Back Up Generators – How Much Are They Worth?

A few months ago we installed a backup generator for a customer in the food distribution business.  Their decision to add the generator was ultimately prompted by yet another New England storm that left them without power.  In the wake of hurricane Sandy many folks are wishing they had made the same decision…

The psychology involved as a company considers adding backup generation is curious.  No company’s management disputes that having on-site backup is a valuable addition to their operation.  But invariably there is a rational explanation for why they have yet to make the investment.

Some businesses don’t have facilities in geographic areas where power outages are common – so they really haven’t felt the pain.  Some manage their risk by pre-arranging flatbed trucks carrying emergency generators which can be delivered to their sites in advance of a weather event.  And, most commonly, facility managers have been unsuccessful at winning their company’s annual capital budgeting war.

Let’s be frank.  Other than the week immediately following a loss of power event, the “let’s add backup generation” conversation is akin to asking your boss to buy more general liability insurance coverage – not an upbeat topic.  Where energy efficiency projects show a measurable financial payback based on energy savings, the financial return for adding backup generation is harder.  It requires putting a valuation on safety, assets at risk and “business continuity.”

Safety is usually easier as businesses already follow Federal and local fire and safety codes for what is required.  It’s pretty black and white if an elevator needs to be able to operate in a power outage.  So “valuation” has already been defined.

Assets at risk are also pretty straightforward.  In the case of our food distribution customer, the value of all perishable food product housed in their warehouse is a large $ number.  Or, for a metals manufacturer running a test on a very sensitive piece of military equipment, a power loss means the entire production run would be compromised – another easy valuation.

Business continuity is the hardest one.  For a commercial office, where the company has a work from home alternative for most employees, what is it really worth?  How much business would be lost if a company loses power for an hour?  For a day?  On the IT front there are wacky stats such as 93% of the companies who lost their data center for 10 days filed for bankruptcy within a year.

Again, can you imagine how excited a manager is heading into corporate budget negotiations to present this case.

However, there are some exceptions.

Recently we performed an assessment for adding backup generation at our customer’s facility in Texas.  Here ERCOT pays financial incentives for low-emission generators which can be added to their grid and controlled as a resource instantaneously – called “spinning reserves.”  The added generation makes the ERCOT grid more reliable – which has a value that they quantify.

The low-emission backup system costs more than a traditional diesel generator ($400k versus $200k), but ERCOT pays $150k per year for the system we designed, where a dirty diesel generator gets nothing.  So our customer gets a better than 3-year payback on their purchase of insurance.

While post-Sandy more Northeast US companies may be reassessing how they value backup generators, it’s not hard to see how incentive programs like ERCOT’s could really spur action – a win for both customers and the utilities.

Which could make buying insurance a much more engaging conversation.

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