industry, and the public sector are all complaining of shrinking budgets and reduced investment strength. When implementing austerity programs, it is important not to neglect one major (cost) factor—energy—because our stocks of primary energy sources such as gas and oil will dwindle and push up the cost of power. Investments in energy efficiency are therefore highly profitable. This is where energy contracting comes in—and experienced energy contractors like Evonik New Energies show how it works. The subsidiary of Essen‘s industrial giant Evonik ranks among Germany‘s largest energy contracting companies and is one of those longest on the market.

Contracting is based on an idea by the Scottish inventor James Watt (1736-1819). „We will let you have a steam engine free of charge. We will install this and take over customer service for five years. We guarantee you that the coal for the engine costs less than you have to spend at present on fodder (energy) for the horses, which do the same work. And all we require of you is that
you give us a third of the money you save.“ James Watt‘s idea still works today—and can even be considered a growth market. There is currently a great deal of interest in this market because potential customers wish to channel their investment resources, which in some cases have been substantially diminished, into investment projects other than energy technology. This is according
to almost 30 percent of those surveyed for the study entitled „The Market for Contracting in Germany up to 2010“ conducted by the trend and market research institute trend: research.

KHS Group, which manufactures filtration and filling systems, started trying to avoid nonessential costs long before the current crisis arose. Over seven years ago, the subsidiary of the Dortmund-based company Klöckner-Werke commissioned Evonik New Energies GmbH to make its production facility in Bad Kreuznach energy efficient. Located in the state of Rhineland-Palatinate, this facility comprises twelve large-scale factory buildings and administrative buildings.

In March 2002, Evonik took charge of heat supply and reorganized heat generation on the basis of a long-term contract. Around EUR 1.3 million was spent on installing a new boiler plant, upgrading the existing heat distribution network, mounting 130 new air heaters in the production halls, and building a solar installation, among other things. KHS AG thus obtained a new heat supply system that guarantees highly reliable supply—tailored to the company‘s
individual needs and using state-of-the-art technology. Impressive savings are achieved: The overall package allows energy costs to be slashed by 35 percent and reduces the installed output by 40 percent.

Word of such advantages gets around: The benefits of energy contracting were also compelling for the nearby Michelin tire factory. With a workforce of around 1,600 and a production area spanning 270,000 m², Germany‘s largest Michelin site is one of the region‘s most important employers. Since 1966, flexible teams
have been manufacturing tires for passenger cars and small trucks, as well as textile cord, among other things. In March 2005, Evonik was commissioned to plan, finance, build, and run a new energy control center, integrating existing sections of the facility, and to operate this center over the long run. The new facility concept for supplying the plant with power and process steam involved installing a steam turbine and a gas turbine with a downstream waste heat boiler, as well as building a new steam boiler. Evonik invested EUR 10 million in the new facility, which came onstream in November 2006.

The results are clear: Michelin has cut its energy costs by 10 percent per year and now has to purchase just 25 percent of its power requirements through the public grid. CO2 emissions have been reduced by 7,000 metric tons per year. Michelin is also benefitting from the CO2 certificates it receives as a result.

“The cogeneration system has enabled Michelin in Bad Kreuznach to further reduce its carbon footprint in keeping with our corporate values. At the same time, the cost savings help to safeguard jobs in the region. The fact that we have placed our energy infrastructure in the hands of an expert partner like Evonik New Energies also frees us up to concentrate on our core business,” stresses Klaus Konrath, head of energy supply at the Michelin site in Bad Kreuznach.

Contracting is not just interesting for corporate clients from manufacturing industry, however; it also obtains points for its versatility: Contracting providers are active in all areas of the energy supply technology segment. Small boiler units for multi-family buildings or municipal facilities are run in addition to decentralized thermal power plants that supply power to entire industrial estates. Many contractors have identified the opportunities presented by renewable
energy sources and now also operate, for example, biomass and biogas plants, frequently as cogeneration systems, to deliver the energy produced to their customers. A variety of contracting models may also be offered, depending on the customers‘ needs.

A growing market
The common denominator among customers is the desire to save energy and reduce costs. Contracting therefore provides a wealth of sales prospects. In Germany alone, around 1.4 million energy facilities would be suitable for contracting purposes; some 500 companies are currently active in the market as service providers or contractors. The annual market volume in the German contracting market exceeds EUR 3 billion. The largest market segment—
also in terms of the growth rate—is contracting for industrial customers, which has a share of around EUR 1 billion. It is crucial to take the needs of potential customers seriously because the possible advantages of a contracting solution—security of supply frequently guaranteed in the contract, higher liquidity due to external financing, or even greater transparency of energy costs—sometimes
meet with skepticism about becoming dependent on the contractor.

Here, the contracting company can counter customers’ fears through reliability, flexibility and—last but not least—good value for money. Ralf Tabellion, who works in sales at Evonik New Energies and is involved in the two projects in Bad Kreuznach, is aware of customers‘ possible misgivings and knows what makes a contracting partnership work: “Mutual trust, the courage to forge a long-term
partnership, a concept that is individually tailored to customers‘ needs rather than a standard concept, and a broad-based preliminary analysis that uses reliable data—all this is indispensable. Then good contracting is not magic!”

Conclusion
Energy efficiency is a pivotal issue, especially in times of economic turmoil: Costs can be reduced, dependence on energy imports can be lowered, and climate protection targets can be reached at the same time.

About Evonik
Evonik Industries is the creative industrial group from Germany which operates in three business areas: Chemicals, Energy and Real Estate. Evonik is a global leader in specialty chemicals, an expert in power generation from hard coal and renewable energies, and one of the largest private residential real estate companies in Germany. Our strengths are creativity, specialization, continuous
self-renewal, and reliability. Evonik is active in over 100 countries around the world. In its fiscal year 2008 about 41,000 employees generated sales of about €15.9 billion and an operating profit (EBITDA) of about €2.2 billion.

Sandra Kühberger
Phone +49 201 177-3007
Fax +49 201 177-3030
sandra.kuehberger@evonik.com

Evonik Industries AG
Rellinghauser Strasse 1-11
45128 Essen
Germany
www.evonik.com

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