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Reaching Energy Cost Goals
Estimates indicate that commercial and industrial energy users can save approximately $20 to $30 billion each year through the implementation of energy efficiency programs. The most common obstacles to initiating such programs are lack of energy management education, funding constraints and organizational roadblocks. However, changes in the energy markets have made the time ripe to identify new opportunities to reduce costs.
Today, energy companies offer a variety of new services, including energy procurement, bill auditing, Internet metering and training. These new services offer new opportunities to develop energy management programs that reduce energy use and offer financial savings.
Often, decisions are made on equipment purchases or facility upgrades without any real buy-in by all parties involved. Many facilities don’t even have a basic agreement among management, building tenants and facility engineers about the operational philosophy of the organization. All decisions should be made with an integrated plan in mind.
Those wishing to control costs might find it useful to begin by viewing energy in a new and unconventional way. Instead of regarding energy as a commodity that needs to have limits placed upon it, facility executives should treat energy as an asset. By definition, an asset is something that can be owned, traded, valued, saved, purchased, leveraged or managed. Energy fits that definition perfectly, which is obvious to anyone who has bought energy futures, bid energy supply or managed energy to obtain bottom-line savings. It is also helpful to look at energy as a raw material that is used in the production of a product or used to support business operations.
Total Energy Asset Management
The concept of treating energy as an asset should be the cornerstone of an effective energy management program. That strategy was recently used by Nortel Networks as the basis of an energy management program for all its facilities worldwide, which include 15 major campus locations in North America housing more than 50,000 employees.
The first step in implementing the energy management program was the development of an energy team consisting of Nortel representatives and energy experts from the firm hired to develop and implement the program. The primary objective was to reduce energy costs by approximately 10 percent over the next 10 years and to manage energy as a long-term asset. A total energy asset management concept — called TEAM — was developed to achieve those goals.
The total energy asset management approach addresses all aspects of energy conservation and management. It formalizes an energy management program into a value chain that highlights five major categories: energy efficiency, supply-side management, integrated resource planning, environmental emissions, and metrics and performance.
The greatest opportunity for cost savings is the efficient use of energy. Examples of energy efficiency include lighting upgrades, improvement of HVAC and control systems, and motor replacements. In the case of Nortel, a comprehensive corporate-level contract was signed with a service firm that could be used at all Nortel locations to assist in implementing and maintaining conservation and energy efficiency measures. Opportunities for savings include optimizing energy use, evaluating financing alternatives, changing operation and maintenance procedures, and measuring and verifying energy conservation opportunities. The contract allowed the energy team to accelerate the process of improving efficiency and obtaining corporate-wide funding by eliminating the need for multiple contracts and negotiations at each Nortel facility.
Funding for energy-efficiency activities was obtained through the contractor and a commercial lending institution under a modified performance contract. Performance contracting uses energy savings to pay for the required capital expenditures and generates a positive cash flow for the project. The commercial lending institution provided financing at a less expensive rate than could be obtained from internal funds, allowing for more energy efficiency projects to be undertaken.
Supply-side management, also known as strategic energy management, is one of the newest and most rapidly expanding areas to become a standard part of a comprehensive energy management program. It is, in large measure, a product of deregulation that allows owners and operators to find ways of reducing the cost of energy.
There are, however, market opportunities in states that have not been deregulated. Facility executives have used the time that the various states dedicated to preparing for deregulation — as much as five years — to prepare their organizations for a deregulated market and to begin saving energy.
Potential savings can range from a nominal amount to 20 percent or more depending on a facility’s load factor, usage, vendor and ability to manage risk. Among the procedures that can be put into effect are supplier selection and negotiations, financial and physical risk management, tariff analysis and optimization, real-time pricing evaluation, and green power mix.
For example, one utility company was marketing its solution to deregulation by offering a special utility rate. The rate provided a single cost for energy throughout the year. Using the single energy rate, the utility’s clients would no longer have to perform complex evaluations of their energy use by considering such items as demand costs and time-of-day rates. The average electrical cost was determined by taking the previous year’s energy and demand cost of the utility bill and dividing it by the kilowatt-hours consumed. In this calculation, the actual cost for energy in the future would be similar to the costs incurred from the last year or a predetermined base year.
Most utilities are eager to lock in customers for long-term agreements prior to deregulation to better establish their business outlook in future years. One company in California was able to lock in electrical rates with a municipality prior to the electrical costs rising sharply in 2000 and 2001. The result was significant discounts and beneficial contract terms.
Integrated Resource Planning
A successful energy management program integrates the supply-side management energy procurement and energy efficiency activities so that energy usage is optimized when energy costs are highest. This activity is called integrated resource planning.
For example, a manufacturing center could opt to have automated tasks done overnight, a time of lower energy cost and consumption. The unused portion of the contracted energy could then be sold back to the energy supplier for further cost savings. The projects and services in this include bill consolidation, load management studies, strategic planning, deregulation awareness and cogeneration.
A large university evaluated numerous ways to reduce high and irregular demand costs resulting from significant variations in equipment and facility operations. A detailed evaluation of the annual utility costs found that more than half were a direct result of demand costs. Of these, the majority were incurred in the summer months. Prior to the analysis, university staff had focused most of their efforts on reducing energy consumption during evening hours.
A detailed evaluation of the utility rate showed that if the university reduced energy consumption by 10 percent at night, utility costs would increase by 10 percent. This demonstrated the dramatic impact of load factor control on the monthly utility costs. As a result, university staff began assessing what could be done to reduce the demand costs and incorporate the information they found into an integrated program. Virtually all aspects of the program resulted from approaching the project based on a big-picture analysis of energy management.
Energy and the environment are directly related because a program in one area invariably has an effect on the other. Many environmental projects can be enhanced through the development of energy management programs. A well-planned program can reduce environmental emissions and increase productivity through energy conservation and efficiency.
A large international food processor, for example, was involved in the development of a comprehensive pollution prevention and energy efficiency program. The purpose of the program was to complete a thorough analysis of both energy efficiency and pollution prevention opportunities. The company discovered it could combine the programs and deal with issues affecting both disciplines. The synergism of the effort produced numerous options for the company to consider. Looking at the process from two or more different vantage points often points the way to new or complementary opportunities.
Metrics and Performance
Metrics and performance embodies many of the management functions that deal with the measurements, public relations, planning, reporting and goal-setting activities related to asset management and energy management programs. These include cost-saving measurements, public and employee awareness programs, benchmarking, incentive programs and reporting systems. Without these functions, the effort to develop a long-term energy management program is compromised and often doomed to failure.
One facility executive at a large organization initiated an energy management program by devising a simple method to judge conservation performance against a baseline that was determined for each facility. The primary factor in the modeling program was the analysis of energy consumption in relation to weather and occupancy. Each month, a report was automatically generated to show how the energy consumption from the current period compared to the baseline. The reports were delivered to facility managers and their chief engineers. An executive summary was developed for state, regional and corporate offices.
Monitoring utility costs produced interesting results. Without any investment other than the modeling and reporting mechanisms, the company began seeing results. Review of the utility data showed opportunities for adjusting the operations and equipment that resulted in savings. Within the first year, annualized savings of several hundred thousand dollars were realized — far in excess of what it cost to provide the tool. What had started as a simple tool to measure performance became an important device for providing more detailed evaluations of facilities, rental contracts, operational programs and the potential for energy management programs.
Even companies that have conducted successful energy management programs without using the total energy asset management approach will find that implementing this concept will amplify and expand their programs to achieve even greater results. In fact, the more successful the original effort, the greater the likelihood of improved results from an expanded program.
D. Victor Bush, C.E.M., is practice and technology leader at URS Corp. in Denver. URS designed and implemented the total energy asset management program (TEAM) at Nortel.
Facility Executives Seek Ways to Simplify Energy Management
Changing energy markets, technology advances and corporate pressures to improve an organization’s bottom line are challenging facility executives to develop effective energy management plans.
Some organizations have handled the bewildering array of energy management options by hiring energy service companies (ESCOs). Even with ESCOs — which do everything from performing energy upgrades to arranging project financing, and from buying energy to monitoring its use — the energy landscape is still dotted with hurdles.
Varying market rules and regulations confound facility executives charged with keeping track of energy use for national organizations. What might reduce prices in one state might have an opposite effect — or none at all — in another.
“It’s very confusing,” says John Sattelmayer, vice president of facilities of Horizon Bay, owners and operators of retirement housing facilities. “I deal in multiple states and cities. I’m trying to find one provider who can assist me. In my world, it would be ideal to have one provider that can cover the entire United States. I have yet to find that.”
In addition, the varying internal needs of an organization and its customers might affect just how much facility executives can rely on energy management practices of ESCOs.
John Jacques, director of operations for Insignia/ESG, a property management firm, says any energy management technique that locks his clients into long-term financial commitments is unlikely to pass muster.
“Basically, our aim on the property management side is to create value for our clients,” he says. “Many of the properties are supported by stockholders, so we have a fiduciary responsibility. So, to lock into anything long term with ESCOs and some of the deals they have is difficult because legally it could create a problem down the road on the investment side.”
At its core, energy management — whether its functions are outsourced or not — lie with the facility executive handling energy use.
To make energy work for the organization rather than against it requires knowing how to turn what has historically been an expense item into an asset. To do that requires, at a minimum, a basic understanding of how energy markets and pricing structures work and how your organization fits into them.
“One of the problems is that we managers are unsavvy,” says Guenther Ohler, manager of engineering for Midstate Medical Center in Connecticut. “We don’t know what’s going on in the field, especially the energy field. That’s the problem. We rely too much on others to make the decision for us. My answer to that is to get all the knowledge you can get.”
— Mike Lobash, executive editor