FM Issue Web Bonus: Options Can Help To Reduce Energy Costs

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By Michael B. Gordon
This web exclusive was published in conjunction with the FM Issue feature in the November 2005 issue of Today’s Facility Manager.

If facility managers want to have total control over their organization’s bills, and they maintain acceptable credit, they can often become a direct customer of the “Power Pool,” or “Independent System Operator.” This can be an excellent option for any facility with peak use of one megawatt or more.

Those who are not direct customers will pay the regulated utility an array of charges, even in deregulated markets. When a facility buys from a supplier who competes with the utility for the “Market Supply” portion of the bill (roughly 60% to 70% of the whole), the facility will still pay the utility for the transmission and distribution (T&D) portion of the bill. Though there is no foreseeable reason for T&D charges to change if the facility moves to a competitive supplier, they sometimes do change T&D charges in geographies in which the utility has been allowed such leeway.

One strategy is to break down an electricity bill into two components: price per unit bought and quantity of units bought. Some quantities and prices are visible on the bill; others are instead “bundled” under one or another category. Many facility managers and consultants assume that bundled portions of a bill cannot be unbundled and controlled. This assumption is generally wrong.

Kilowatt Hours And Kilowatts

With respect to quantity, most facility managers are more or less familiar with the difference between kilowatt hours (kWh) and kilowatts (kW). One watt (which is actually defined as a joule consumed for one second) sustained for one hour is one kWh. A kWh costs between 10¢ to 20¢ per, and the facility is billed for all kWh used over all the hours in a billing period. (Generally kWh are measured and billed monthly.) The biggest expense for the power plant in delivering kWh to a facility is the cost of fuel to produce the power. Since most power plants are natural gas fueled, the price of a kWh of electricity tends to follow the price of natural gas fairly closely.

The second largest expense in delivering a kWh to a facility is the cost of transmitting that electricity over power lines. This is a major part of the reason that the price of a kWh of electricity tends to be more expensive on a hot, summer, weekday afternoon—when many businesses are consuming much power, and competition among power plants for transmission access drives the price of transmission up. Another reason for this price differential is that more power plants must be running at this time, so the system must dig into its resources that are a bit more expensive to run.

There are several strategies to reduce the kWh portion of the bill from both a price and quantity angle, which are discussed later.

KiloWatts (kW)

The kW portion of the bill can account for as much as 40% of the total costs. This is an assumed one hour use based on a reading of how much a facility is using in one given half hour of each billing period or of each season. (In some areas, the time period is one hour, in others 15 minutes.) The facility manager does not see all components of this charge; they are bundled in as many as five areas of the bill. However, all components of this charge are under the facility’s control. Two “kW charges” that tend to be better understood are the following.

Charge: Most facility managers know about the “peak demand charge.” This is calculated based on the highest use the facility hits during the month. Sometimes this charge is segregated into time sensitive slots: e.g. it costs $22 per peak kW consumed during the hours of 9 AM and 6 PM on weekdays and $12 per peak kW consumed at all other hours.
Control Strategy/Strategies: Create a target demand number that will allow for reasonable facility comfort at all times and shed load with an engineering plan that is comprehensive (i.e. staging chillers, pre-cooling, adjusting water temperatures, ramping down drives, switching fuel to steam from electric, checker-boarding perimeter lighting, etc.).This is a fairly straightforward procedure since it simply requires alarms to warn when the facility is approaching the demand target. Then, the facility manager can generally either activate the building management system to engage the plan or can implement the plan manually.

Charge: Often, an electricity provider will have a “ratchet” component in the bill. The provider will measure peak kW (again, over one hour, half hour, or 15 minutes; it differs but this information is available from the supplier), looking backward, over some period of time (e.g. one year, 18 months; information publicly available), during some window of time (e.g. summer season or all seasons from 9 AM to 6 PM; information usually explicit on the bill).
Control Strategy: When there is a ratchet cost in the bill, the facility manager should be able to control the kW number through the above plan to shed load. However, the value of this plan is harder to calculate. Opportunities to reduce the ratchet number do not come every month, nor is the facility in danger of increasing this number every month.However, the opportunities and dangers that do present themselves are a much bigger deal than the monthly demand charge outlined above. Increased costs from a ratchet will be with the facility for many months and reductions from creating lower ratchet numbers can be sustained for many months. Demand charges from ratchet rates are definitely in the dollars per kW range. They are sometimes in or close to the double figure dollars per kW range, so this is big.

Good demand management companies calculate this impact through close to real time metering and through very accurate calculations of the impact. Some will offer these services for free in many locations.

Some demand management companies will offer these services for free in some locations.

Other Kilowatt Charges

There are several “kW charges” that are not explicit on a bill. Some of these are calculated differently than the above calculations. Others are calculated similarly. Though these sometimes take a little more effort to control, they can be controlled.

Charge: Few people know that in many areas a facility’s use is measured at the moment that the geographic area has its own period of peak use. This can have a large or a small impact on the bill, depending primarily on the rules in place in the specific location.For example, in New York City, what is consumed in this one hour costs more than $100 per kW, per year, and the facility pays for this in increased per kWh costs throughout the year. In New England and the Mid-Atlantic states, the facility pays only $3 to $5 per kW. However, starting in October of 2006, those in an area of New England or the Mid-Atlantic, where it is difficult to site power plants, will likely pay more than $100 per kW for this consumption. This is going to be a big deal in these areas, and eventually, everywhere.
Control Strategy: Where this hidden cost is in place, and where it is likely to be significant in the near future, it is smart to control this reading now. Facility managers will need a demand management company to monitor the system to control this reading. It is very important that the provider:

  • understands the grid market and operation structure (not just operational expertise, but financial services expertise);
  • provides clear, simple, and timely grid information so the facility can implement plans to shed in time and not more than is necessary;
  • understands exactly which end users are being billed based on real use at times of system peak as opposed to based on what it is assumed the facility is using at that time (otherwise, the facility could shed load and not see any benefit); and
  • can either negotiate on the facility’s behalf with the supplier to pass these savings on to the facility or, preferably, will simply cover the risk (if the facility hits the targeted number, the demand management company will pay the facility. If it does not, it will cost the facility nothing).

Charge: In many areas (Texas, California, New York, Mid-Atlantic, New England) the facility can earn money by shedding load when the grid is in stress.
Control Strategy: In some states this opportunity is entirely independent of the facility’s bill or supplier. In some (e.g. Texas and some regulated environments), this is linked to the supply contract. In some areas the facility has a choice of programs—those that are independent of supply choice, or those that are offered only through the supplier (e.g. California).Earnings opportunities vary greatly by locale:

  • In New York City, the facility can earn as much as $110 per kW shed when the grid is in stress—the earnings are fairly consistent in the summer and winter.
  • In New England, earnings opportunities are very large in the winter and will soon be quite large in the summer.
  • In California, earnings opportunities are currently largest in the summer; only the utilities and some monopoly demand-response providers (e.g. one in San Diego) offer any significant winter earnings opportunities

Charge: There are often ratchet rates hidden in a facility’s “adjustment bills.” An adjustment bill is the regulated utility’s true-up. It is generally dependent on market conditions (e.g. natural gas prices).This is significant even for those who buy competitively if they buy for a price that is somehow related to the utility bill. For example, suppliers often provide discounts from what the facility would have paid. These discount arrangements are called “index deals.” In an index deal, the facility will get adjustments exactly as it would with the regulated utility.
Control Strategy: A good demand management provider includes these in its calculation of costs/benefits from peak demand and ratchet rate management. Also, when the facility buys from a regulated supplier (the utility), the cost per kW is generally unavoidable. However, the quantity is still controllable. Further, if the facility structures a competitive bid in an index approach (more on this in the kWh section below) it is paying this charge. If the facility leaves the utility and it structures its deal differently, this charge can be avoided.

KiloWatt Hours (kWh)

One strategy to reduce kWh consumption is to install more efficient equipment. Facility managers are likely quite facile with such approaches as variable frequency drives to reduce much kWh consumption, particularly during the fall and spring. Many markets, though, now offer the structure that will allow a facility to reduce costs, even when there is little more to be done to reduce consumption.

Facility managers will generally only see a kWh charge on their bills, which delineates how many kWh they have consumed and at what price. Facilities may be eligible to buy either by “time sensitive rates” or by “real time” rates, even if they do not choose to become a direct customer of the power pool. Most areas offer access to time sensitive rates. Only some locations offer the opportunity to buy “real time,” with a different price for each hour.

Time sensitive rates. If opting for a time sensitive rate plan, energy managers will pay more for each kWh during the day, during the week than at night, or during the weekend. They’re also likely to pay more during the summer than in other seasons. This can be a good plan for those who either use less during the day than others like them (e.g. commercial buildings that are approximately the same size) or those who have the ability to move their use away from peak hours.

Real time rates. Some locales have free markets that have different prices during each hour of the day. This is a good price plan for those who use very little during the weekday afternoon period. Some markets have different prices for the same hour, depending on when it’s purchased (day ahead or minutes ahead). This can be a great plan for those who have good control over their use as well as for those who are served by a savvy demand management firm—when the price went up overnight they’ll be able to reduce the facility’s use to less than what the facility expected to use, and sell back what the facility bought yet did not use, at a profit. In some markets these rates are soon to be released as “critical peak prices.” These will be advantageous for those with the above assets.

In most markets the most profitable customers are those who use close to the same amount at all times. Those consumers (e.g. a hospital or, to some degree, a hotel) can use this “high load factor” as either an opportunity to negotiate better rates with suppliers or as an opportunity to buy a block of power (a block is the same amount of power bought at all times). Load factor is the fraction defined by the following numerator: Total kWh in the bill period divided by total hours, and the following denominator: peak kW use in that time. If a facility’s load factor is above 60%, the facility has negotiating leverage.

Any of the assets described above (high load factor, less use during the day than others in a like facility, a great deal of control over use) are definitely reasons to look at becoming a direct customer. These are also reasons to either use an expert to negotiate or to go to a firm that conducts real time auctions that permit suppliers to submit bids over the Internet to serve the facility load.

If a facility does not take advantage of these opportunities, it may also be paying adjustment charges for each kWh bought. These charges are look-backs that depend on the price of the utility’s fuel. These adjustments are retroactive and they are not delineated, even by price per kWh; they are generally just listed as a charge or a credit. Recently, in New York City, one such adjustment was calculated at more than 6¢ per kWh. This is a shock when it’s retroactively applied to a bill for, for instance, the last three months.

Sales opportunities. Often independent of the bill,a facility can now sell back the power it chooses not to use. This is a tremendous opportunity for customers in markets with real time rates, because the wholesale power rate can often exceed the retail rate. If the facility uses a bit more on days that the price is lower, it can sell it back at the higher rate on days that the price is higher. Most of the East Coast now offers such opportunities.

Overall, electricity markets are becoming better designed. Consumers can separate themselves from the utility, they can use the power of competition to work for them, and they can change their use patterns and save quite substantially. More power is in the hands of the end user. However, as economists figure out ways to ensure that the energy price more accurately reflects the facility’s burden on the power grid, they have certainly not designed these new electricity markets and electricity bills to be more simple and understandable to the layperson.

A facility manager’s best option today is to understand the general nature of the market and of the directional impact of decisions to be made. Then, they can use their power and clout to bring a firm in to support the facility by presenting these choices in a quantifiable manner. Once they learn about the facility, they will be able to advise: what to turn on or off, and when to do so, as well as precisely how much the facility will earn or pay upon following this advice.

Further, the new market brings companies that will offer these services at risk. Facilities will not have to pay unless the firm’s advice proves sage. Even then, they will pay only a portion of the savings and earnings these firms bring. Complexity brings to the market experts who are capable of demystifying it.

Gordon is president and founder of ConsumerPowerline, a company based in New York City. 

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