Why worry about energy costs in greenhouses?

Dr. Robin BrumfieldDr. Robin BrumfieldSpecialist in Farm ManagementSpecialist in Farm ManagementBrumfield@aesop.rutgers.edu

http://aesop.rutgers.edu/~farmmgmt

2007 National Extension Risk 2007 National Extension Risk Management Education ConferenceManagement Education Conference

Phoenix, Arizona.Phoenix, Arizona.

April 17-18, 2007.April 17-18, 2007.

Why Worry About Energy Why Worry About Energy Costs?Costs?

Agriculture is under Intense Agriculture is under Intense CompetitionCompetition

Energy is 7-9% of Sales in Energy is 7-9% of Sales in GreenhousesGreenhouses

How Does this Break How Does this Break Down?Down?

Greenhouse ExampleGreenhouse ExampleEnergyEnergy % of Sales% of Sales

Heating FuelHeating Fuel 5.3%5.3%

Gas/DieselGas/Diesel 0.5%0.5%

ElectricityElectricity 1.9%1.9% TruckingTrucking 0.8%0.8% TotalTotal 8.5%8.5%

Cost per Square FootCost per Square Foot

Heating FuelHeating Fuel $ 0.870 $ 0.870 Gas/DieselGas/Diesel $ 0.070 $ 0.070 ElectricityElectricity $ 0.341 $ 0.341 TruckingTrucking $ 0.151 $ 0.151 Total EnergyTotal Energy $ 1.432 $ 1.432 Total/Sq. Ft.Total/Sq. Ft.Sq. Ft WkSq. Ft Wk

$ 29.51$ 29.51 $ 0.73 $ 0.73

Why Worry About Energy Why Worry About Energy Costs?Costs?

% of Sales% of SalesEnergyEnergy 8.5%8.5%LaborLabor 24.6%24.6%MaterialsMaterials 32.4%32.4%

Breakdown of SalesBreakdown of Sales

% of Sales

Operating Expenses 71.5%Overhead Expenses 17.5%Return to Operator's Labor/Mgt & Equity Capital 11.0%

100.0%

Average Greenhouses in Average Greenhouses in NJNJ

Greenhouse Size (Size Feet) 111,883Average Weeks per Year 38Acres Outdoors 4.2

Average Return to Average Return to Operators’ Labor/Mgmt & Operators’ Labor/Mgmt &

Equity CapitalEquity Capital

Per Sq. Ft. $4.82Per Full-time Operator $72,416(2500 hours)

Total Cost of EnergyTotal Cost of Energy

Sales $2,294,310 Return to Labor/Mgt & Equity Capital $ 216,606 Energy Costs Heating Fuel $ 136,036 Gas/Diesel $ 4,407 Electricity $ 33,424 Trucking $ 14,920 Energy Total $ 188,787

Energy Cost

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

1 2 3 4 5 6 7

11999-2005

$ per

milli

on B

TU

Electricity

Natural Gas

No.2 Heating Oil

Propane

Kerosene

Fuel Increase since Fuel Increase since 20032003

ElectricityElectricity 7.7%7.7%

Natural GasNatural Gas 33.8%33.8%

No. 2 Heating OilNo. 2 Heating Oil 44.1%44.1%

PropanePropane 27.9%27.9%

KeroseneKerosene 54.1%54.1%

GasolineGasoline 102.5%102.5%

Effect of Energy Effect of Energy Increase with no Other Increase with no Other ChangesChanges

2003 NowSales $ 2,294,310 $2,294,310 Return to Labor/Mgt & Equity Capital $ 216,606 $ 134,241% Profit 9.4% 5.9% Heating Fuel $ 136,036 $ 196,014 Gas/Diesel $ 4,407 $ 8,924 Electricity $ 33,424 $ 36,001 Trucking $ 14,920 $ 30,213 Energy Total $ 188,787 $ 271,152

% Energy Costs% Energy Costs 8.2% 11.8%

Effect of Energy Effect of Energy Increase & 5% Price Increase & 5% Price IncreaseIncrease

2003 Increases 5%Sales $2,294,310 $ 2,409,026 Return to Labor/Mgt & Equity Capital $ 216,606 $ 248,956

% Profit% Profit 9.4% 10.3%

Heating Fuel $ 136,036 $ 196,014 Gas/Diesel $ 4,407 $ 8,924 Electricity $ 33,424 $ 36,001 Trucking $ 14,920 $ 30,213 Energy Total $ 188,787 $ 271,152

% Energy Costs% Energy Costs 8.2% 11.3%

Effect of Energy Effect of Energy Increase & 4% Price Increase & 4% Price IncreaseIncrease

2003 Increases 4%Sales $ 2,294,310 $ 2,386,082 Return to Labor/Mgt & Equity Capital $ 216,606 $ 226,013 % Profit 9.4% 9.5% Heating Fuel $ 136,036 $ 196,014 Gas/Diesel $ 4,407 $ 8,924 Electricity $ 33,424 $ 36,001 Trucking $ 14,920 $ 30,213 Energy Total $ 188,787 $ 271,152 % Energy 8.2% 11.4%

Investment CriteriaInvestment Criteria

Larger benefits are preferred to smaller ones.Larger benefits are preferred to smaller ones. Early benefits are preferred to later ones.Early benefits are preferred to later ones. Safety is preferred to risk.Safety is preferred to risk.

Questions to AskQuestions to Ask Which alternative enables me to reach my objectives?Which alternative enables me to reach my objectives? Which alternative best matches my firms skills & Which alternative best matches my firms skills &

resources?resources? Which alternative best meets my preferences?Which alternative best meets my preferences? Which alternative minimizes the creation of new Which alternative minimizes the creation of new

problems?problems? How will each alternative affect my current activities?How will each alternative affect my current activities? How much time will be required to incorporate each How much time will be required to incorporate each

alternative?alternative?

Things to ConsiderThings to Consider

Include employeesInclude employees Evaluate trade-offsEvaluate trade-offs Chose solutions consistent with Chose solutions consistent with

firm’s mission and objectivesfirm’s mission and objectives

Decision MethodsDecision Methods

IntuitionIntuition Payback MethodPayback Method Partial BudgetingPartial Budgeting Net Present ValueNet Present Value Internal Rate of ReturnInternal Rate of Return

IntuitionIntuition

Management is part science and Management is part science and part artpart art

Intuition should not be discountedIntuition should not be discounted Best if used in conjunction with Best if used in conjunction with

quantitative methodsquantitative methods

Partial BudgetingPartial Budgeting

Reduced CostsReduced Costs Added RevenuesAdded Revenues

-_______________-_______________ Added CostsAdded Costs Reduced RevenuesReduced Revenues

Payback MethodPayback Method

Most common after intuitionMost common after intuition Determine how soon the investment Determine how soon the investment

will “pay for itself”will “pay for itself” SimpleSimple LimitationLimitation

– Does not take into account the size of the Does not take into account the size of the returnreturn

– Ignores benefits and costs after the Ignores benefits and costs after the payback periodpayback period

– Ignores the time value of moneyIgnores the time value of money

Net Present ValueNet Present Value

Expresses all costs and returns in Expresses all costs and returns in today’s dollarstoday’s dollars

Sums the present value of costs and Sums the present value of costs and returns minus the initial investmentreturns minus the initial investment

Considers the time value of moneyConsiders the time value of money Considers the size of the alternativesConsiders the size of the alternatives Only as accurate as the chosen Only as accurate as the chosen

discount ratediscount rate

Internal Rate of ReturnInternal Rate of Return

Rate at which the net present Rate at which the net present value of benefits equals the costvalue of benefits equals the cost

Chose the investment with the Chose the investment with the highest returnhighest return

Does not take into account the Does not take into account the size of the return in $size of the return in $

Conservation Checklist Conservation Checklist – Reduce Costs – Reduce Costs

Photo: Dr. A.J. Both

Reduce Fuel CostsReduce Fuel Costs Select the cheapest Select the cheapest

fuel supplierfuel supplier Switch to a different Switch to a different

fuel fuel Use a dual fuel systemUse a dual fuel system Buy in off seasonBuy in off season Consider buying on Consider buying on

the spot market – 20% the spot market – 20% savingssavings

Photo: Dr. A.J. Both

Reduce Air Leaks Reduce Air Leaks

Caulk and weather-strip Caulk and weather-strip doors, windows, etc.doors, windows, etc.

Lubricate louversLubricate louvers Seal all cracks in wallsSeal all cracks in walls Repair broken glazingRepair broken glazing Use highest R-value for Use highest R-value for

insulationinsulation

Look at Technology – Look at Technology – Horizontal Airflow FansHorizontal Airflow Fans

Uniform Uniform temperature temperature & humidity& humidity

Reduces Reduces cold pocketscold pockets

Improve Improve plant quality plant quality and and uniformityuniformity

Photo: Dr. A.J. Both

Double layerDouble layer

Inner layer Inner layer saves 15% in saves 15% in fuelfuel

Poly over Poly over older glass older glass reduces heat reduces heat loss 25-50%loss 25-50%

Photo: Lawrence S. Martin

Energy (and shade) CurtainEnergy (and shade) Curtain

20-50% heat savings% heat savings

Photo: Dr. A.J. Both

Perimeter InsulationPerimeter Insulation

• • At least 1 foot deepAt least 1 foot deep(preferably 2 feet)(preferably 2 feet)

• • At least 1 inch thickAt least 1 inch thick(preferably 2 inches)(preferably 2 inches)

• • Avoid gapsAvoid gaps• • Try to work neatly Try to work neatly

around post footingsaround post footings

Photo: Dr. A.J. Both

Space UtilizationSpace Utilization

Peninsular or Peninsular or movable benches movable benches use 80-90% of spaceuse 80-90% of space

Install multi-level Install multi-level racks for low light racks for low light level cropslevel crops

Put hanging baskets Put hanging baskets over benchesover benches

Roll out benchesRoll out benches

Photo: Lawrence S. Martin

Efficient Heating Efficient Heating SystemSystem Under bench heat allows temp to Under bench heat allows temp to

be set 5-10 degrees lowerbe set 5-10 degrees lower Check accuracy of thermostatsCheck accuracy of thermostats Perform timely maintenancePerform timely maintenance Periodically check operation of Periodically check operation of

mixing valvesmixing valves Periodically check system Periodically check system

performanceperformance

Alternative Heating Fuel Alternative Heating Fuel SourcesSources

Solar (hot water heating)Solar (hot water heating) Other solid biomass (corn)Other solid biomass (corn) Bio-dieselBio-diesel Waste oil (fast food industry)Waste oil (fast food industry) Waste gas (landfill)Waste gas (landfill) Geothermal (hot water/steam)Geothermal (hot water/steam)

Photo: Dr. A.J. Both

Wood (waste wood, fire wood)Wood (waste wood, fire wood)

Waste Hot WaterWaste Hot Water(power plants, (power plants, industry)industry)Waste Gas (Co-generation)Waste Gas (Co-generation)

Photos: Dr. A.J. Both

Efficient Cooling Efficient Cooling SystemSystem

Build open-roof Build open-roof greenhousegreenhouse

Install roll up sidesInstall roll up sides ShadeShade Install evaporative Install evaporative

coolingcooling Keep doors closed Keep doors closed

when fans are onwhen fans are on

Photo: Lawrence S. Martin

Conserve ElectricityConserve Electricity

Inspect wiringInspect wiring Replace inefficient motorsReplace inefficient motors Replace incandescent bulbs Replace incandescent bulbs

with low wattage with low wattage fluorescent to save 2/3rds fluorescent to save 2/3rds on electricityon electricity

Lower night tempsLower night temps

Reduce fuel 3% Reduce fuel 3% per degreeper degree

Effect of reducing nighttime temperatures on bedding

plants Crop base temperature Cool air temp Crop delayNormal air temperature of 68° F36° F (cool-season crops)

64° F 11% 61° F 13%

41° F 64° F 13% 61° F 15%

45° F ( warm-season crops)

64° F 15% 61° F 18%

Normal air temperature of 63° F36° F (cool-season crops)

59° F 13% 55° F 15%

41° F 59° F 17% 55° F 20%

45° F (warm-season crops) 59° F 20%

Effect of reducing nighttime temperatures on bedding plants Delays crops 11% Delays crops 11%

to 20%to 20%

Partial Budgeting :Partial Budgeting :Effect of 4 degree Effect of 4 degree reduction in temperaturereduction in temperature Reduced Costs - Reduced Costs - reduce fuel 12% reduce fuel 12%

(3% per degree) (3% per degree) Added RevenuesAdded Revenues

-_______________-_______________ Added CostsAdded Costs Reduced Revenues - delay crop 11% Reduced Revenues - delay crop 11%

(for 4 degrees) (for 4 degrees)

Partial Budgeting :Partial Budgeting :Effect of 4 degree Effect of 4 degree reduction in temperaturereduction in temperature Reduced Costs Reduced Costs $20,700$20,700 Added RevenuesAdded Revenues

-_______________-_______________ Added CostsAdded Costs Reduced Revenues Reduced Revenues - - $252,374$252,374 Net LossNet Loss $231,675$231,675

Effect of 4 degree Effect of 4 degree reduction in reduction in temperaturetemperature

2003Decreases 4 degrees

Sales $ 2,294,310 $ 2,041,936 $ 2,041,936 Return to Labor/Mgt & Equity Capital $ 216,606 $ (94,612)$ (94,612)% Profit 9.4% -4.6%-4.6% Heating Fuel $ 136,036 $ 172,493 Gas/Diesel $ 4,407 $ 8,924 Electricity $ 33,424 $ 36,001 Trucking $ 14,920 $ 30,213 Energy Total $ 188,787 $ 247,631 % Energy 8.2% 12.1%

TrucksTrucks

Regular tune-ups save 10% on Regular tune-ups save 10% on fuelfuel

Avoid lengthy idling and save 15-Avoid lengthy idling and save 15-20% on fuel20% on fuel

Run at the proper gearRun at the proper gear Consider hiring trucks or having Consider hiring trucks or having

customers pick-upcustomers pick-up

Watering SystemsWatering Systems

Heat water to 120 degreesHeat water to 120 degrees

Locate hot water tanks near Locate hot water tanks near most frequent usemost frequent use

Eliminate leaksEliminate leaks

ManagementManagement

Lower night temps to reduce fuel Lower night temps to reduce fuel 3% per degree3% per degree

Delay starting greenhouseDelay starting greenhouse Keep growing areas fullKeep growing areas full CompartmentalizeCompartmentalize Grow cool season cropsGrow cool season crops

Remember to AskRemember to Ask Which has a positive return?Which has a positive return? Which alternative enables me to reach my overall Which alternative enables me to reach my overall

objectives?objectives? Which alternative best matches my firms skills & resources?Which alternative best matches my firms skills & resources? Which alternative best meets my preferences?Which alternative best meets my preferences? Which alternative minimizes the creation of new problems?Which alternative minimizes the creation of new problems? How will each alternative affect my current activities?How will each alternative affect my current activities? How much time will be required to incorporate each How much time will be required to incorporate each

alternative?alternative?

Profit = Price - CostProfit = Price - Cost

To Increase Profits:To Increase Profits:

– Cut CostsCut Costs

– Increase PricesIncrease Prices

Percent of managers aware of Percent of managers aware of factors affecting pricing decisionsfactors affecting pricing decisions

84%

81%

75%

71%

34%

21%

Variable costs

Fixed costs

Price of competing products

Value of product to consumer

Consumer response to pricechanges

Consumer willingness to pay

Source: Note on Behavioral Pricing, Harvard Business School, 9-599-114.

Cost of goods sold (COGS)

Product price (P)

Perceived value (PV)

Objective value (OV)

{Firm’s incentive to sell (P-COGS)

{Consumer’s incentive to purchase (PV-P)

$0

Marketing efforts Marketing efforts Prices of substitutesPrices of substitutes

Value Pricing and the Economic Perspective

Source: Note on Behavioral Pricing, Harvard Business School, 9-599-114.

Consumer’s Consumer’s Willingness to Willingness to

PayPay

Economic Economic Utility of the Utility of the TransactionTransaction

Fairness of Fairness of the the

TransactionTransaction= +

Perceived value – Actual Price

Combining the Economic and Behavioral Drivers of

Willingness to Pay

Source: Note on Behavioral Pricing, Harvard Business School, 9-599-114.

Additional ReferencesAdditional References Energy Conservation for Commercial GreenhousesEnergy Conservation for Commercial Greenhouses, NRAES , NRAES

33 Greenhouse EngineeringGreenhouse Engineering, NRAES 33, NRAES 33

Natural Resource, Agriculture, and Engineering Service (NRAES)Natural Resource, Agriculture, and Engineering Service (NRAES)Ithaca, NY (607) 255-7654Ithaca, NY (607) 255-7654http://www.nraes.orghttp://www.nraes.org

Energy Conservation for Greenhouse GrowersEnergy Conservation for Greenhouse Growershttp://msucares.com/pubs/infosheets/is1618.html

Greenhouse Energy Conservation ChecklistGreenhouse Energy Conservation Checklisthttp://www.hort.uconn.edu/ipm/greenhs/bartok/htms/Greenhousehttp://www.hort.uconn.edu/ipm/greenhs/bartok/htms/Greenhouse%20Energy%20Conservation%20Checklist.htm%20Energy%20Conservation%20Checklist.htm

Dealing with the High Cost of Energy for Greenhouse Dealing with the High Cost of Energy for Greenhouse OperationsOperations http://www.ext.vt.edu/pubs/greenhouse/430-101/430-101.htmlhttp://www.ext.vt.edu/pubs/greenhouse/430-101/430-101.html

Questions?Questions?

http//:aesop.rutgers.edu/http//:aesop.rutgers.edu/~farmmgmt~farmmgmt

Dr. Robin G. BrumfieldDr. Robin G. BrumfieldProfessor and Extension SpecialistProfessor and Extension SpecialistRutgers UniversityRutgers UniversityBrumfield@aesop.rutgers.edu732-932-9171 ext. 253732-932-9171 ext. 253