By Michael Gordon
Published in the March 2006 issue of Today’s Facility Manager
Historically, facility managers have viewed energy as an uncontrollable expense. And in today’s world, the average manager is handling more and more responsibilities with fewer and fewer internal financial resources.
Broadly put, the impact of Hurricane Katrina, a barrel of oil priced at $60 and up, and an overstressed electricity grid have forced those managing facilities to think about energy in new, and often painful ways. Couple these facts with the devaluation of the historical tools at the disposal of front line facility managers, and a paradigm shift is afoot, forcing them to become something of energy economists, hedge fund managers, and market participants.
Beyond price hikes and fossil fuels, market structures are changing. They are growing more complex as regulators and deregulators seek to send price signals that reward efficient consumption and penalize unnecessary waste at a critical time for the energy infrastructure. These complexities bring opportunity, but they often require the skills and knowledge of an energy hedge fund manager. While a facility professional may be able to master these opportunities, there are only a certain number of hours in the week for facility managers to do their core jobs.
The Situation As It Stands
Nationally, energy demand is growing astronomically, and the traditional view on addressing this need is either “build or cut.” “Build” equals the construction of new power plants—coal, nuclear, or gas—to meet the new demand. But these plants are costly, environmentally difficult to site, and often take years to complete.
Beyond building there is “cut,” which encompasses a regulatory regime that encourages or mandates power reduction or curtailment. This option is often seen as anti-business. As they are framed, both options seem to be difficult, expensive, and “lose-lose” for municipalities, individual facilities, and the business community at large.
The system as it stands cannot meet the needs of all its participants at all times. On very hot days, very cold days, or days when the basic power consumers are using more electricity than is resident in the system, there can be rolling brownouts or blackouts. To combat these incidents, local power authorities can turn on expensive “peaking” power plants that pump more high cost electricity onto the grid than is required, thus raising rates for all consumers regardless of their consumption.
Without the creation of smaller virtual power plants (explained later) located on-site and distributed across the entire system, the crisis may seem like an intractable problem. Couple this with the plethora of new market based options for facilities to limit their exposure to the volatility of the market, and the issue can be overwhelming.
Deciding On The Right Program Structure
Deregulation of the energy markets has enabled Independent System Operators (ISOs) in an increasing number of states to establish market instruments to construct and maintain energy grid reliability. To ensure the grid can meet demand, state managed ISOs offer incentive programs to individual energy consumers to curtail electricity use during periods of peak demand or shortfalls. These programs are called demand response markets.
Facility managers may lack precise understanding of peak period energy usage, dynamic price and market information, and the structure of how their commodity supplier must buy products on their behalf. But by using strategic energy asset management services, properties have the potential to generate revenue, conserve energy, reduce costs, and enhance facility reliability and comfort.
Curtailment Planning And Electricity Bidding
To help solve the aforementioned problems, one option is curtailment planning. This involves selling excess energy consumption capacity back into local and regional energy markets on a daily, monthly, seasonal, or annual basis.
By lowering system demand during peak periods, demand response program participants commit to use their own generation assets or to reduce energy consumption. By doing so, the facility is a virtual power plant that can provide a small dose of sorely needed electricity to the broader grid. As ISOs rely on these commitments for grid stability, participants receive economic benefits with minimal or no cost.
Numerous processes can be used to maximize the energy assets in a building. These include switching between electricity and steam or gas and operating and configuring distributed generation and turnkey environmental/grid interconnection permitting services. [For more on the switching strategy, see this month’s Green Solutions column, “Hybrid Chiller Plant Meets The Needs Of An Evolving Building”.]
To implement the correct set of processes, a facility manager, in most cases, should consult with an energy management firm that can contribute to the design and implementation of procurement contracts for electricity, gas, oil, and steam. These contracts offer advantages, because an energy consultant can often provide comprehensive data monitoring.
Managing The Market
How can facility managers earn from the markets without becoming financial experts or extending their work weeks? Contracting with a demand response provider can help.
When a facility signs with a demand response provider, how this action earns money depends on a number of factors. The facility manager must keep in mind that each earning opportunity requires a different level of involvement. One level is a considerable overhaul; another is an opportunity requiring no major change; and finally, there’s an opportunity that requires some operational adjustment. Here are three examples of what to expect.
Take the case of Elechester, a 2,500-unit housing complex in Flushing, NY. When market participation through electricity bidding was proposed to Elechester, the value was readily apparent to the management team. (Full disclosure: The facility managers at the complex called in ConsumerPowerline to assist with energy management.)
Prior to establishing its electricity bidding program, Elechester had not earned money from the market. When management realized market revenue could be earned by automating control of its air conditioning, the incentive became apparent. A three year payback was possible because of the coupling of market revenue and incentives available. Elechester conserved and earned $150,000 in revenue, and the local grid gained a reliable three megawatt resource.
Beyond Demand Response: No Major Change Necessary
While demand response is a core tool with which facility managers can regulate their power consumption and exposure to the markets, there are other options. One is an upgrade of their physical plants.
Even with smart upgrades, facility managers may be missing opportunities. For instance, a building can cool through a central plant that can use gas, steam, or electric equipment, which increases options.
Because of the rate structure, the electric supplier adds a surcharge based on the highest amount a facility consumes in one hour each month. A smart operator will run the electric equipment on days that are a bit cooler, so as not to use as much central electric at the same moment that window air conditioners may be adding to the load. This operator will use steam or gas at those times.
Even though it’s probable that the steam equipment costs more to operate hourly (perhaps, 25¢ per ton/hour, versus 12¢ per ton/hour), the surcharge for the peak use hour trumps this expense (as much as $20 per ton added at peak).
This is valuable to the electric grid beyond the simple savings on the surcharge for the facility. A smart outsourced energy manager will bid this reduction of electricity use on a hot summer afternoon into markets that pay for it.
Some Change Is Good
Naturally, electricity prices are highest when the power grid is under stress. It is often sound to cool aggressively on a summer morning and allow temperatures to float a bit in the afternoon. For example, a facility that is 73°F and remains fully lit on a gray, 83°F day can garner earnings by changing these procedures on a bright, 90°F day. This change would involve cutting some lighting and cooling to 68°F in the morning, then allowing temperatures to rise to 75°F in the afternoon.
By employing savvy energy management, facility managers can reduce costs and perhaps generate revenue. As a result, they position themselves as a strategic asset for the organization as a whole.
Gordon is founder and principal of New York City-based ConsumerPowerline, a demand response provider. He can be reached by e-mail at [email protected].