Opportunity Cost Of Poor Power Reliability

Most business people look at the costs of doing business, whether they are capital expenditures, maintenance or operating costs. These costs are the apparent cost of business and they show up as our cost of goods sold on the company balance sheet.

What about the opportunity, or hidden cost of business? What is the cost of inaction and its impact upon business economics? Let’s take a look at these costs with special attention to the cost of unreliable power on a manufacturing facility.

Does your business experience power outages or interruptions that interfere with the manufacturing of your products? What is the cost of power loss during a batch production run that increases waste costs from sub-par quality products in the manufacturing process? What is the cost of not having power, and losing production of a valuable product at the worst possible time?

Not knowing the power loss opportunity cost can leave large amounts of money on the table, and force your company to forego large amounts of revenue.

What are the power loss opportunity costs? First, it is the lack of production from the manufacturing facility and its lower revenue and profit generation potential. Second, it is the increased cost of idling the plant or shutting down production altogether, including unproductive labor costs. Third, it is use and cost of the standby generators to satisfy critical power loads when the main power supply is interrupted. Depending upon the industry, these power loss opportunity costs can be $25,000, $100,000 or even $1,000,000 per hour.

Calculation of the actual cost of power loss for each interruption is the first step. To do this, determine the frequencies of power loss, the durations, and the cause. With these metrics and the loss of revenue for foregone production or incremental costs, your company can determine its cost of power loss in $ per hour.

The causes of power loss can be varied: 1) inadequate energy production in the country causing power rationing, 2) poor transmission capacity, 3) spikes in voltage in transmission that trip transformers, 4) low voltage in transmission, or 5) poor sub-station step-down transformer operation or maintenance.

With the “prize in power loss dollars” in hand as the potential cost savings or revenue stream, determine the potential solutions to reduce power loss incidences. Estimating costs for improved generation, transmission, a correction for voltage swings, or additional backup power generation serve as the capital expenditure for a capital project. With all of the necessary components in place, a cash flow analysis can be generated to determine the project payback period, net present value (NPV), and internal rate of return (IRR).

I welcome your comments and questions, and the opportunity to analyze your poor power reliability costs. I am the principal at Reliant Energy Solutions LLC, a Certified Energy Manager, and can be reached at [email protected], or at www.linkedin.com/in/ronmiller10.