A multi-tiered plan for industry success
By Keith Reid
That the oil heat industry has faced any number of challenges in recent years is certainly no surprise to anybody reading Fuel Oil News. However, the industry has managed to hold its own in the face of these challenges and the National Oilheat Research Alliance has put together a strategic plan that it hopes will not only stabilize the fuel oil industry, but create new opportunities.
A NORA meeting in December 2006 examined broad global energy industry trends, develop an understanding of industry strengths/weaknesses within the rapidly changing energy world and to develop a plan to expand the industry in the 21st century. The questions posed during the strategic planning session and the industry answers collected form the basis for this strategic plan.
As the introduction to the strategic plan notes:
The Oilheat industry is entering a period of transformation that will allow it to grow. The industry faces a wealth of opportunities and challenges. Globalization, energy deregulation, environmental issues, and new technologies require that Oilheat companies reevaluate their existing business strategies. New business models will be required for future success and survival. In particular, the Oilheat industry must forge strategic alliances to position itself for market success by providing innovative products and services, offering unique technology solutions, delivering superior value to customers, setting new standards of efficiency and environmental protection, and maintaining competition and profitability.
NORA has identified five strategic goals that are critical to achieving its vision: technology growth, business model transformation, public policy and regulatory improvement, public awareness and strategic alliances.
A cornerstone of the strategic plan that transcends a variety of areas is a commitment to technology. A more mainstream aspect is the Core Technology Pathway, that focuses on fuel oil’s historical efficiency advantages. While natural gas and propane condensing furnaces and boilers have caught up and even surpassed fuel oil efficiency, NORA research and development projects have responded by concentrating on condensing appliances, multi-stage burner technology and expanding into smaller water heaters.
The Fuels Pathway covers a transition into the next generation of cleaner burning fuels such as low sulfur distillate, biodiesel and other liquid blends as they become available. The industry perspective will focus on selling consumers, who tend to appreciate environmental issues and the industry’s key markets, and the benefits of going green with liquid fuel. Important milestones in this process included:
Biodiesel produced has grown from 500,000 gallons in 1999 to over 75,000,000 gallons in 2005. There are currently over 86 biodiesel plants in production with a capacity of 580 million gallons, ramping up to 151 plants with a capacity of 1.980 billion gallons. Sales were 400 million gallons in 2007 and are expected to reach 1.0 billion in 2010.
- Develop biofuel transition to B20 (20 percent blend)
- Develop B20, CTL20 (Coal-to- Liquid), GTL20 (Gas-to- Liquid) transitions at the right time
- Identify and create conversion kits for all equipment to use X20 (B20, CTL20, GTL20)
While this growth has certainly been exceptional, there are limits to how much agricultural production capacity exists and much of that is committed to transportation use. Will fuel oil dealers be able to get its share?
“With the mandate in the energy bill for clean fuels, a lot of renewable fuel is going to go to transportation and this Congress is looking at upping those mandates also generally for motor fuel use,” said Huber. “So, we are going to be in a competitive environment. How will the environmental industry respond to that? Will they expand production? Do we have enough cropland to do that? Agricultural productivity is still on a strong upward curve, and as biofuels become important as a product they will be putting more effort into increasing their yields. We also have developing technologies, such as coal-to-liquid, which is potentially unlimited as a feedstock.”
Synthetic fuel oil can be made from biomass, natural gas, solid waste and coal. While the feedstock may be relatively inexpensive and plentiful, these approaches typically need to surpass a few technological hurdles and then receive sufficient funding through investment (both on Wall Street and in Washington, to build the production infrastructure. In the case of CTL (coal-to-liquid) fuels, if crude prices are expected to remain above $45 per barrel for an extended number of years, which at this point is not that unreasonable, there should be a significant incentive for investments in both technology and the production infrastructure.
John Huber, president of the National Oilheat Research Alliance
Another consideration with existing biofuels, is that much of the market viability of has hinged on subsidy support which is particularly important when the price of crude oil drops notably below its current $60 per barrel levels. Can the subsidy support be expected to continue?
“I think politically (biofuels) work very well congressionally, with strong support from the Midwest, New England and California — areas philosophically and economically receptive to green fuels,” said Huber. “So I think you’re going to continue to see strong support in both the House and Senate towards green fuels. We may see some limits placed on these in the future — some adjustments and controls — but overall the basis of these subsidies for these products will continue for an extended period.”
Beyond biofuels, NORA’s New Technology Pathway is focused on developing a variety of next-generation residential/commercial technologies for unified household heating, air-conditioning and perhaps even energy generation. The goal is to make liquid fuel the fuel of choice with new construction and generate upgrade incentives among existing users. These initiatives include:
"One thing that would be particularly appealing to a homeowner would be self powering equipment, so that if the electricity went out during a storm or hurricane or tornado you could continue to make heat and hot water," Huber said. "Another area we are looking into is heat pumps and air conditioning powered by an oil unit so that you can say, 'Look, I'll buy the oil and it's going to power my air conditioning in the summer as well as the heating and the winter.' And in another area you have hydronics, which is really the strength of the industry. That's where you get a very even, comfortable and efficient heat." Huber noted that retrofitting hydronics systems is a difficult proposition to sell, but that opportunity certainly exist with new construction.
- Oil-fired heat pumps
- Innovative fuel storage solutions with respect to: size, shape, materials, appearance and purpose
- Integrate oilheat and solar thermal and thermal storage
- Small wall-hung instantaneous water heaters
- Ancillary products: patio heaters, fireplaces, etc.
- Electronic handheld service tools
- Self powering appliances
- Computer controlled equipment integrated in whole-house control system
- Combined heat and power systems
- Standby electric generation
Business Model Transformation
In order for the industry to meet existing challenges and move beyond them, fuel oil marketers are going to have to make some changes. As NORA notes, household energy efficiency is projected to continue to increase which will mean a continued reduction of heating and hot water fuel use. The strategic plan calls for a focused on increasing the variety and quality of services for the existing customer base, while reducing operating and other costs. Specifics include:
"Small business, multi-generation, have all had to change over time," said Huber. "A lot of our company started out as ice haulers or coal haulers, switched to oil, added plumbing services and while change is always painful these companies have found a way to adapt and survive for generations. And I see them continuing to adapt generation after generation moving forward and not only survive but regained some market share in the process."
- The need to get the industry at large to recognize the need for change to remain viable in the future
- Dealers must offer more services
- Oil dealers should become energy dealers
- Dealers will need to accept lower fuel sales per home (gallons/home) and transform their business for growth and higher profitability
- Oil dealers have to become more service oriented because consumption will drop with increasing efficiency and home building envelope improvements
- Dealers need to embrace energy efficiency and become technology leaders
- Develop a successful business model based upon 500 gallons per year sales per home by making money on allied services - comfort, climate control, IAQ
- There is a need to focus on home comfort
- Equipment upgrades must be promoted
- Upper-end systems design and sales should be prioritized
- Dealers should be willing to lease systems to customers
Looking somewhat farther down the road there is an interesting possibility is for the oil heat industry to maximize on an entirely self-contained residential approach. “The grid is becoming increasingly stressed in America so anytime people can move off grid and be producing electricity at home or in a commercial facility in an efficient manner such as integrating with solar you get additional opportunities that will develop with technology as it is pushed along,” said Huber. “I think we will start to see advantages in the custom home market in these areas. You don’t need phone lines anymore, do you really need electrical lines and can you save on building a home that way?”
Public Policy and Regulation
The strategic plan called for the liquid fuels industry to increase collaboration and create standards and regulations that properly present the energy efficiency and economic impact of heating and cooling appliances. With improved energy efficiency rating standards, there are enhanced incentives to encourage customers to change out existing oil-fired boilers and furnaces with new oil-fired boilers and furnaces, and incentives to encourage the change out of existing in-ground storage tanks. This can also apply to incentives to switch to cleaner burning fuels.
NORA noted that the industry must strengthen its alliances with entities that benefit from our the strategic plan's vision of the future. These partners could include the Biodiesel Board, renewable fuels providers, solar thermal industry and the range of energy efficiency advocates.
Policy makers, media, manufacturers, dealers and consumers need to understand and support the Industry's strategic vision. Increasing public awareness of the unique properties, uses and benefits of heating oil is an important goal for the industry. The industry also has the opportunity to position itself as developing critical sustainable liquid fuels for the future, developing new and exciting appliances, energy solutions and business models. And the messages will likely resonate.
“Oil has definitely been having some problems recently — it is part of an international market in pricing structure and things have been very difficult over the past three or four years,” said Huber. “Natural gas, as a competitor, has been a domestic product but when they go into the international market things will become as difficult if not more difficult for them.
When we had Katrina and Rita several years ago it really wiped out much of the infrastructure for both oil and natural gas. The natural gas recovered because many of its major users in the area—fertilizer producers and chemical manufacturers—has really made up a whole lot more natural gas available to residential users but that’s not going to always be the case. As these plants continue to come back online were going to continue to see more stress on natural gas. On the East Coast, electrical rates are really to move up over the next few years. So I think as these things develop over the coming years, where we have better products and more advantages in the market and our prices settle down a little bit we’re going to have some opportunities.”