FM Issue: Getting A Handle On Energy Costs

What can facility managers do about rising prices? One solution is to purchase their energy with the most cost effective strategy available.
What can facility managers do about rising prices? One solution is to purchase their energy with the most cost effective strategy available.

FM Issue: Getting A Handle On Energy Costs

FM Issue: Getting A Handle On Energy Costs

By John M. Studebaker, Ph.D.

Published in the November 2005 issue of Today’s Facility Manager

If facility professionals are not taking an active role in managing energy costs, they may be overpaying for them. And at a time when these costs are soaring, this could be a very expensive mistake.

Typically, most people think of energy conservation when efforts to reduce energy outlays are considered. While lowering energy consumption is an important part of any program aimed at reducing utility costs, many overlook opportunities to reduce the amount they pay per unit of energy.

Energy costs and their impact on the bottom line depend almost entirely upon the actions taken by facility managers. Yet, many do not take advantage of energy savings opportunities that might be available to them, because they are unaware of what can be accomplished.

Once the concepts involved are understood and applied correctly, both facility operational cost savings and financial risk reductions result.

Analyzing Energy Costs

Before energy costs can be analyzed, certain base cost data must be available. Energy base or incremental cost data is developed from a document called a tariff schedule. The tariff schedule describes all of the costs and conditions data as they apply to a specific energy usage characteristic. 

Such usage characteristics for electricity include: hours per day, days per week, and periods of high/low usage. Natural gas usage characteristics include periods of high/low usage and whether service is firm or interruptible.

The information contained in the tariff schedule is developed by the serving utility of the particular commodity being analyzed. When the development and regulatory process is complete, a final applicable tariff schedule is released for use by the serving utility’s customer base. There may be more than one applicable tariff schedule for a given usage characteristic, and there may be variables for a specific usage characteristic within a given tariff schedule.

This may sound complex at the outset, but if the basics of tariff schedule development and implementation are not understood, very little can be accomplished in trying to determine if cost savings are available.

Before actual analysis can begin, an understanding of the information and costs on the energy bill must be reached. The appropriate tariff schedule is the only source for this data. There are at least four sources from which to obtain specific tariff schedule information: serving energy company representative; serving energy company Web site; regulatory agency responsible for oversight of a particular serving energy company; and regulatory agency Web site.

After obtaining the complete tariff schedules applicable to the energy being analyzed, facility managers can use this information to determine alternative tariff options available for a specific usage characteristic. Once the complete energy tariff schedule and all the related variables are available, the analysis process can begin.

Energy Bill Content 

Depending upon the energy type being analyzed, different criteria can be evaluated. For electricity costs, consider tariff schedule appropriateness; voltage level; demand level; usage level; and power factor level.

Tariff schedule appropriateness. Considering specific usage characteristics, is the most cost effective tariff schedule being utilized?

Rate savings potential can be up to 30%—and requires no cost to implement. Ensuring rate appropriateness is the customer’s responsibility.

Voltage level. Is the service voltage at secondary, primary, or other voltage levels? If current voltage service is secondary, can it be changed to primary? If so, what are the savings/cost relationships? Net savings potential as it relates to electricity voltage levels is between 1% to 3% annually. This represents a six to 24 month payback.

Typical voltage levels are secondary (110/440 volts) and primary (4160 volts or higher). In looking at cost reduction strategies, facility managers should ask themselves: Is voltage level a cost factor? What is the payback on transformation equipment? From there, the facility manager should take several actions:

  • have utility company calculate potential annual savings between secondary and primary voltage;
  • have utility provide depreciated value of transformation equipment;
  • determine most economical method to convert to primary. Is it the purchase or the lease of transformation equipment?

Demand level (kVA/kW). What percentage of the typical bill is demand based? Could demand levels be reduced or moved to other times to lower costs? Net savings potential for demand level is 5% to 20% annually, with zero to 36 month payback.

It is important to know that demand charges are a result of the maximum load on a system in a given period of time, generally 15 to 30 minute intervals. In order to achieve demand reduction, facility managers should conduct an analog strip chart analysis. This type of chart shows levels of energy use on any given day in the billing period.

The facility manager should request installation of a strip chart recorder to analyze peak demand periods. Variable peak patterns can be determined. The facility manager can investigate reasons for variability in demand and take corrective action.

Usage level (kWh). How much of a typical bill is usage based? Can usage be reduced with more energy efficient equipment or by managing operational characteristics of equipment? Net savings potential for usage levels is between 3% to 10% annually, with a zero to 36 month payback.

Usage level is linked to load, times, and hours of usage. For example, 10 100 watt incandescent lightbulbs operating for one hour results in the use of one kWh of electrical energy and one kW of demand.

So what can the facility manager do? Several options are: using energy efficient equipment; performing a facility analysis to determine kWh reduction potential; and investigating basic items for reducing usage.

Power factor level (kVA vs. kW). Are there any “power factor” penalty charges on the bill? If so, can they be reduced by utilizing power factor improvement equipment? The net savings potential for the power factor is 5% to 15% annually, with a three to 12 month payback. Power factor corrections do not reduce customer peak demand (kW) levels, but do reduce utility delivered real power (kVA).

Again, what can facility managers do? Determine if power factor is used in calculating electricity cost; calculate power factor penalty costs; and install power factor correction capacitors if payback is satisfactory.

In analyzing natural gas billing, there is another set of factors to examine: tariff schedule appropriateness; usage variability; firm vs. interruptible service; and non-serving utility provided natural gas commodity.

Tariff schedule appropriateness. Considering specific usage characteristics, is the most cost effective tariff schedule being utilized?

Usage variability. Determine if natural gas usage is characterized by any of the following conditions: highly variable; little or none in the summer; bulk of usage in the winter; or other highly variable conditions.

Can a more uniform usage for natural gas be developed? Can an alternative on-site fuel supply (fuel oil, propane air, etc.) be installed that would reduce the variability of usage?

Firm vs. interruptible. If the current tariff schedule rate is firm (non-interruptible), could an interruptible rate be utilized if an alternative on-site fuel supply were installed? Could usage be split into firm and interruptible to reduce costs?

Non-serving utility provided natural gas commodity. Determine if there are tariff schedules available that allow customers to purchase their own natural gas commodity. If so, arrange for an independent marketer to develop a quotation on providing the natural gas commodity at a cost less than the serving utility.

The Role Of Deregulation 

As it applies to electricity and natural gas, deregulation is the removal of the commodity portion from the serving utility retail rate so that the retail customer can arrange for the commodity to be provided through an independent third party.

Energy deregulation affects only the commodity portion of the serving utility retail rate. In electricity, the commodity portion of this rate is typically 20% to 50% of total electricity cost. For natural gas, the commodity portion of the rate is typically 50% to 70% of total natural gas cost.

Reduction Of Energy Costs 

To review, there are several aspects to understand in planning energy cost reductions. These are: electricity and natural gas usage data (how energy is consumed at the facility); status of energy deregulation; facility energy usage characteristics (How is the energy used?); and commodity cost/usage data (How much energy is used? What is the unit cost?).

The next step is to examine the larger concepts. These include: an effective energy strategy (What is the plan for energy use?); internal organization factors (Who is responsible for what?); and commodity and energy service contracts and their long-term implications.

A Successful Energy Strategy 

In creating a reduction strategy, the following should be evaluated: usage characteristics (hours/day, days/week, and usage variables such as high/low usage periods); deregulated commodity purchasing; tariff schedule rate alternatives; combined billing/metering if more than one meter used; on-site backup/peaking generation options; thermal storage systems; and energy efficient equipment.

For natural gas, consider: usage characteristics (usage variables by day, month, season, etc.; firm; interruptible; peak; non-peak); deregulated commodity purchasing; tariff schedule rate alternatives; combined billing/metering if more than one meter utilized; class of service variables (firm, interruptible, peaking).

The Action Plan 

Assess the situation. Know the energy budget. Determine what cost reduction activities are being investigated and implemented. Expected reduction rate is between 3% to 8% of energy costs, generally without any implementation expenses.

Preparation for future energy changes should also be conducted. Considerations include: deregulation developments in the state; rate structure revisions (controlled by the serving utility); and changes in facility operational characteristics.

The facility manager must know the current energy purchasing strategies. For electricity, factors include: rate applicability; demand; power factor; voltage level; and usage. For natural gas, considerations include: rate applicability; firm or interruptible service; and curtailable options.

Usage characteristics for each energy type must also be known. For electricity, these are: load factor; load usage; and on-site backup. Natural gas factors are: load characteristics; on-site backup; and bypass (direct connection to an interstate pipeline).

The Sooner The Better 

Evaluating energy costs is a valuable use of time and resources. Many organizations are reacting to, rather than planning for, energy costs. To accomplish energy cost reduction programs, facility managers need the right information in the right format.

There are energy cost reduction opportunities in every organization. With the current energy cost instability, now is the time to get started with these strategies. Energy cost reduction requires time and expertise, but delaying the process reduces savings and increases losses.

Studebaker is president of Studebaker Energy Consulting, LLC, an independent energy consulting company located in Lexington, KY. International in scope, Studebaker Energy assists all types of organizations in reducing utility costs. For more information, visit

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