November 2005

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.

By John M. Studebaker, Ph.D.

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. These opportunities are attractive for a number of reasons. Typically they:

do not require capital outlays;
can be implemented quickly;
can produce immediate and meaningful benefits; and
are permanent sources of savings.

Facility managers can look to their utility bills to help identify unit-cost savings opportunities.

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. The main concepts to address are:

analyzing energy costs;
energy bill content;
what needs to be done to control and reduce energy costs;
items that should be included in any successful energy strategy; and
the action plan.

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.

So what can facility managers do to identify rate savings potential?

Evaluate serving utility tariff/rate and look for alternative rates/riders.
Evaluate alternative rates/riders as appropriate to usage characteristics.
If alternatives are available, identify cost reduction potential.
If a lower cost rate/rider is applicable, have the serving utility change current rate to lower cost rate.

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 (shown above in Figure 1) 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 (see Figure 2). This type of chart shows levels of energy use on any given day in the billing period.

Figure 2. Copyright: J. Studebaker

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.

A sample billing analysis is presented in Figure 1:

Energy charge component is $2,477.03, which equals 50.7% of total electric cost.
Total electric cost is $4,881.14, so what accounts for 49.3% of this?
Customer charge is $21.64.
Demand cost is $2,382.47.
Almost 50% (kW portion) provides no value to the customer.