Energy and Utilities Cost Accounting - Part 1

Submitted by Thiago Turchetti Maia on Wed, 03/15/2017 - 16:13
Energy and Utilities Cost Accounting

In the first article of our management series, we argued that although energy management systems are usually associated with driving energy efficiency, there were other management functions that they could enhance to create value. In this second article, divided in two parts, we explore the theme of cost accounting, particularly for energy and utilities.

Most cost-sensitive operations dedicate leadership time and effort to properly manage their costs. The tighter the margins in the business, the more sensible it becomes to cost variations and, usually, the more attention it receives. Good costing usually requires accruing different cost sources to multiple cost centers. The structure of these cost centers varies from business to business, but one of the most common practices is to assign costs to the cost center for which a given manager is responsible. The goal is to achieve cost accountability, which also requires the proper corporate framework to command performance from managers based on their numbers. When done right, managers feel the pressure to cut costs right down to their own individual bottom line, and strive to improve the economic performance of the operations they are responsible for. When done wrong, that is, when costs are not properly assigned nor results diligently commanded, costs become a lesser priority to the organization with the inevitable ensuing consequences.

Another frequent and complementary way of accruing costs is assessing precise production costs in operations delivering multiple products or services. Again, the purpose is to achieve cost accountability, only this time cost centers correspond to specific product or product lines, as opposed to parts of an operation and their owners. When done right, the company understands the costs of each of its products accurately, which is particularly useful in businesses with tight margins. When done wrong, products that require less inputs will cover for products that require more, jeopardizing pricing strategies and improvement initiatives.

Now let us return to energy and utilities management. Accruing ordinary inventory costs is somewhat of an easy task. The sheer fact that stock items can be seen and counted makes accounting for them a simpler chore. Other types of inventory, such as solid raw materials, can be seen but must also be weighted, which complicates the job slightly although it is hard for them to go unnoticed. On the other hand, fluid inputs, either liquid or gas, or even electricity, are easily distributed through pipe or wire grids and cannot be seen, which does complicate their accrual. This is one of the main reasons why managing energy and utilities is so much harder than other inputs. Every single piece of equipment whose consumption must be accurately accounted for requires a dedicate meter. Depending on the operation, managing a large measurement infrastructure over widespread distribution grids is far from trivial. To further complicate things, flow measurements should be taken constantly, in real time, and later aggregated over time to convey meaningful indicators. Properly managing all that data requires assessing the status of each meter, identifying quality issues in the data, balancing grids, evaluating costing rules, and other activities that impose put a strain on automation and IT teams.

Not all companies have the proper resources in place. Some fail on the metering infrastructure, some on data handling, some on the management itself. The result is the same: cost distribution becomes a guessing exercise, and all technical and managerial initiatives that follow are hindered.

In part 2 we will go over costing rules, the issue of distributing costs (and responsibilities) among managers, and what to expect from an energy management system. Stay tuned!

The Viridis platform handles all data management necessary for proper cost accounting, automating the whole workflow from meters and costing rules to indicators and accounting transactions. The Viridis costing module integrates directly with ERP systems, improving process accuracy, timeliness, transparency, and agility.

CEO, Viridis

Viridis founding partner with 20 years of experience in leading high-technology companies focused on international markets. Career includes innovation and technology projects in the United States, Europe, and Latin America. He holds a PhD and an MSc in Electrical Engineering from UFMG, a BSc in Computer Science, and an MBA in Finance. He has conducted research projects and academic collaboration in applications of artificial intelligence to industrial problems. He currently serves as chairman at Fumsoft – Minas Gerais Software Society, of which he is a former president.

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