When it comes to climate change, the auto industry will be better served by working with the energy industry on cleaner energy plants than dealing with more and more severe weather incidents in the future. That's the finding of a new study by Business Forward, which says that supporting the EPA's new rules – which is supposed to make energy plants 30 percent cleaner – is the right move. The reason lies in just-in-time production methods, which can be tremendously impacted by severe weather incidents.
The numbers look something like this. The EPA predicts electricity prices will rise 6.2 percent by 2020 with the EPA's clean power plan. Since the average car has $105 worth of electricity in it, that 6.2 percent rise will mean an extra $7 per car. Business Forward Foundation president Jim Doyle told reporters on a conference call last week that that means an hour of downtime is more expensive to these plants than a year of increased costs due to lowering carbon emissions. Business Forward's numbers show that an hour of downtime can cost over $1.25 million. It's tough to compare that to $7 more per car, but there you have it.
It's not just changes in America that can affect the auto industry. Business Forward says that:
You can download a copy of the report, called "Severe Weather and Manufacturing in American: Comparing the Cost of Droughts, Storms and Extreme Temperatures with the Cost of New EPA Standards," here. If you don't want to read it all, we've got a press release and an infographic breakdown of the numbers below.
American manufacturers rely on supply chains that are increasingly large, specialized, global and fast. The very characteristics that make them efficient also make them interdependent, and this interdependence is what makes them susceptible to severe weather. Climate change is disrupting our ports, highways, bridges, and rails – and, because producers come from all over the world, severe weather in Asia affects us, too.
Expected higher electricity prices will cost auto industry $7 per car, while unexpected shutdowns cost plants $1.25 million per hour
WASHINGTON, DC - A report released today by the Business Forward Foundation compares the cost auto manufacturers already face from severe weather with the increases in electricity prices they could realize from new power plant standards released this week by the Environmental Protection Agency. The study finds that the new carbon limits will cost only $7 per car, while a plant loses over $1,250,000 for every hour of unplanned downtime. This past winter, some auto plants lost days of production to severe weather.
Click here to read "Severe Weather and Manufacturing in American: Comparing the Cost of Droughts, Storms and Extreme Temperatures with the Cost of New EPA Standards." The study is co-authored by Business Forward Foundation President Jim Doyle and noted auto industry economists Kim Hill, Debra Menk, and Richard Wallace.
"Severe weather is already disrupting supply chains, reducing crop yields, damaging infrastructure, and hurting consumer demand," Doyle said. "Factories may use a lot of power, but they use a lot of everything. Since electricity makes up less than 1 percent of their costs, an increase in electricity rates pales in comparison to the costs they face from extreme weather."
This week, the EPA published draft greenhouse gas standards that will require states to reduce the amount of carbon their power plants emit. Critics of the standards argue that manufacturers will respond by moving jobs overseas. Proponents of the standards call them a necessary response to the rising threat of severe weather. This study considers each point, using America's largest manufacturing industry – automotive manufacturing – as a case study.
Because of their size, factories use a great deal power, but electricity represents less than 1 percent of the average manufacturer's cost. If electricity rates increase by 6.2 percent as EPA projects, a product that costs a manufacturer $100 to produce today will cost an additional six cents in 2020, the expected peak of electricity prices. Most auto manufacturers are already investing heavily in energy efficiency (with goals of double digit reductions in their energy intensity). These investments could offset the costs further.
Assembly plants spend only about $105 on electricity per car. If that assembly plant produces 300,000 vehicles each year, and rates rise as EPA predicts, a year's worth of electricity rate increases in 2020 will cost less than losing a single hour of production today. This increase breaks down to about $7 per car, or an additional 6.2 percent above the $105 spent on electricity to produce each car.
"The data is clear – downtime caused by severe weather has an exponentially greater impact on an auto plant's bottom line than this relatively small increase in electricity costs," Menk said. "The projected electricity rates will increase the cost of a car by only $7, and the average vehicle costs $30,000."
An auto assembly plant employs between 2,000 and 3,000 workers, purchases as much as $3 billion in parts each year, and produces about 300,000 vehicles. Supply trucks arrive at the plant every three to five minutes, nearly 24 hours a day. Today's highly efficient, "just-in-time" assembly plants carry only two to four hours' worth of parts inventory, which means they can shut down in as little as two hours if supply trucks are delayed. Because these plants are so big, disruptions to the line cost $1.25 million or more each hour.
"American assembly plants rely on hundreds of suppliers, spread across the globe, which means extreme heat in Texas, storms near Gulf Coast ports, floods in Asia, tornadoes in Kentucky, and falling water levels in the Great Lakes can each slow or stop production at a plant here," said Hill. "Severe weather at any link in the chain can halt production at the main plant."
Noting that American manufacturing plants (across industries) have historically experienced about 20 hours of unexpected downtime per year, the study cites examples of recent severe weather disruption to ports, rail, shipping and bridges and highways that cost auto plants days or weeks of production.