Does compressed air as a utility make financial sense for your plant?
Wayne Perry is Senior Technical Director at Kaeser Compressors, and has more than 40 years of experience in all aspects of the compressed air business. Matt McCorkle is Manager of Branch Operations for Kaeser Compressors and has worked as a Certified Energy Manager through the Association of Energy Engineers. In this episode of the Compressed Air Podcast series, Wayne and Matt explore the concept of compressed air as a service and how to determine if this model is right for your facility.
PS: Especially for this topic too, air is a utility, I appreciate you being on the podcast because I've noticed that Kaeser and other compressor companies have developed some new options for plant customers to operate their compressed air systems. Wayne, maybe I can start with you for the first question. What are some of the alternative models that you see are getting traction in the market?
WP: Well, Tom, you know, when I started in this business, the only way to operate a compressor was give somebody a purchase order by the compressor, and then you're on your own. Today, a lot of things have changed. I'd like to start by talking about just the enhanced service programs.
Normally you could get a service contract with a service provider and that would just cover the regular maintenance on it. If anything broke out of the ordinary, that was on you, so you still had some uncertainty as of what your costs for maintenance were going to be. But now a lot of providers have got enhanced service programs that not only do the regular normal maintenance, but will take care of anything that breaks, any failures that you have on components in the system. And you have a set fee every month, so you know what your maintenance costs are going to be. It’s still your equipment, but at least that part of the equation is now evened out, so we know exactly what you're going to be spending. Most of these contracts, most of these kinds of contracts require an extended period, three to five years, sign a contract for three to five years.
Now, the other thing that's happened in the market is you can contract a compressor for a one-year term, and that includes all of the maintenance. Your service provider will bring out a compressor, put the compressor in, and the service provider handles all of the maintenance and service for a monthly fee. That monthly fee can be a fixed fee or can be based on the amount of air you use, and that's really based off the number of hours that the machine runs.
The third thing that's out in the marketplace, and has been here for some time and is not pushed by a lot of people but a lot of people actually like it, and that's using air as a utility where the service provider like Kaeser, we call ours Sigma Air Utility, owns the equipment and operates the equipment. The end user doesn't pay for any of the equipment, and has really no upfront costs – they don't get charged during the installation or anything. They don't get charged until they flip the switch and start using the air, and then they get charged by the cubic foot of air that they use. Generally in those systems there's backup for everything. So customers really just buy air like they would buy water or gas or electricity.
MM: Yeah, I think one of the things we're seeing in terms of these alternative models, Tom, as Wayne has talked about is, you know, as systems become more complex, customers are realizing “maybe it's not advantageous for me to operate and own this.”
I think that's one of the things that's driving these alternative models is, yes, they can do some of the basics and the fundamentals, but when you get stretched and staff is thin or expertise is thin, and you have increasing complexity to reach the efficiencies and the performance that plants demand these days, it can make sense to have somebody else take care of that work.
PS: That is so true. I mean, there's an ongoing challenge to hire experienced technicians on the maintenance and reliability side. It can be even more expensive to hire a compressed air technician. So, Matt, as long you're talking about this, could you focus a little bit on Kaeser’s Sigma Air Utility? How is that offering implemented and what are some of the practical considerations that customers need to think through?
MM: Our Sigma air utility program is basically the full featured offering where customers do not own any equipment, don't contract for any service. It's all inclusive and as Wayne was saying, they just pay for the cubic feet they use on a monthly basis, just like other utilities. The process to get it started is very similar to a capital purchase, at least in the beginning, in the sense of, you want to assess the needs: how much air does a plant need? What are their minimums, maximums, and averages? And what's the air quality that's needed? Typically we'll conduct a study just like we would in a normal situation.
And then we design a system, we design redundancy into the system and then frequently what happens in these cases as well is we'll design an enclosure for the system so it doesn't take up plant space because one of the benefits of outsourcing is truly fully outsourcing the compressed air system so it's not taking up any plant space. It's outside your facility, still on obviously the property of a plant, but not taking up a critical production space.
And so once we have that designed, then we can present a contract that says, okay, this is what the rate would be on a monthly basis to put this in place. And once this has started up, that would be what you would pay for air. You'd no longer have to maintain equipment or own equipment. It would completely be outsourced, and you would just have a monthly bill as you would other utilities.
The practical considerations I think most plants should think about are, do you want to devote manpower to maintaining and operating your compressed air station? Would you dramatically benefit from not having the space taken up with your compressed plants? These are some of the things that we find that plants find a lot of value in and, and, and think that, uh, you know, this is a better solution than owning.
WP: To add something to what Matt said when he said, you know, when we go in and evaluate the system we do a complete study on how much air is being used, where it's being used, how it's moved around. And in most of our air utilities we go in and correct problems with piping being undersized, headers in the wrong place, that sort of thing, and that's rolled into the price of the air utility. So, the customer may have had tremendous pressure drop getting from one side of the plant to the other, and we'll fix that as part of the air utility. We want to be sure that we supply the air at the right pressure, the right flow, and the right air quality. And to do that, we've got to fix all of these generic problems that that we find in the plant when we do the survey. It’s, it's not just, we just plop some machines on the ground and say, here you go. We want to make sure the whole system works the way it's supposed to work.
PS: I'm glad you mentioned cost as part of that answer, Wayne, because I wanted to check with you on that. You mentioned a couple of different models at the start of the podcast of what is out there for customers. How do specifically air-as-a-utility models compare financially to the common method of buying equipment and doing maintenance in house, or even paying suppliers for maintenance and repair services?
WP: Well, a lot of that depends on the company's financial needs. We've been doing this on some greenfield operations and the main thing that the user looked at is, do I want to spend a million dollars or several hundred thousand dollars on compressors, or do I want to buy some production equipment that's actually going to make me money? A lot of times they decide they'd rather spend the capital that they have available on production equipment, and then just pay a monthly fee for using the air. That's one of the issues that comes up financially.
The other thing as you pointed out, Tom, is am I going to be having to hire people to maintain the compressed air equipment? Or do I want them to maintain the production equipment? And we've had customers who've had these air utilities and renew them because they now have their maintenance and engineering people working on equipment that makes them money and not trying to maintain a utility. They don't generate their power or pump their own natural gas and have to maintain all of that equipment. With an air utility, they don't have to do that either.
We've even had some customers who had an air utility for 10 years and decided they wanted to run their own equipment, bought the equipment from us, kept it on site, ran it for a couple of years, and then called us back and said “come give us a quote on another air utility, we don't know how to maintain this equipment like you guys do.” They said, “we're having downtime, and when you guys were running it, we never had downtime.”
It used to be that you could keep all of this stuff, air as a utility, off the books. They've made some changes in the last few years in the accounting rules, so you basically still have to treat it differently from if you were just renting equipment or paying a utility bill, but you don't have that cash outlay up front.
Now, if you've got a compressed air system that's five years old and all the compressors are still on the books, and they're all running relatively well, then air as a utility normally won't make sense to you. But if you've got compressors that are 10 plus years old, or you're doing a greenfield, we can make a real financial case where now you're going to have a good compressed air system and you don't have to have capital available. You don't have to put this in your capital budget to buy all of this equipment and maintain it.
The other plus side from a financial point of view is that in most manufacturing plants, those people, as Matt has said, don't really know how to maintain their equipment, and they wind up with fluctuating pressure, low flows, low pressure, bad air quality. We had one of our air utility customers tell us, you know, we had sold this on, “we're going to save you money, because when we do our study, we can tell you how much money you're spending to power your compressed air system. And then we can tell you how much money you'll spend to power our air utility.”
Listen to the entire interview
We sold this particular customer because it was going to save him a whole lot of money on power. And he had an old system. After it'd been in there for about a year, he came to us and said, “we now have steady pressure, good flow, good air quality, and it's made such a difference in our productivity. That made us way more money than the money we saved on power.” So you're going to look at all of these things to figure out how it's going to make sense in your particular situation.
MM: Financially, I think a lot of times what folks don't consider with compressed air stations, if you just look at the cost of the compressor and maybe you even include the direct costs of energy and having maintenance done, you might say, oh that's not all that much money. But there's so many hidden costs that aren't taken into account related to downtime or your maintenance staff, or upgrades and engineering, and controls needed to operate the system correctly. Customers that really benefit from Sigma Air Utility, they tend to be the ones who've experienced those costs and so they want to offload them, or as Wayne said, they're starting out new.
In those cases they can realize, oh, I don't have to hire that staff or plan for those expenses. And I have the assurance of no downtime and those are significant costs that every customer incurs, or has to deal with if they're operating and owning their own compressed air station.
PS: Let's dive into some of the specifics about air as a utility, and Matt, I'll start with you, and follow up on and your comment about getting the system started up and running. I'm sure a lot of our listeners are going to want to know, between the client and the provider, who is responsible for paying for what part of the system, when you start air as a utility?
MM: Well, the part that Kaeser always pays for, that the provider pays for, is the equipment, and the service, and the operation of that unit. We monitor the units, we're responsible for all maintenance and repair costs, and we're certainly responsible for supplying the equipment, and in many cases the enclosure that the equipment is operating within.
The part that is sometimes negotiable or varies by site is the site work. In some cases, we may pick up a little bit of the site work and sometimes the customer pays for the site work needed. Generally we try to make that a minimum in terms of where we put the equipment and then bringing in the electrical, and bringing in the piping, because that's more infrastructure. In many cases, uh, customers pay for that because that would stay on site permanently with that facility. In other cases, sometimes we'll roll it into contract, those are some of the negotiable parts, and we certainly arrange for the placing of the equipment, the rigging of the equipment.
Now, when it comes to the operation of the equipment and maybe the cooling water, if there's cooling water needed, or the actual electricity to operate the compressed air station, the customer is responsible for those fees. It's against their electricity bill, and generally speaking, there are guarantees in the contract, or limitations, that that rolls into the overall performance of the compressed air station, so they know that there's not an incentive on our part, on the suppliers part, to increase energy costs at all.
WP: To Matt's topics that he talked about there, we can't guarantee what a customer's going to be spending on power because we can't control the cost per kilowatt hour of the power. We can tell the customer here's how many kilowatts you're going to use or kilowatt hours to make this much air. And in some contracts we've put that in there as part of the contract.
And as to what Matt said about who pays for what, as far as the infrastructure goes is exactly right. We can roll all of that into the cost of the contract if the customer doesn't want spend any money, but that increases his monthly cost for the air utility. We've got customers who actually want to pay for all the piping, pay for all the power being brought in, and and keep the monthly cost as low as possible.
PS: Matt, let me ask you one more question about performance benefits, we've touched on that a little bit during today's podcast, on how these kind of services can really help the plant teams focus away from the utility equipment and more on the production equipment. Can you talk a little bit about some of the performance benefits that you've seen, some plants achieve with air as a utility?
MM: Absolutely. I think the most significant one is related to reliability. These systems are designed to run, and have redundancy built so no matter what the environmental conditions are or what happens with usage in the plant, that they are supplied with a stable air pressure at the quality that they need. When plants realize that that can be assured 100% of the time, it's just incredible the savings that they can benefit from. So that I would say is definitely the number one performance benefit that plants achieve with these Sigma Air Utilities.
It's not to say there aren't cases where we've had downtime, because we certainly have, but it's always been due to some extremely extraordinary events, generally weather related. When you look at the what, 15-plus years that we've been doing Sigma Air Utilities, you can count on one hand the times some of these oddities have occurred. Because we're the system design experts, we understand these customer applications and we understand how to deliver the air at the right quality and control the compressors to deliver stable power. The key thing I think, and the biggest performance benefit is definitely the reliability.
Now certainly, Kaeser is huge on energy efficiency, getting more air for less energy and everything that we provide. Our Sigma Air Manager, our SAM product is industry leading in terms of the control algorithms that it uses, so we are able to squeeze the most air for power out of these systems, and customers certainly see that benefit too, particularly when it's one of the cases Wayne mentioned that's very common with Sigma Air Utilities where you have aging equipment and it's a significant capital investment due to maybe how it was installed and just how old it is in terms of trying to get new equipment in there and operational. A lot of times those are energy hogs with older controls, older technologies, and when they come in with new technologies, modern equipment, modern controls, savings can be dramatic. We've seen just hundreds of thousands of dollars in energy savings with Sigma Air Utility solutions. And again, there's no capital outlay to see those benefits.
The other performance benefit is, I think as we've all learned with some of this COVID and supply chain challenges that we face, production isn't always steady. You make projections, you plan, but economic challenges happen, world events happen, and you have to be able to upsize and downsize. With Sigma Air Utility, we have that flexibility to say, okay, let's add to this contract, let's modify this contract. Those are all possible, which I think are much more easily done in these scenarios than it is if you have hardened assets that you own and need to use whether you need them or not.
So those are really the three key benefits that I've seen from many plants: reliability, optimizing energy, and then flexibility.
PS: Wayne, we’ve come to the close of the podcast, so let me aim the final question at you. What did I miss when getting these questions ready? Are there any other benefits or considerations to here that we haven't covered yet, that we really should mention before we close out?
WP: One of the things that, that people don't even think about, I was with one customer, we were sitting down going over what it really costs them to maintain their compressed air system. Part of that was their purchasing department. Every time they cut a purchase order, it cost money. Every time they receive parts or pieces that go into their warehouse, all of that handling costs them money.
We went over and looked at how much they spent every year, just in handling, purchase orders, and receiving equipment, you know, parts and pieces to fix the compressors that they had. It was a huge amount that normally doesn't get looked at when they're trying to figure out, okay, how much does our compressed air system cost us? Usually what they do when they do that is they just look okay, how much did we spend on parts and oil, things like that, how much did we spend on power? And they think that's it, and it's not that at all.
When you've got an air utility, basically, the user doesn't touch that equipment. They don't touch the parts, they don't touch any of that. That's all Kaeser’s responsibility. So you've got that to consider. You don't need to train your personnel on how to operate compressors and I will tell you, 98-99% of the plants that I've been in in 40 years don't have people on their staff that understand compressed air systems. How to generate the air, how to get the air from one spot to another spot, how to make sure it's treated right, how to maintain it properly. And when you get an air utility, you've got a service provider there who does understand that and that's their business to understand that.
It makes a big difference on how reliable the system is. As Matt says, we always include redundant equipment so that if there's a failure of a compressor or a dryer, it automatically switches over and the customer never sees it. We've had customers who told us that they couldn't believe how reliable our systems were, that we've never had a failure on it, and we're just kind of shaking our head and say, “oh yeah, we have, you just didn't know it because your supply didn't change.” We made sure that you had the supply that you needed, that you had contracted for.
The other thing is, I talked about how expensive it is to purchase and handle that, but you've got customers out there who stock parts and consumables, and that's an expense they don't think about. You don't have administration issues with how are we going to get our people out, you know, when are we going to schedule people to do this particular service or that particular service? It's like switching on a light: you open a valve, you've got air, and you don't need to worry about it.
The biggest benefit that I've seen in the 15 or so years that we've been doing it is people just have that peace of mind that they've got a constant air supply and they don't have to worry about it. They don't have to maintain it. They don't have to do anything except use the air.
PS: There's enough trouble on the production side, why would people needlessly to worry about the utility side, right?
WP: That's right. There is one thing when we're talking about air utility, we're talking about several hundred horsepower. The first question you asked me was other options. People who have a small shop or something, but don't want to spend the capital, there are other options for them as we discussed in the very first question. So don't think that this is just about big, huge systems.