“When we make cars, we argue about pennies sometimes,” he said. “Make it better, but don’t spend the money.”

Butt is the regional environmental director at Toyota Motor Corp.’s assembly plant here, where time and precision are measured down to the final bolt. More than 7,000 full-time workers a day pass through Toyota’s largest assembly plant outside of Japan, a sprawling 7.5-million-square-foot space in the rolling hills of central Kentucky horse country.

Coils of rolled steel are stamped into a Camry or an Avalon. Robots and people work side by side to weld parts into a body, before the car is loaded onto a conveyor belt and off to the paint room. This fall, the plant will start producing Toyota’s luxury brand Lexus.

Put it all together, and you have a major consumer of electricity in a state where there’s really only one source: coal-fired generation. When the plant opened in the 1980s, Kentucky was a cheap place to let a machine run all weekend. Workers did just that.

“People were afraid to turn something off,” Butt said. “It’s the human element, the culture. We’re still working through it, making sure we’re turning something off.”

The discussion about electricity use continues to change at the Georgetown assembly plant. Managers say their attitude falls under the Japanese principle called kaizen, or “continuous improvement.” Adopting more efficient ways of using power and considering their effect on Toyota’s competitiveness in North America and the resulting greenhouse gas emissions put kaizen to the test.

But today there’s an additional challenge, and that’s the rising cost of purchasing power from electric utilities in Kentucky and across the Midwest. Regulated electricity rates are outside of the control of Toyota employees, even as they preach careful energy management. Also outside of their control are proposed federal regulations aiming to cut power-sector carbon dioxide emissions tied to climate change.

PPL Corp.’s Kentucky Utilities, which serves Georgetown and southern Scott County around it, requested a 9.6 percent rate increase from the Public Service Commission in November. The $153 million revenue boost would help the utility handle rising capital costs.

Utility CEO Victor Staffieri cited $5.4 billion in capital costs through 2019, including firing up a natural gas generation unit and increasing capacity at a hydroelectric plant along the Ohio River that’s operated by Louisville Gas & Electric. LG&E and KU are jointly run under the PPL umbrella of investor-owned utilities.

“We all realize that the cost of energy is going to increase dramatically over time,” Butt said in an interview in his quiet office a few hallways down from the busy assembly floor. “That’s a risk for this company.”

A nod for manufacturing

During visits to Washington, D.C., Kentucky officials are eager to point out that the state’s manufacturers could be badly hurt by U.S. EPA’s proposed Clean Power Plan. The state’s industrial sector benefits from some of the lowest overall energy costs east of the Mississippi River, they’ve told EPA Administrator Gina McCarthy.

Those costs are going up as utilities replace old coal plants with cleaner power sources.

Kentucky has 220,000 people working in manufacturing. That spans energy-intensive aluminum smelters and the tens of thousands going to work at auto part factories or assembly plants.

The industrial sector is smaller than in Rust Belt states to the north and east, but the job numbers dwarf those employed in Kentucky coal mining. Even so, saving coal jobs has been the sole focus of a well-financed effort by Sen. Majority Leader Mitch McConnell (R-Ky.) and coal industry allies looking to kill President Obama’s climate plan.

“So you tell me what this is going to be about. It really is about manufacturing,” Kentucky Energy and Environment Secretary Leonard Peters told EnergyWire last month, when asked about the focus of a highly charged statewide debate here about the costs of regulating carbon.

One of the ways to offset rising electricity costs is to use less of the commodity: Turn the lights out. Power down industrial widgets. Install rooftop solar panels that eliminate fuel costs. But Kentucky joins other states in wrestling with how exactly to incentivize electric utilities and industrial customers to work together on programs to control consumption better before costs start rising quickly.

For Toyota and other corners of the state’s expanding auto industry, energy consumption can be tweaked by employing new and better technology for building cars. At a smelter or a cement factory, there’s little wiggle room when so much of its raw material is the energy itself.

“In Kentucky, while there’s been some progress and some increased investment, as a whole it’s not one of the leaders in energy efficiency,” said Jill Tauber, a managing attorney for Earthjustice.

Kentucky tends to eat up more energy per unit of economic activity than other states. The industrial sector here has one of the highest energy intensity rates in the nation, according to the U.S. Energy Department, and it consumes about 45 percent of the state’s total energy demand.

The Public Service Commission in Kentucky doesn’t have the authority to mandate that utilities encourage residential, commercial and industrial customers to use less power. But the commission continues to bring it up in rate cases, and it’s pressing the large investor-owned utilities and rural co-ops to study ways to incentivize industrial users to save energy.

Regulators here are pitching efficiency as a tool for navigating — or surviving — rapid changes in the power sector.

“The commission continues to believe that conservation, energy efficiency and demand-side management, generally, will become increasingly important as more constraints are likely to be placed upon utilities whose main source of supply is coal-based generation,” the commission said in a Jan. 16 order that grants a 2.4 percent rate increase to Cumberland Valley Electric.

The commission is pushing utilities to take more aggressive measures through what’s called demand-side management, or DSM. That refers to the variety of programs and financial incentives that utilities can use to control how much energy big customers use during peak hours.

‘Lowest-carbon kilowatt’

For utilities, the economic benefit of selling less of their product to big customers isn’t obvious unless they can recover the cost of doing so through regulated rates. But efficiency is on the shortlist of tools states can use to comply with federal targets for cutting carbon emissions.

“The lowest-carbon kilowatt is still the one you don’t use,” said Gale Boyd, an economist and director of the Triangle Research Data Center at Duke University.

“That’s going to require a partnership with management, and for companies to let their energy suppliers into their plants,” he said. “It’s what successful utilities are going to do with respect to their industrial load.”

In November, the commission approved an efficiency plan with plenty of cost-recovery for LG&E and Kentucky Utilities through 2018. That includes energy profiles for high-consuming residential customers; the use of “switches” to cycle down air conditioning, heat pumps and equipment during peak hours; low-income weatherization programs; and $150 to $1,000 incentives for multi-family houses to change their consumption habits.

LG&E and KU proposed a voluntary advanced metering program for a limited number of customers.

But in rolling out its plan, the utilities ran into trouble when they presented a study on what more can be done to boost energy efficiency. The study didn’t include the industrial sector.

Sierra Club jumped in and asked the commission to direct the companies to study what industrial customers can do.

The PSC described the utilities’ concern this way: If large energy consumers such as Toyota opted out of an industrial demand-side management and efficiency program, costs for everyone else would go up. It described a domino effect that would lead other industrial customers to opt out.

The utilities also pointed to a lack of interest in energy efficiency programs among big industrial customers, according to a 2012 survey they conducted.

“The companies presented no evidence, except for the 2012 survey, to support its contention that there is no wide-scale interest in industrial DSM/EE programs,” the PSC said in its November order.

The PSC ordered the utilities to commission a study of potential industrial energy efficiency.

Cumberland rates

States that burn a lot of cheap coal have held down regulated electricity rates for decades. Yet in a number of those states, including Kentucky, the monthly residential electric bills that land in customer mailboxes are higher than in states with more aggressive efficiency programs.

In Kentucky, West Virginia, Indiana, Alabama, Mississippi, South Carolina and Louisiana, average monthly residential electric bills are between $105 and $135 a month, according to 2012 data compiled by Fitch Ratings.

In California and Colorado, where rates are higher but state policies incentivize utilities to encourage energy savings, the average monthly bill was between $80 and $87.

EPA carbon regulations are expected to be finalized this summer. The transition to a power system that is ultimately cheaper and more manageable for consumers means big capital costs for utilities on the front end of what’s expected to be a multi-decade process.

In the Cumberland Valley rate case in January, the PSC acknowledged that there’s a need for utilities operating in poor regional economies to “guard against” the revenue erosion that happens when customers and sales decline. Cumberland Valley distributes power to customers across the southeastern part of Kentucky, where the population and local economies are declining. That puts both the utility and state regulators in a tough spot.

Electricity demand has remained relatively flat in recent years. And burning loads of coal to produce and sell as much electricity as possible isn’t the fail-safe business model it used to be. Natural gas is priced competitively with coal, and the cost of supplementing baseload generation with zero-carbon sources such as wind and solar is coming down fast.

In Midwestern states on Kentucky’s doorstep, electric transmission infrastructure is an emerging cost. In states less coal-dependent than Kentucky, interstate lines meant to build out the regional grid to tap wind power from the Great Plains and to integrate utility-scale solar power are being factored into discussions about cost control.

Back in Georgetown, Toyota has decided to take some of this into its own hands.

This spring, the plant expects to start converting methane from a local landfill into 1 megawatt of electricity, and increasing power production from there. Starting out, it’s enough to power the production of about 10,000 cars.

In the meantime, Butt, the environmental manager at Toyota, says the system of capturing methane cuts about 90 percent of the landfill’s greenhouse gas emissions and helps the region meet ambient air quality standards.

“We’ll always be on a major grid of some sort,” Butt said.

Increasingly, however, there’s some choice in the matter. “How do we step out from where we’re currently at and evaluate the next pieces of technology we could use here?” Butt asked.

Toyota is looking for opportunities to couple investments in energy-cost savings and emissions reductions, he said. But he acknowledged that the goal is harder to meet for industrial plants in states like Kentucky, Ohio and Indiana, where utilities remain locked into burning coal for most of their power.

“If you look at our manufacturing plant in Toronto, Canada, which is all hydropower, we don’t look so good,” Butt said, by comparison to the Georgetown plant’s carbon footprint.

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