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By Mike Lobash
May 2003 -
Power & Communication Article Use Policy
Energy has had its share of ups and downs the past couple years. Not only have prices bounced from all-time highs to seasonal lows, but so too has the amount of attention that facility executives pay to their buildings’ energy use.
In 2000, for instance, hardly a week went by when there wasn’t some national story about California’s energy crisis or seasonal electricity shortages in the upper Midwest and Northeast. Facility executives were told to use energy sparingly, lest their organization cause rolling blackouts and brownouts.
The following year brought word of Enron’s bankruptcy and accounting scandals at other energy firms. Again, facility executives were being told to be judicious in their decisions to enter the big-league energy market.
Then, just last year, attempts to push deregulation and to codify a national energy policy fell on deaf ears in Congress. The message to facility executives this time: An ample supply of energy is important to the nation’s future, but the future is not necessarily now.
During energy’s roller-coaster ride through fame and infamy, there’s been a quiet, almost subconscious understanding: Concern about the environment and costs means everybody — facility executives included — should attempt to conserve and to use energy more efficiently.
“It’s absolutely a terrific time to use fewer kilowatt-hours and Btus,” says Bob Dixon, general manager of Siemens Building Technologies’ Energy Services & Solutions division.
The one quantifiable fact that has emerged from energy’s up-and-down ride is that the price of energy has risen more than it has fallen. As a result, facility executives have good reason to be interested in exploring cost-cutting options energy service companies (ESCOs) offer.
ESCOs have undergone a rebirth of sorts, giving facility executives new reasons to investigate ESCO services. The failure of Enron and others prompted ESCOs to review business models and methods to better respond to facility needs. Also, the maturation of deregulated natural gas markets and of electric markets, where they exist, has created procurement opportunities that allow facilities to take advantage of developing technology. Finally, energy prices have just completed their first up-and-down cycle of what’s likely to be a volatile year-long period.
ESCOs have attempted to reposition and redefine themselves over the past couple years as a result of failures by a variety of energy companies. Most noteworthy is that ESCOs are approaching facility executives with an eye toward improving an organization’s performance by helping it use energy wisely.
Charles Athanasia, vice president of energy services for ConEdison Solutions, a New York-based ESCO, says retrofit projects are becoming less of a focus for his firm. Instead, his company is asking customers to share information necessary to improve an overall business equation. The ESCO wants to know how its customers make money so it understands what aspects of the operation are affected by energy.
“Energy is a large part of the equation that spills into many areas of an organization,” Athanasia says.
ESCOs have traditionally given facility executives the ability to reduce energy expenses by changing out inefficient equipment — such as T12 lamps with magnetic ballasts and old chiller systems — for more efficient systems — such as T8 lamps with electronic ballasts and modern HVAC equipment and controls.
Where that approach is used, the equipment and financing options that ESCOs offer have gotten more sophisticated. But facility executives are equally likely to find ESCOs selling their ability to help organizations meet business goals.
Today’s ESCO will want to see business plans so it can be sure an energy-saving project done now will continue to save money if an organization expands, Athanasia says. What’s more, having data about an organization’s future plans will allow the ESCO to help the customer prioritize energy projects.
“A customer’s first goal shouldn’t necessarily be to save energy,” Athanasia says. “It should be to improve business operations and to meet business goals.”
ESCOs have taken that approach more seriously as the past two years have unveiled a string of accounting scandals, bankruptcy filings and corporate restructuring involving energy trading companies and ESCOs. Even though only a handful of firms were involved with sordid financial dealings, the problem tainted the industry.
Facility executives are asking tougher questions than ever relating to the financial stability of the ESCO sector and of individual ESCOs with which they are interested in signing contracts. That, ESCO representatives say, is a welcome change to the way some facility executives approached contracts in the past.
John Upchurch, vice president of sales for Alliant/Cogenenex, an ESCO, says some facility executives were overly impressed in the past with the offers by ESCOs, some of which have since filed bankruptcy. They were also overwhelmed with the prospect that some ESCOs — full-service ones in particular — would be able to take over a building’s entire energy needs.
Those firms promised not only to perform retrofits to a building envelope as well as to mechanical and electrical systems, but also take over energy-data analysis and energy-purchasing functions. The problem was some firms did so without really understanding what sort of resources are required to fulfill that commitment.
“What a lot of people learned is that if it feels too good to be true, it’s too good to be true,” Upchurch says.
ESCOs that survived the upheaval are those that take a conservative approach to savings estimates and project financing as well as those that are focused on specific aspects of energy services. Alliant/Cogenex, for example, specializes in performing projects. Upchurch says other services, such as energy procurement, are performed by separate divisions within the company.
Likewise, Dixon of Siemens Building Technologies says his firm and others never got involved with many of the accounting procedures for which certain ESCOs found themselves the target of federal investigations.
Off-balance-sheet financing has been and continues to be one of the more popular ways to fund energy retrofits. Deals structured in that method allow facilities to fund the capital improvements made to energy-using systems by using a portion of the savings to pay for the project. The deal is structured so that the payments on the improvements appear to be operating expenses related to energy use instead of expenses to pay for improvements.
Where off-balance-sheet financing ran into trouble, Dixon says, is that some ESCOs improperly reported the arrangement on their books, creating a false sense of financial security for customers and share holders. While facility executives need not delve into the details of how ESCOs keep their ledgers, they should have reasonable assurances that the ESCO won’t be out of business shortly after reaching a services agreement.
“Private companies should look into the financial health of an ESCO before agreeing to have them perform work on their facilities,” Dixon says. “ESCOs should have outside auditors looking at contracts to make sure they are structured in a legal way.”
Even with those assurances, however, facility executives and their organizations’ financial officers have showed more concern regarding energy services contracts, ESCO representatives say. The concern is two-fold: First, some worry that ESCOs won’t be financially solvent through the term of the contract. Second, some financial managers doubt the cost-saving estimates ESCOs formulate when selling projects to facility executives.
“That’s a direct result of companies tightening up the books,” says Tom Kirkpatrick, president of Eco Engineering, an Ohio-based lighting service company. “There’s a suspicion that these companies — mine and others — are stretching the savings.”
Kirkpatrick says if ESCOs don’t perform measurement and verification services as a matter of course when retrofitting building systems with energy-efficient equipment, facility executives should ask them to.
With lighting retrofits, measuring and estimating savings typically involves replacing a sampling of fixtures with the energy-efficient lamps and ballasts, if needed, to be used in the project. Eco Engineering recently did that in a project it completed at the 500,000-square-foot Cincinnati Museum Center. Once the energy-efficient lamps were in place, the museum operated under normal conditions for about a week, Kirkpatrick says. At the end of that week, calculations showed the museum would save $2,800 in monthly energy bills.
“Investing in an upgrade like lighting is like investing in a certificate of deposit,” he says. “It’s going to be long, steady gains.”
Lighting has long been considered one of the most sensible energy projects to undertake at a facility. The savings are typically significant. They are also verified easily compared to other projects — such as HVAC systems — that are dependent on weather variables rather than just a facility’s operating hours. And, depending on the extent of an upgrade, lighting projects can have a simple payback period of two years or less.
Controlling demand through system retrofits and operational changes is one of the first steps that Upchurch of Alliant/Cogenex says facility executives should take. Doing that might mean more than just changing out systems, however. Upchurch says facility planners rarely took a long-term view in designing systems like central plants. He sees opportunity for energy savings in optimizing facility systems that an organization has outgrown.
Organizations that have added facilities through the years are likely using systems designed for individual buildings. But, Upchruch says, if enough individual buildings are added, the organization has a campus. It would likely benefit from redesigning systems so they operate more efficiently.
Once demand is under control, facility executives can consider securing energy commodity procurement contracts to reduce the amount they pay for energy. The exact savings to be gained when purchasing electricity on a contract basis are difficult to quantify, says Dixon of Siemens Building Technologies. The delay of deregulation nationally has closed opportunities that facilities would have had access to.
When purchasing natural gas, however, using risk-management and hedging strategies can save significant dollars and remove the peaks and valleys from how much a facility pays for the commodity.
In February and March, for instance, natural gas customers around the country were slammed with a 30-percent price increase. According to the U.S. Energy Information Administration, the average price utilities paid for natural gas in the first quarter of 2003 was $5.82 per million Btu. The lowest price expected this year is $4.89 and the lowest price over the next two years is expected in the third quarter of 2004 when utilities are forecast to pay $4.42.
The price at the start of 2002 was $3.22. Whether facility executives realize prices are rising is another matter.
“I still think we haven’t gotten over the perception of low prices that existed in 2002,” Athanasia of ConEdison Solutions says.
As forecasts show, energy prices are expected to rise over the next couple years. With interest rates setting new record lows, ESCO representatives say facility executives should investigate now whether it’s time to finance an energy project. At a minimum, says Dixon of Siemens, facilities should be taking advantage of new information technologies that allow them to track and analyze energy use.
In addition to meters that track how much energy is used, facility executives should investigate software options that determine how energy can be used differently to save money.
“Some of the things you don’t see on your energy bill are often the most important toward determining where a facility can save money,” Dixon says.