Companies Buying Energy From Their Utilities – the Math Works, Until It Doesn’t

There are two sides to a company’s energy profile – consumption of energy by its facility assets (HVAC, lighting, etc.) and it’s purchase of utility services (electricity, gas, etc.)  In practice energy engineering teams (including ours) spend most of their time identifying opportunities for energy efficient equipment upgrades or behavior changes.  Purchased utility services are usually taken as a given, with utility bills being studied for historical inflation rates, usage patterns and demand charges.

But the Enterprise Smart Grid framework highlights that to operate most efficiently companies need Visibility, Control and Management Integration for both of these elements.  And here there’s a useful lesson to be taken from the information technology industry.

In the 1970′s corporations used time-sharing to access mainframe computing, paying on a per-minute, per-job basis – call it computing as a service.  A decade later, microprocessor advances made it financially practical to bring PC and server computing in-house.  By the late 90′s software as a service, using low cost Ethernet connected servers, made it equally attractive for companies to move their computing back out to the network, this time the Internet.

So over a thirty year period technology advances shifted the best economics for corporate IT from pay-for-service, to owning and back to pay-for-service.

Power stations (electricity as a service) predate corporate IT by almost a century, first being delivered in the late 1880′s.  Like the mainframe model, utility providers centrally manage a high capital cost system (a generator) and deliver the service (electrons) over the network (the electrical grid) with customers paying as they go for what they consume.  Generally they’ve had few alternatives to buying their electricity in this local utility pay-for-service model.  Only a handful of the largest industrials have been able to cost justify installing and operating their own on-site primary generators.  Also, in the last decade companies in deregulated markets have been able to hedge a portion of their electricity costs by purchasing third-party power generation.

With the latest solar PV technology advances (and renewable incentives) some have considered bringing a portion of their electricity generation back in-house.  But with today’s average US cost of $0.11kWh, the math still points to pay-for-service (i.e. solar PPAs) and that only in four to five states in the country.

Steam as a service (Saas) is less well known, but has also been in existence for almost a century.  The industry’s trade association (International District Energy Association) started in 1909.  Universities and hospitals have run their own steam systems for a long time; with Harvard’s Blackstone plant having been in service since the late 1800′s.  NYC’s ConEd network, operating since 1882, is the largest in the US.

As with electric utilities, the Saas model runs a centrally managed high capital cost system (a boiler or cogen plant) to deliver the service (Btus) over the network (physical steam piping.)  Technology has not changed so rapidly in steam generation, with the latest large boilers moving from @ 70 to 80 percent efficient over the last 50 years.  While 90% efficient systems are in development, their high cost likely make them impractical for quite some time.

The corporate alternative to Saas involves installing a large on-site steam boiler and retrofitting a building’s mechanical system.  Where PV is renewable, solid state and overproduction can be sold back to the grid, financially modeling on-site steam is more complicated, including estimating future gas prices, a total maintainance cost for a lot of moving parts and a less clear excess steam utility sell back model.  (For an reference point on the cost of running a 100-mile steam pipe network check out ConEd’s 2010 long-term investment plan)

Recently we performed an energy assessment on a 20-story New York City commercial building still using district steam from ConEd.  Our analysis confirmed a three-year 40% increase in our customer’s cost of steam, this coming principally through newly assessed demand charges.   So the bring it in-house payback model needed to forecast the future cost of ConEd steam versus the new boiler and retrofit cost, the future cost of gas at a 20% premium to ConEd’s high volume cost, the on-going maintenance costs, with the ConEd incentives which supported this retrofit.  (Another reminder of why utility incentives needed to be decoupled)

The simple payback was 5 years.  Which means NYC steam as a service has officially priced itself out of the market and we’ll be working with this customer to bring their “mainframe” in-house.

Another alternative for the largest corporate users is a pay-for-service delivered by a non-utility third party.  Like solar PPAs for electricity, these vendors specialize in owning, operating and maintaining large traditional boilers, chillers, cogen and electric generator systems for single or multiple tenants, selling chilled/heated water, electricity or heat with long term purchase contracts.  But these agreements do have their challenges – and don’t lend themselves towards a customer changing their mind after a few years.

In a world where utility rates and incentives are dynamic, energy costs are likely to be accelerating (after a three-year hiatus) and new energy technology development is being introduced, our engineers should expect to be performing more of this in-house vs. pay-for-service tradeoff analysis.

via Companies Buying Energy Services, The Math Works, Until It Doesn’t | Enterprise Smart Grid

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