Hedge Against Energy Cost Increases With Ozone Laundry

Energy costs go up. That's bad news for energy consumers like on-premise laundries (OPL) because energy is an intrinsic part of the operation. Finding ways to reduce energy inputs - and to control costs rather than be controlled by them - is critical to the continued efficiency of laundry operations.

One proven way for OPL operators to take charge of their costs is to install ozone laundry systems. These systems can generate verifiable energy cost reductions without any compromise to laundry outcomes. And because the energy savings are permanent, ozone laundering is a hedge against uncontrollable future energy price hikes.

To rephrase this, the energy savings of an ozone laundry system confer two major benefits to on-premise laundry operators:

Short-term savings through reductions in energy consumption pay for the installation costs of the ozone system in a surprisingly short time, often under 2 years (see the case study of the Minneapolis Hilton, below), and linen outcomes remain of the highest quality.
Long-term use of ozone in the laundry effectively restores some control over energy cost increases to the OPL operator. Ozone is the gift that keeps on giving.

Since these points depend on energy prices, it's important to get some factual background. The next couple sections outline the trends of natural gas prices in the United States.

On-Premise Laundries Experience Rising Gas Prices

The very recent trend has been for rising natural gas spot prices in nearly all markets in the lower 48. As always, there is regional variation and temporal variation around the trends, but most laundry operators who are on variable price energy contracts have experienced uncontrolled cost increases during the early summer of 2010. In mid-June 2010, gas prices were about $.60 higher per MMBtu than the previous June 2009, with a price of $4.861 on June 25, 2010 (according to NYMEX data).

Would a fixed-price contract or direct futures hedge fix the problem? Probably not. Investing in futures contracts involves complex risks that should not be part of the financial picture of most OPLs. The more common tactic, negotiating a fixed-price contract, might help in the medium term, but the real issue is that energy prices have been in a generally increasing trend since the 1970's, so fixing a price only postpones the increases by a short time.

Natural Gas Prices Have Risen Long-Term

It's a commonplace to hear that energy prices are high and climbing, but anyone paying attention knows that these prices are market-driven and that they go down as well as up. Still, it is the balance of supply and demand over the long haul that is the point for on-premise laundry. What is the historical trend of natural gas prices?

The overall trend for U.S. natural gas prices since 1922 has been up, as determined by the U.S. Energy Information Administration. The overall trend has turned up sharply since the first oil price shock in the early 1970's, with a long stable (but higher priced) plateau in the late 1980's and 1990's.

But since about 2000, prices have been both rapidly increasing and volatile. The short-term energy consumer has been whipsawed by large movements both up and down, the latest being the big run up in prices in the early parts of the recent recession followed by a collapse in prices in 2009. As shown in the next section, the price trends have reverted to a steady upward climb, but it's good to keep this volatility in mind.

Where to next: Natural Gas Future Price Projections

As government reports tend to do, the projected prices of natural gas are smoothed out by assumptions. The volatility observed in the past decade gives way to a quieter though generally increasing price trend, as shown in the following data. This data shows projected natural gas prices in constant 2008 dollars according to the U.S. Energy Information Administration's Annual Energy Outlook.

These entries show the year, Henry Hub Spot Price and final delivered price in 2008 dollars:

2008 $8.86 $12.29

2009 $3.49 $9.45

2010 $4.50 $9.19

2011 $5.68 $10.44

2012 $6.17 $10.96

2013 $6.13 $10.99

2014 $6.09 $11.11

2015 $6.27 $11.46

2020 $6.64 $13.02

The Henry Hub Spot Price is per million Btu U.S. The delivered commercial price is per 1000 cubic feet. Source is the US Energy Information Administration.

In other words, the Spot Price is projected to increase about 39% between 2010 and 2015, and the commercial price per 1000 cubic feet about 25%. These numbers reflect current assumptions (summer 2010) that predict only slowly increasing economic demand, which means energy supply can more easily keep up, thereby moderating prices. However, although these are U.S. price projections, it is important to remember that these prices are directly affected by worldwide demand, not just U.S. demand. Consistent with the slow growth expectation, the commercial delivered price is projected to increase somewhat more slowly than the overall market price.

The Impact of Volatility on Natural Gas Prices

The problem with this rosy scenario is the volatility natural gas markets have experienced the last 10 years. Even though general economic conditions suggest a moderate increase in prices (if a 25% increase in 5 years is "moderate"), obvious conditions on the world stage clearly show a possibility of much sharper discontinuities.

History, as anyone who buys stocks or funds knows, is often used as a predictor of the future, but it's sometimes wrong because of unexpected events, often referred to as "shocks." When these "shock" events happen, the pricing system undergoes a reset because something about the underlying expectations has changed. When underlying expectations are dislodged, people perceive higher risk (they're probably right) and prices go up.

Think back to the natural gas price volatility shown in the years from 2000 forward. Large increases followed by large decreases, but with a strongly upward trend. The shocks that cause the volatility create uncertainty, especially when they touch so directly on energy production as the Iraq War, Katrina and now the Deepwater Horizon blowout have done.

Will the energy market experience another shock? No one can know for sure. But the risks of energy price increases are very real, from the moderate increases projected by the USEA to the possibly much bigger increases due to the next shock.

It will pay the smart ozone laundry operator to hedge against them.

Reduced Energy Use Pays for Ozone Laundry Startup Costs

Here is the simple syllogism of ozone laundry:

Energy conservation is the cheapest way to reduce energy bills.

Ozone Laundry conserves energy.

Therefore, Ozone Laundry is a cheap way to reduce energy bills.

Yes, energy conservation comes with an investment price tag. Ozone laundry installations cost money. But a properly designed ozone laundry system using high quality components and correct wash formulas can deliver energy savings large enough to pay for the system in a very short time, with the long-term energy savings accruing to the bottom line.

Take a look at the verified experience of the Hilton Hotel in Minneapolis, Minnesota. The National Energy Services Company (NESC) installed an ozone laundry system in the Hilton's on-premise laundry that demonstrated the energy saving potential of the approach in a controlled, verified implementation reported by the non-profit Energy Solutions Center of Washington DC. Download the study summary for details (the top article in the list at this destination).

In the Minneapolis project, NESC measured the key variables, including hot water use, energy consumption, and some chemical consumption, as well as the quality of the laundered products. Here's some key points about that 4-month experiment:

Hot water use per load of laundry dropped from 198 gallons to 89 gallons, a 55% savings.
Re-wash requirements were halved, with overall good quality linen outcomes.
The hotel's annual carbon footprint was reduced by 209,437 pounds.
The laundry system penciled out to paying for itself in 13.5 months.
The ROI was 89%.

These verifiable energy savings helped the Minneapolis Hilton qualify for the Xcel Energy rebate program.

Lock in Lower Rates by Using Less Gas

The bottom line is that on-premise laundry operators can control energy costs, now and in the future, by installing ozone laundry systems. These systems help OPL operators lock in lower energy costs simply by dramatically reducing the amount of energy needed to produce top quality linen outcomes in the wash.

For more information about how ozone laundry can help control costs in the on-premise laundry, or to get a customized assessment of an Ozone Laundry Program, contact John Grillo, VP of Ozone Laundry for DEL Ozone, at 609-645-3131 or jgrillo[at]delozone.com, or just visit DEL ozone laundry online.

Dennis Lavelle has served as president of DEL Ozone for nearly 15 years. During this time, Dennis has helped shape ozone technology as a preferred sanitation solution for a wide variety of commercial, industrial, and residential uses. Currently, DEL's spa ozone generators are installed in nearly 80% of all hot tubs making DEL the leading ozone brand in the hot tub market. The company also manufactures ozone sanitation products for on-premise laundry, commercial aquatics, residential pools, and other household products. To learn more about ozone sanitation technology, visit http://www.delozone.com.