Energy Efficiency:: Real Time Energy Infrastructure Investment and Risk Management

Energy Efficiency

Leslie A. Solmes

Energy Efficiency Real Time Energy Infrastructure Investment and Risk Management

Leslie A. Solmes LAS & Associaties 30 Harbor Cove Way Mill Valley, CA 94941 USA [email protected]

ISBN 978-90-481-3320-8 e-ISBN 978-90-481-3321-5 DOI 10.1007/978-90-481-3321-5 Springer Dordrecht Heidelberg London New York Library of Congress Control Number: 2009934352 © Springer Science+Business Media B.V. 2009 No part of this work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, microfilming, recording or otherwise, without written permission from the Publisher, with the exception of any material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

For David

Contents

Introduction ..................................................................................................... 1 Mystery ................................................................................................. 2 Intent ..................................................................................................... 3 Book Structure ...................................................................................... Part I

1 1 1 3

Setting the Stage

1

The Most Reliable Energy at the Lowest Unit Cost............................... 1.1 A Beginning – 1978 ........................................................................... 1.2 Energy Principles ............................................................................... 1.2.1 The Second Law of Thermodynamics ................................... 1.2.2 Resource Scarcity................................................................... 1.2.3 Integrated Energy Supply Systems ........................................ 1.3 The 1978 National Energy Policy ...................................................... 1.4 Our Goal Is….....................................................................................

7 7 8 8 9 10 11 11

2

The Opportunity ....................................................................................... 2.1 Aged Infrastructure ............................................................................ 2.2 Information Technology..................................................................... 2.3 Opposing Business Goals .................................................................. 2.4 Uncertainty......................................................................................... 2.5 The Age Advantage ...........................................................................

13 13 15 16 16 17

3

Energy Supply Systems ............................................................................ 3.1 Components of Traditional Energy Supply Systems ......................... 3.2 Definition of Energy Supply Systems and Ownership ...................... 3.2.1 Electricity System .................................................................. 3.2.2 Customer Systems.................................................................. 3.3 Decentralization ................................................................................. 3.4 Efficient Electrical Infrastructure Development ................................ 3.5 Discouraging Supply-Side Efficiency ................................................ 3.6 The High Costs of Peak Demand ....................................................... 3.7 Back to the Future ..............................................................................

19 19 21 21 23 25 25 26 27 29 vii

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4

Contents

Funding Problems ..................................................................................... 4.1 Piecemeal Approach .......................................................................... 4.2 No Money! ......................................................................................... 4.3 Financial Burden or Investment Opportunity .................................... 4.4 Summary ............................................................................................

Part II 5

6

31 31 32 33 34

A Different Way of Doing Business

Energy Supply Investment Planning Methodology ............................... 5.1 Trust and Collaboration ..................................................................... 5.2 Basic Business Planning .................................................................... 5.3 Where to Start the Planning Process .................................................. 5.4 Building Blocks ................................................................................. 5.5 OA Methodology ............................................................................... 5.6 The Baseline – Steps 1 and 2 ............................................................. 5.6.1 General Facility Description .................................................. 5.6.2 Business Goals ....................................................................... 5.6.3 Facility Budget ....................................................................... 5.6.4 Growth and Escalation Rates ................................................. 5.6.5 Tax Information...................................................................... 5.7 Step 2 – Baseline Energy Use, Costs, and Equipment ....................... 5.7.1 Baseline Energy Usage, Demand, and Costs ......................... 5.7.2 Equipment Specifications and O&M Costs ........................... 5.8 The Baseline Results .......................................................................... 5.8.1 What Will Happen If No Investments Are Made in the Facility?........................................................................

37 37 39 40 40 41 42 42 43 44 45 46 47 48 51 55

The Real Investment Opportunity........................................................... 6.1 Case Studies ....................................................................................... 6.1.1 Navy Utilities Privatization .................................................... 6.1.2 The University of Maryland, College Park Funding Goal ......................................................................... 6.2 Step 3 – Energy Supply System Technical Proposal ......................... 6.2.1 Demand-Side Energy Efficiency Measures and Adjusted Baseline............................................................ 6.2.2 Production and Distribution System Solutions ...................... 6.2.3 Illinois State University Investment Scope ............................ 6.3 Step 4 – Project Financing, Ownership and Implementation Options ............................................................................................... 6.3.1 Construction Information ....................................................... 6.3.2 Long Term Debt ..................................................................... 6.3.3 Long Term Debt Payment ...................................................... 6.3.4 Depreciation ........................................................................... 6.4 Step 5 – The Energy Infrastructure System Investment Plan Reports .......................................................................................

59 59 59

56

61 63 63 65 66 66 67 67 68 69 69

Contents

ix

6.4.1 6.4.2

Executive Summary ............................................................... Proforma and Operational Calculations (Solmes 2008) ........................................................................ Energy Supplier Opportunity – The University of Iowa .................... 6.5.1 Customer and Energy Supplier Benefits ................................

69

A “Living” Business Plan ......................................................................... 7.1 Information and Communication ....................................................... 7.2 Web-Based Financial Modeling Software ......................................... 7.3 Energy Information and Management System Business and Functional Goals .......................................................... 7.4 Information Cost Control ................................................................... 7.5 The Bigger Picture ............................................................................. 7.6 Integration with the Local Utility ...................................................... 7.7 Summary ............................................................................................

81 81 83

6.5

7

8

Profits from Value-Added ........................................................................ 8.1 Change ............................................................................................... 8.2 The University of Southern California............................................... 8.2.1 The Energy Investor’s Proposal ............................................. 8.2.2 Lowest Cost Investment Strategy ........................................... 8.2.3 Lower Implementation and Capital Costs.............................. 8.2.4 Reduced Business Risk .......................................................... 8.2.5 Improved Financial Control and Reporting ........................... 8.2.6 Financing Strategy ................................................................. 8.2.7 Supplier Profits ...................................................................... 8.2.8 What Happened at USC ......................................................... 8.3 The University of New Mexico.......................................................... 8.3.1 The Problems ......................................................................... 8.3.2 Manifestations of UNM’s Problems ...................................... 8.3.3 A Gold Mine of Opportunity ................................................. 8.3.4 Addendum – Public Service of New Mexico (PNM) ....................................................................... 8.4 Utility Investment Incentives ............................................................. 8.4.1 Calpine – Opportunity Missed? ............................................. 8.4.2 The First Rule of Financing ................................................... 8.4.3 A Cascade of Load Reduction and Elimination of Spikes................................................................................. 8.4.4 Maximizing Supplier and Customer Energy Supply Systems ...................................................................... 8.5 Information Technology – Again!...................................................... 8.6 How Do Electricity Suppliers Make Money? .................................... 8.7 Summary ............................................................................................

72 73 80

84 87 89 89 90 93 93 94 94 94 97 98 98 99 100 100 100 100 101 102 102 103 103 103 104 104 105 105 106

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Contents

Part III

Fear of the Unknown

9

Risk Assessment ...................................................................................... 9.1 Investment Plan Assumptions ........................................................ 9.2 Areas of Risk.................................................................................. 9.3 Risk Mitigation .............................................................................. 9.3.1 Project Revenues .............................................................. 9.3.2 EPC Contracts .................................................................. 9.3.3 Operations and Maintenance Contracts ........................... 9.3.4 Primary Fuel Costs........................................................... 9.3.5 Supplemental, Maintenance, and Standby Power ............ 9.3.6 Financing Costs and Off-Balance Sheet .......................... 9.3.7 Environmental Permitting ................................................ 9.3.8 The Uncertainty of Policies and Regulations................... 9.4 Sensitivity Analysis........................................................................ 9.5 The Importance of Timely Information and Communication ........ 9.6 Request for Proposal ......................................................................

109 109 110 110 111 111 112 113 113 113 114 114 115 116 118

10

Energy Service Companies..................................................................... 10.1 Demand-Side.................................................................................. 10.2 Supply-Side .................................................................................... 10.3 Barriers to Implementation ............................................................ 10.3.1 Market Inertia................................................................... 10.3.2 Transaction Complexity ................................................... 10.3.3 Changing Horses Mid-Stream.......................................... 10.3.4 Communication of Financial Parameters ......................... 10.3.5 Limited Staffing and Technology..................................... 10.3.6 The Importance of Applied Training ............................... 10.4 Data Collection – A Policy Priority ............................................... 10.5 Progress .......................................................................................... 10.5.1 CHP – EPA Partnership ................................................... 10.5.2 International District Energy Association ........................ 10.6 Implementation .............................................................................. 10.6.1 One Step at a Time ........................................................... 10.6.2 Levels of Granularity ....................................................... 10.6.3 Comparing Investment Options .......................................

121 122 123 123 123 124 124 124 125 125 126 127 127 127 128 128 129 130

11

Performance-Based Investment Financing ........................................... 11.1 Rebuild America ............................................................................ 11.2 Energy Performance Metrics ......................................................... 11.3 Project Financing ........................................................................... 11.4 University of California, Santa Barbara (UCSB)........................... 11.5 The Serious Cost of Unreliable Infrastructure ............................... 11.6 The Maryland Economic Development Corporation ..................... 11.7 The World Bank .............................................................................

133 133 134 136 137 138 138 139

Contents

11.8 11.9

xi

Guidebooks .................................................................................... Better Than the Stock Market ........................................................ 11.9.1 National Rural Utilities Cooperative Finance Corporation......................................................... 11.9.2 FARECal ..........................................................................

140 141

The Advancement of Energy Efficiency................................................ 12.1 Status of Electricity Supply Systems ............................................. 12.1.1 The Electric Power Research Institute ............................. 12.1.2 Other Points of View ........................................................ 12.2 Barriers and Incentives................................................................... 12.2.1 Implementation of Public Utilities Regulatory Policy Act (PURPA) ...................................... 12.2.2 EPA CHP Partnership ...................................................... 12.2.3 2005 Energy Policy Act ................................................... 12.2.4 Standard Interconnection Agreements and Procedures for Small Generators .............................. 12.2.5 The Energy Independence and Security Act of 2007 ...................................................................... 12.3 What Will Be the Cost of Electricity? ........................................... 12.3.1 National Energy Policy Initiative Expert Group Report ................................................................... 12.3.2 The Potential Benefits of Distributed Generation (DG) and Rate-Related Issues That May Impede Its Expansion ...................................... 12.3.3 US Clean Heat and Energy Association (USCHPA) ....................................................................... 12.4 The Electric Utilities ...................................................................... 12.5 Answer – Opportunity Assessment and Opassess ......................... 12.6 The Value of Emissions Reductions, Waste Disposal, and Subsidies .................................................................................

145 146 146 147 148

161

13

Leadership ............................................................................................... 13.1 Combining Casten and Friedman................................................... 13.2 Work Flow Software and Internet Application .............................. 13.3 Fundamental Currency of Capital Markets ....................................

163 163 164 166

14

Commitment to Resource Efficiency ..................................................... 14.1 Energy Efficiency........................................................................... 14.2 Energy Infrastructure ..................................................................... 14.3 Investment ...................................................................................... 14.3.1 Comparing Options .......................................................... 14.3.2 Who Pays? ....................................................................... 14.4 Real Time ....................................................................................... 14.5 Risk Management ..........................................................................

169 170 171 171 171 172 172 173

12

142 142

148 150 150 151 151 152 153

156 157 157 159

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Contents

14.6

14.7 14.8 14.9 15

173 174 175 175 176 176 178 178 179 180 181 182 183

A Framework for Working Together .................................................... 185 15.1 Utility Incentives ............................................................................ 186 15.2 A Framework ................................................................................. 187

Part IV 16

14.5.1 The ‘Smart’ Grid .............................................................. 14.5.2 Alternative Energy Investments ....................................... Recommendations for a New Energy Information Age................. 14.6.1 Adopt a Standard Tool ..................................................... 14.6.2 Focus on the Full Business Solution ................................ 14.6.3 Support Stakeholder Communication .............................. 14.6.4 Reinforce Adoption.......................................................... 14.6.5 Automate Consumer Data and Translation ...................... 14.6.6 Promote Inter-Operable Energy Software Tools .............. 14.6.7 Institute Energy Unit Costs Reports................................. A Student Energy Core .................................................................. The Larger Energy System ............................................................ Summary ........................................................................................

Addendum

Plan of Work: The American Recovery and Reinvestment Act of 2009................................................................ 16.1 Interpretation of Goals ................................................................... 16.2 Some Ground Rules ....................................................................... 16.3 The Plan of Work ...........................................................................

193 195 195 196

References ........................................................................................................ 199 List of Abbreviations ...................................................................................... 201 Index ................................................................................................................. 205

About the Author

Leslie A. Solmes is founder and president of LAS and was named 1998 Energy Service Professional of the Year and Legend in Energy by the Association of Energy Engineers. She has more than 25 years of senior management experience in the energy field, including energy supply and end-use investments for utility affiliates, power plant development, performance contracting, wholesale energy purchase, sales, interconnection, transportation, wheeling contracts, and environmental consulting. On the cutting edge of energy-related economic thinking, she has authored numerous published articles and papers on energy management and investment and is the creator of the Opportunity Assessment™ energy investment methodology and Opassess software application. She also created and directed the first university energy education outreach program at Michigan State University and five new business entities representing all sides of energy business issues: the Office of Energy Management for Dade County, Florida; Florida Division of Kenetech Energy Services (power plant developer); California Office for Bosek, Gibson & Associates (energy engineering firm); Mission Integrated Energy Services (utility supply investment firm–part of Mission First Financial, now Edison Capital); and in 1995, LAS & Associates, Inc. She has led development and provided testimony in support of energy policies and regulations before the U.S. Congress and departments, State legislatures and Public Service/Utilities Commissions, and local governments. She joins her husband, David Grunau, in their semi-retirement in CA and in New Zealand.

xiii

Acknowledgments

I struggled to maintain the momentum to complete the research and write Energy Efficiency until one day, I asked a wonderful friend, Joan Honeyfield, if she would help me. Joan is creative, articulate, talented, and most of all a great charge of enthusiasm. Joan created the book illustrations. She organized my writing into the editor’s format, structured all the many references, and guided me to obtain copyright permissions. For all her help, I cannot thank her enough. For sharing her spirit and energy, her professionalism and patience, she deserves unlimited acclaim and heroine status. Jeffrey Bedell and Lauren Snell, I could not have done this without you. Jeff first put the Opportunity Assessment methodology into Excel spreadsheets and helped me apply energy infrastructure investment for a host of clients. Lauren Snell stepped in and not only learned to apply OA but guided its development to a web application. Jeff and Lauren, this book is as much your creation as mine. My family…Andrea and Robert Brook, my children, helped me to start my company LAS & Associates. They have been the core of support that keeps me grounded and sane. I love you and thank you. This book is dedicated “to David”. David Grunau is my husband, friend, and strongest supporter. In so many quiet and uncomplicated ways, David provided for the development of Opassess and Energy Efficiency. What can be said about a person who stands behind you in every way? In all the many hours that I spent behind a computer, David not only encouraged me to complete my passion, but improved his tennis game. His is my character and muse. Finally, my thanks to Fritz Schmuhl at Springer as well as Barney Capehart and Tom Tamblyn, who have supported my vision and made the book a reality.

xv

Introduction

1

Mystery

Why, in a world dependant on scarce fossil fuel energy resources and concerned about their impact on global warming, is there no policy that requires energy suppliers to get as much useful energy out of every unit of energy burned? More importantly, why are investors in the United States (U.S.) not using the energy efficiency savings that result from investing in integrated heat and electric power production to finance the upgrade and expansion of the nation’s aged infrastructure?

2

Intent

Energy Efficiency is a journal and a guide intended to communicate to people, especially in the United States, the economic and social benefits of rebuilding our aged, inefficient energy supply systems. My hope is to excite an explosion of investment in integrated energy supply systems where use of internet-based information technology underpins the communication and trust needed to realize the huge profit potential contained in energy efficiency. Electricity, heat/steam, and cooling production and distribution infrastructure across the United States are aged, inefficient, unreliable, and polluting. The ongoing requirements to upgrade energy infrastructure are often ignored until a crisis occurs. The solutions employed often fall into one of two categories: The first approach is follow a tradition of investing in large electricity generation and expand the electric grid. Consumers continue to replace their heating and cooling equipment. Unfortunately, these responses increase pollution and raise the costs of energy to consumers. The alternative solution is patch, patch, patch until there is a deeper, broader and more costly failure. Funding to upgrade customer utilities is too often the last budget item considered.

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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2

Introduction

There is a better way: by committing to policies and practices that require investments in highly efficient production and distribution of electricity, heat/steam, and chilled water supply systems, the United States has an enormous opportunity to reduce the cost of energy, create investment returns, promote employment, increase productivity, and reduce emissions. Highly efficient means that for every unit of fuel that is consumed, the greatest amount of useful energy output results. Highly efficient also means that energy supply investments will demonstrate the lowest combined capital, operating, maintenance, fuel, and environmental costs for the life of the investment. Waste heat/steam from electricity production will be used to serve customer energy needs and customer steam, hot and chilled water production, distribution, and end-use systems will be updated and operated in combination with electric supply systems. The overall goals of a more highly efficient energy supply investment strategy are to gain the greatest value from utility infrastructure and commodity investments, and to sustain this value by managing risk over time. These goals can be accomplished by building and managing integrated utility and consumer energy supply systems that provide reliable energy services at the lowest cost and by dispatching equipment to attain the optimal mix of energy supply, production, and distribution systems to insure reliable supplies of electricity, heat and cooling energy to consumers. Making investment decisions and managing risks of such an integrated system requires real time updates, communications, and reporting on investment plans and performance. Traditionally, electric utilities earn profits by building central power plants with large grids to sell the most power they can at the highest prices allowed – a revenue optimization approach. Adoption of a new investment methodology and web-based risk management tools will encourage electric utilities to earn profits from investments that gain the greatest energy value from each unit of energy – a shift to a viable cost minimization approach. Consumers will enjoy business partnerships with energy supply companies that improve business reliability, profits, and productivity. Investors will enjoy returns from funds that are evidenced as sound financial management leaving aside the emotion of the stock market and Wall Street. Energy Efficiency demonstrates how to implement a joint energy supplier and consumer economic and environmental opportunity and details an energy systems planning methodology called Opportunity Assessment™ and a web-based, three-tier application software called Opassess which are used to demonstrate how to achieve and sustain the value of efficiency investments. More importantly, Energy Efficiency challenges businesses, government, and regulators to lay aside their cultural fears and turf battles to work together to realize profits from investing in efficient infrastructure. The book demonstrates the value of adopting an integrated, energy efficiency investment methodology and web-based tools which will empower people to measure, manage, and report energy investments as living master plans where risks can be managed and returns guaranteed.

3 Book Structure

3

3

Book Structure

Energy Efficiency is presented in three parts. The first part sets the stage for how to gain the most reliable energy at the lowest energy unit cost. The foundation of the book is based on the principles of resource scarcity and resource efficiency setting combined goals of gaining the greatest energy value from each unit of energy consumed and development of integrated energy production systems that reduce capital and operating costs. The investment opportunity contained within aged, inefficient energy production and distribution systems for both electric utilities and consumers becomes the solution to finance rebuilding energy systems infrastructure in the United States and world-wide. Descriptions of traditional energy supply systems, ownership, and development provide a history of how supply systems inefficiencies evolved. What appears as a huge problem of having to find the money to rebuild and expand infrastructure is presented as a huge opportunity that will create jobs, earn profits for both suppliers and consumers, reduce costs and emissions, and improve reliability and security. Part II demonstrates a different way of doing business. Through the use of experiences with energy suppliers and consumers, an energy systems investment methodology called Opportunity Assessment™ (OA) and a web-based software application called Opassess are used to show how by integrating the development of electric, heat, and cooling production and distribution systems sized to meet efficient building end-use, all these investments can be paid for from reductions in energy budgets. In addition, the models show how energy suppliers and consumers can by working together earn profits from efficiency and manage and mitigate investment risks. Use of web-based technology to create and implement energy infrastructure investments allows real time communication to all stakeholders of changing market metrics which is essential to building the trust to close deals and managing investment risks from the beginning of a project and throughout its life cycle. Part III addresses the fears and barriers that have limited the development of energy supply systems efficiency. Risks and ways to manage these risks are detailed. The importance of timely information and communication are keystones to creating long-term, successful business partnerships, over-coming transaction complexity, and incorporating new fuels and technologies. The important role of energy service companies – both demand and supply-side – the legal and regulatory constraints put in place by government and promoted by electric utilities fearful of losing market share – the importance of metrics to performance-based financing – the serious costs of allowing business as usual – new financial structures to earn returns on investment – are all a part of reducing fears associated with making money from efficiency and value-added and not from selling the most energy at the highest price. Part III discusses the progress that is being made to change a paradigm of separate electric and heat/cooling production and distribution systems to one of distributed

4

Introduction

generation promoting combined heat and power. What is happening with federal and state energy legislation; what do the energy experts recommend; what is the electric utilities’ position? Who are the pioneers of supply-side energy efficiency, and what are the battles that they are continuing to fight to be allowed to compete with energy monopolies? The answer to energy infrastructure efficiency is presented as a parallel to the evolution of the information technology industry. Experts like Thomas Casten, Thomas Friedman, Vijay Vaitheeswaran and others come together to point toward the convergence of energy efficiency and information technology. Fundamental prerequisites for economic growth and financing of energy infrastructure include scientifically applied analysis and the ability to rapidly communicate information that is vital to make investment, management, and cost control decisions. Many of these prerequisites are demonstrated through OA and Opassess. Energy Efficiency describes the commitment that is needed to realize resource efficiency and the importance of moving to a new energy information age based on a standard industry framework that is already used by energy service companies to develop and manage energy infrastructure investment. Seven important factors needed to promote the development of a mature, energy-related, information technology are cited. Finally, another framework – the framework of working together – is presented as the solution to realizing energy efficiency, reliability, security, flexibility, economic growth, environmental sustainability, and increased productivity. The framework is based on incenting profitability and efficiency over market share, an alignment of international, corporate, and domestic strategic interests, and establishing cooperative standards and tools where open markets stimulate competition. Note: In order to tell the story of Energy Efficiency, numerous technical terms are used, but the book is intended for a broad audience of people – many who may not be knowledgeable about energy jargon. As much as possible, the text and endnotes offer definitions of some of the terms, but additional definitions may be needed. Rather than duplicate a glossary of energy-related terms, the reader is encouraged to find definitions of terms at the U.S. Department of Energy – Energy Efficiency and Renewable Energy web site: http://www.eia.doe.gov/glossary/index.html

Chapter 1

The Most Reliable Energy at the Lowest Unit Cost

Abstract The author tells the story of how she was selected by Michigan State University in 1978 to conduct the first energy education outreach program in the United States. She describes the energy principals of resource efficiency, thermodynamics, and integrated energy production systems that have supported her efforts to help people control costs and overcome pollution in a fossil fuel driven energy society. She introduces the investment opportunities that exist to pay for energy infrastructure upgrades as well as lower energy costs and reduce emissions. Keywords Cost control • Emissions reductions • Integrated energy production systems • Investment opportunity • Lowest unit energy cost • New energy supply investment era • Paid from savings • Resource efficiency • Thermodynamics

1.1

A Beginning – 1978

I was working in my garden when Jim Neal, my neighbor, waved to me and crossed the street to talk. “Leslie, Michigan State University has decided to start an energy education outreach program. I think that you should apply for the job.” I replied, “But Jim, I don’t know anything about energy.” Jim put his arm around my shoulders, smiled down at me and answered. “That’s O.K. No one else does either.” Within a year, I was not only helping to guide energy education development for Michigan State University (MSU) but also doing workshops for the National Association of Counties. Little did I know that my social science background, especially, economics and political science fused with education studies, directly met the job requirements. Economics is the study of the allocation of scarce resources. In 1978, the United States (U.S.) national energy concerns were how to gain greater efficiency from non-renewable (scarce) energy resources, largely fossil fuels – oil, natural gas,

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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1 The Most Reliable Energy at the Lowest Unit Cost

coal – and how to replace these scarce fuels with renewable resources – solar, wind, geothermal, hydro, and other renewables. The Arab oil embargo in 1973 threatened the economic stability of the U.S. economy with an infrastructure built on consumption of fossil fuels. Transportation, electricity, heating, cooling, water, and wastewater systems were and are the foundation of life and economic growth. MSU sought to define the energy education needs of communities and to provide educational programs to meet those needs. We are now past the turn of the twenty-first century. The question is still with us. “How do we help people use increasing scarce fossil fuel resources to be more efficient and affordable?” Only now, a consciousness of the environmental effects of energy pollution from burning fossil fuels, especially coal and oil, and nuclear waste threatens life on earth as we know it.

1.2

Energy Principles

My on-the-job energy education and delivery began. Leading researchers like Dr. Herman Koenig, an energy agricultural engineer at MSU, taught me three principles that directed my 25 year career.

1.2.1

The Second Law of Thermodynamics

The first principle, that influenced my approach to creating an educational outreach program for MSU, was the second law of thermodynamics. In brief, this law states that every time one form of energy is turned into another, some energy is wasted. I was amazed to learn the waste of fossil fuel energy that results from the generation of electricity. When fuels like natural gas, coal and oil are burned to produce electricity, two-thirds of the energy content contained in the fuel becomes waste heat and is vented into the atmosphere or dumped into rivers and the ocean. In addition to the inefficiency, the heat going into the atmosphere contains carbon dioxide, methane, nitrous oxide, mercury, and other pollutants. It’s Michigan! People are being asked to turn down their thermostats in the winter and turn off their lights to conserve energy. It’s cold and dark. Waste heat is being thrown away? U.S. energy conservation has focused on the demand-side – asking households and businesses to reduce their energy consumption. The time is here to take advantage of the huge opportunity for saving energy on the supply-side, the generation and transportation of electricity, heat, and cooling energy. Electric utilities are the largest energy users in the world, accounting for onethird of all U.S. carbon dioxide emissions. In 1998, Thomas Casten, leading developer and advocate of combined heat and power energy systems, reported, “The production of electricity accounts for one-third of all U.S. carbon dioxide

1.2 Energy Principles

9

emissions, and the energy waste is colossal. The energy thrown away by U.S. electric generators each year exceeds the total energy use of Japan. Then, we burn more fuel to separately produce our thermal energy. These two sectors of the United States economy – heat and power production – consume two-thirds of all the fuel burned in the United States. The remaining third is consumed by transportation.” (Casten 1998, 5). As Casten, wisely knew, investment in heat and power energy supply systems in the U.S. has the greatest potential for energy efficiency and reduction in carbon emissions.

1.2.2

Resource Scarcity

Tangential to the wasted energy to produce electricity, fossil fuel energy is needed to mine, transport, process, and deliver primary fuels – oil, natural gas, coal, uranium – to power plants. The real issue with fossil fuels is resource scarcity. The world is not going to run out of fossil fuels, but the amount of energy that it takes to get useable energy is growing significantly. The net energy gain is diminishing. How many units of energy does it take to get another unit of useable energy? What is the cost, especially if all costs including emissions and disposal are included? For the first 70 years of the twentieth century, economy-of-scale advances in electricity generation contributed to retail cost reductions. By 1970, production efficiency peaked. Utilities reported, “Diminishing economy-of-scale returns coupled with slowing demand growth, higher fuel costs, and rising environmental requirements, all converged to challenge the traditional declining cost-commodity business model and the structure of the utility industry.” (Electric Power Research Institute for the Board of Directors 2003, 2.) Rising energy costs not only impacted customer decisions to conserve but have greatly challenged energy suppliers’ willingness to risk investments in large central power plants and transmission grids. The average efficiency of production is still at 33% for the electric utility industry. An additional 7% is lost in transmission. Yet, the U.S. needs to make capital investments in new energy supply systems. In January, 2006, Eugene Trisko, Esquire, who is an author, lecturer, and advisor regarding energy and environmental economic and policy issues, states, “Over the next 25 years, the U.S. will need to construct more than 300 GW of new power plant capacity to keep pace with rising electric demand and to replace older plants with more efficient technologies.” (Trisko January 2006, 2) Trisko goes on to state that coal provides 50% of the electric generating capacity in the U.S. and 50% of these plants are more than 30 years old. The U.S. is on the cusp of making decisions regarding resource efficiency that will impact its economy and environment for the next 30–50 years. Future chapters tell about the age, inefficiency, pollution, and unreliability of U.S. energy supply systems.

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1 The Most Reliable Energy at the Lowest Unit Cost

1.2.3

Integrated Energy Supply Systems

The third principle is that application of resource efficiency requires an integrated energy supply systems approach. In order to obtain the lowest cost energy and reduce air emissions, construction and operation of all energy systems need to be integrated. For example, the wasted heat energy from burning fossil fuels to produce electricity and manufactured products could to be captured and used for heating and cooling buildings, providing hot water, and other energy uses. However, to capture this efficiency requires that multiple systems be planned, built, operated, and maintained as an integrated system. Integrated energy supply systems by definition must consider gaining the greatest energy value from every unit of energy consumed at the lowest energy unit cost. New energy supply investment economic decisions must consider the total development, capital, operating, fuel, maintenance, financing, management, tax, disposal, emissions, controls, distribution, decommissioning, and other life cycle costs to create each unit of energy. By locating energy supply systems where both power and heat can be used, the total combined cost to provide electricity, heat, and cooling energy to the end-user is reduced and greater utilization of the value of the energy burned results. In addition, less equipment is needed to produce heat and to transmit electricity – thus lowering capital costs. Local energy supply systems are known by many names: ●

●

●

●

●

●

Emergency generators – Generators located a customer’s facilities that are used to provide emergency electricity when the customer experiences interruptions in electricity from the electricity supplier. Cogeneration – A process where fuel is burned to produce electricity and the waste heat is recycled to produce more electricity and/or provide useful heat energy. Cogeneration will also occur when a fuel is burned to produce heat energy largely used in industrial processes and waste heat is also used to generate electricity. Trigeneration – The same as cogeneration except the waste heat is also used to produce chilled water for air conditioning. Combined Heat and Power (CHP) – Use of a primary fuel to produce both useful electricity and heat energy. Central plants with district energy systems – Instead of having heating and cooling equipment in every building, a separate building contains all the equipment to produce and distribute the energy to heat and cool each building. Distributed Generation (DG) – DG is a phrase that can include any of the kinds of generation listed above as well as simply electricity or heat energy generated in or near the place where the energy is consumed. DG can include modular, decentralized, grid-connected or off-grid energy systems. Solar, natural gas, or any other primary fuel may produce heat and/or electric energy on or close to the customer’s site.

The technology to develop integrated energy supply systems has existed for more than a century. To gain the lowest Btu cost, especially emissions costs, all fuels and

1.4 Our Goal Is…

11

technologies that are available for generation and management of power, heat, and cooling should be considered. Integrated energy supply systems investments seek to evaluate all primary fuel options – municipal waste, biomass, solar, wind, fuel cells, natural gas, coal, oil, and any other fuel option to realize and sustain the lowest life cycle cost of long term energy supply systems investments.

1.3

The 1978 National Energy Policy

The same year that I began doing energy education, President Jimmy Carter signed the National Energy Act (NEA). President Jimmy Carter stated, “We have declared to ourselves and the world our intent to control our use of energy, and thereby to control our own destiny as a nation.” (U.S. Department of Energy November 1978) NEA provided for national energy conservation, limitations on utility and industrial fossil fuel use, pollution control, time of use electricity pricing, promotion of power plants that used both electricity and heat energy, generation from renewable fuels, natural gas pricing and deregulation, and tax incentives. While the NEA set the right course to gaining energy efficiency, control of NEA’s implementation was assigned to State public utility/service commissions, legislatures, and local governments. The power of electric utilities came out in force to retain control of their monopoly sales and discourage integrated energy supply systems investments. Future chapters will detail how utilities and consumers can realize profits from integrated energy supply investments and will tell about the regulatory and legal barriers that discourage efficient energy supply systems investments.

1.4

Our Goal Is…

… To help people gain the most reliable energy at the lowest energy unit cost to serve their electrical, heat, and cooling needs. If we think about each gram of energy containing energy content, let’s use British Thermal Units (Btu)1 as a common measurement, then our goal is to gain as much Btu value as possible from each gram of energy. Calculate the combined unit costs in Btu to produce steam, hot and chilled water, and electricity. All contain Btu, maintenance, operation and capital costs.

1 The British thermal unit (Btu) is a precise measure of energy. It is the amount of energy required to raise the temperature of one pound of water 1°F when the water is near 39.2° F. Btu is used as a common measurement unit to be able to compare the energy value of all energy commodities. For example, electricity is measured in kilowatt hours, steam in pounds per hour, and air conditioning in tons per hour. In order to determine the amount of energy value that results from each unit of primary fuel (largely natural gas and coal) burned to produce electricity, heat, and chilled water, all commodities (electricity, heat and chilled water) are converted to Btu’s.

12

1 The Most Reliable Energy at the Lowest Unit Cost

Our assignment is to identify all the costs associated with providing energy supplies that will result in combined Btu unit consumption and cost reduction. Our goal is to gain the greatest amount of energy value from each unit of energy consumed. In realizing this goal, I have found millions of dollars of investment opportunities exist to pay for infrastructure upgrades. Implementation of these upgrades dramatically reduces energy consumption and environmental emissions, improves economic productivity, limits the cost of government, and conveys investment health and stability. Supply-side resource efficiency requires utilities and customers to work together. Future chapters not only describe how to gain the most reliable energy at the lowest unit cost but detail how to accomplish these opportunities in ways that provide for timely decision-making, risk management, and greater profits.

Chapter 2

The Opportunity

Abstract The author cites reports of the cost shock that customers face to pay for electricity generation and transmission systems reliability and capacity problems. She then reveals the equally serious backlog of investment needed to pay for aged and unreliable customer production and distribution systems and the associated investment uncertainty. She explains how customers and suppliers have opposing business goals and how by integrating investments in energy supply systems on both sides of the utility meter, savings in energy supply system efficiencies become an investment opportunity for both suppliers and customers. With proper application of web-based information technology, financial benefits can be realized and risk mitigated. Keywords Capacity • Customer production and distribution systems • Electricity generation and transmission systems • Financial benefits, Integrating investments • Investment uncertainty • Reliability • Risk mitigation • Web-based information technology

Before beginning this chapter, I would like to reference an article called Integrated Energy Systems: Reliability and Lowest Btu Cost that I wrote for the Encyclopedia of Energy Engineering and Technology edited by Barney Capehart and published by Taylor and Francis in 2007 (Solmes 2008). Numerous quotes from that article are contained in the following chapter. To simplify reference, I would like to acknowledge the article and encourage readers to explore this wonderful Encyclopedia.

2.1

Aged Infrastructure

The resource efficiency opportunity begins with investment in aged infrastructure. Both electricity supply systems and customer energy and other infrastructure production and distribution systems in the U.S. are aged and unreliable. The U.S. needs to L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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2 The Opportunity

update its energy infrastructure. The means to pay for infrastructure upgrades is to use the value that can be gained from rebuilding inefficient energy supply systems into energy efficient, environmentally sustainable, and productive infrastructure. August 6, 2003, the Board of Governors of the Electric Power Research Institute reported, “… there is a growing concern that the electricity sector’s aging infrastructure, workforce, and institutions are losing touch with the needs and opportunities of the twenty-first century. The investment gap – inadvertently reinforced by the regulatory uncertainty of electricity restructuring1 – is exacting a significant reliability cost that is seen as just the tip of the iceberg in terms of the electricity infrastructure’s growing vulnerability to capacity, reliability, security and service challenges.”2 By August 14, 2003, the Northeast U.S. experienced power failure that impacted 50 million consumers in the U.S. and Canada. The front page of the Financial Times of 18 August stated, “Public to pay for power upgrade. Energy secretary (Spencer Abraham) warns that much of the $50 bn (billion) bill will be passed on to customers.” The headline that followed on page 3, “Failure of the power came as little surprise to experts. Wake-up call was just latest alarm.” (Financial Times 2003) Energy supply investments are needed, but the public cost for energy should reduce, not increase, cost to consumers. What does not get front-page headlines are the billions of dollars needed to upgrade unreliable, old, customer energy supply production and distribution systems like heat, air conditioning, and water. One example is APPA: The Association of Higher Education Facilities Directors. APPA represents facility managers from colleges and universities throughout the U.S. and world-wide. APPA reported in 1995 that the backlog of deferred maintenance for colleges and universities was $26 billion (APPA 2008). The major portion of this backlog was needed for utility systems upgrades. The problem has not gone away.

1 Electricity restructuring is a phrase used to describe a situation where State public policy makers require investor owned utilities (IOU) which own electric power plants to sell them to other business entities which compete to sell wholesale electricity. The intent is for States to increase competitive pricing of electricity and reduce regulations that set rates. At one time, restructuring was called deregulation. However, while the supply was deregulated, the price was not. Numerous state and federal policies and actions (or inactions), especially in California, resulted in large cost increases in retail rates especially by electric producers gaming (manipulating) the electric grid and operating their plants in ways to artificially increase the retail price. The CA experience was a result of regulatory failure not true deregulation. The U.S. now has a mixture of regulated and restructured electric generation. Pennsylvania is cited as the best case where electric restructuring has reduced costs. Electric Power Industry Restructuring Fact Sheet www.eia.doe.gov/cneaf/ electricity/page/fact_sheets/restructuring.html 2 The Electric Power Research Institute or EPRI is a non-profit organization which drives longrange research and development planning for the electric industry. EPRI’s members represent more than 90% of the electricity generated in the United States. International participation in its programs includes 40 countries.

2.2 Information Technology

15

The U.S. needs new electricity generation and transmission systems. The U.S. also needs to upgrade and expand customer heat, cooling, water, and other production and distribution systems. These needs are not problems but opportunities – huge investment opportunities. The U.S. can now upgrade these systems as an integrated investment, not the traditional approach of separate energy supplier generation, transmission, consumer production and distribution systems, and building end use that will be illustrated in Chapter 3. Rather than losing money and energy through the traditional approach of investing separately in electricity and customers’ energy supply systems, right now we can build systems as integrated investments, save money, make money and stop wasting energy. The out of pocket increase in costs to customers forecasted in the Financial Times does not have to be billions of dollars. For two decades, customers have learned how to use existing operating budgets to pay for capital upgrades by integrating primary fuel supply, production and distribution systems, and end-use technologies to find the lowest overall unit cost for energy. Projects described throughout this narrative tell the stories that prove our opportunity is real if we choose to change to a new energy supply investment era where energy suppliers, service companies, and consumers work together to plan, communicate, rebuild, and operate efficient energy systems. The key to realizing the investment opportunity is to learn how to use a comprehensive, integrated approach to utility systems investment and cost management. Huge economic benefits are available to energy suppliers and consumers. Instead of a piecemeal approach to upgrading energy supply systems, we can work together to rebuild and manage all energy systems needs as an integrated strategic business initiative. Case histories from colleges and universities, airports, medical centers, Navy bases, and other facility owners nationwide demonstrate the benefits that result from using the comprehensive, integrated approach to design and implement utility systems operations and upgrades. In every case, Btu energy yields increase and the unit costs of energy are reduced. Operating budgets pay for energy and for multimillion dollar upgrades in facility infrastructure with no increase in operating costs and improved energy reliability.

2.2

Information Technology

Key to the adoption of the integrated approach is instituting real time business communication, decision-making, and risk management capability. This means integrating the information technology systems that will transmit time sensitive data to all people involved in managing the investment plan. In the energy world especially, costs can change moment by moment. Built into the investment are technology and operating options that allow people to control costs if they have timely information to turn equipment on and off based on market price signals and operating requirements.

16

2 The Opportunity

Realizing financial benefits from energy supply investments mandates the use of web-based information systems. Web-based technology allows investors to see the financial impacts of changes resulting from equipment operations, costs, and customer demand. With the complex and dynamic nature of energy supply and demand, web-based technology is essential for all stakeholders to manage and mitigate risk.

2.3

Opposing Business Goals

In the decade of the 1980s, I was invited to develop and direct the Office of Energy Management for Metropolitan Dade County, Florida, a newly formed staff office of the County Manager. The new Office’s primary job was to help departments have reliable energy to meet their service requirements at the lowest cost. This meant buying the least energy for operations at the lowest price. It took a number of months to confirm that three-quarters of the County’s energy costs were from purchase of electricity – an amount of about $60 million annually. Electricity was primarily purchased from the local utility, Florida Power & Light Company (FPL). FPL’s business goal was to sell the most power it could at the highest price that it could get. Obviously, these are opposing business interests. Every purchaser of energy supplies is seeking the same least cost goal. Every supplier has the goal of larger sales and higher revenues. This fundamental difference in business goals is the basis upon which energy infrastructure efficiency and emissions reductions have not occurred.

2.4

Uncertainty

Public policy and regulations have caused vast uncertainty for the electric utility industry. From the 1970s through the end of the twentieth century, changing regulation and growing competition from independent power producers have made the utilities’ obligation to provide electricity at any time a moving target. How much reserve is needed to serve general customers is unknown. Financial risk caused investments in power plants and the grid to virtually stop. Demand growth slowed; environmental requirements rose; fuel prices increased. The Electric Power Research Institute’s Board views the twenty-first century solution as one of building two-way communication systems among suppliers and consumers. With information technology and the integration of distributed (decentralized) energy resources planning, investment risk to build and manage energy supply can be reduced. What is interesting about this solution is that it is exactly the right solution for energy suppliers and customers to plan and invest in upgrading energy supply systems.

2.5 The Age Advantage

2.5

17

The Age Advantage

We know that both utility and customer-owned energy supply systems in the U.S. are largely aged and inefficient. Reliability and financial uncertainty are serious problems on both sides of the meter. Here is our economic opportunity to update these systems, save huge amounts of energy, pay for capital costs out of budget savings, earn returns on investment, and dramatically reduce greenhouse emissions.

Chapter 3

Energy Supply Systems

Abstract The author illustrates electric utility and customer energy supply systems by breaking down the component parts of each supply system and explaining how integration of the systems results in energy savings. Background is provided on why energy supply systems have been built inefficiently and why the costs have increased. The issues of competition and regulation, especially utilities’ obligation to provide electricity upon demand, are explained. She demonstrates how rebuilding the systems in concert can overcome investment risk, result in efficiency and reduce costs. Keywords Competition, Component parts of supply systems, Customer supply systems, Electric utility, Obligation to serve, Regulation

3.1

Components of Traditional Energy Supply Systems

There are three components to an energy supply system – the primary fuel supply, the production and distribution1 equipment and systems, and building or facility end-use. The three components are illustrated in Fig. 3.1 – Energy system. Notice three ovals that distinguish the separate energy fuels, production/distribution electric, heat,2 and cooling systems, and end-use or consumption of electric, heat, and cooling energy. The real meaning of energy efficiency is to gain as much useful energy output from every unit of primary energy fuel consumed. To accomplish energy efficiency, planning, investment, and operations of the energy system components must be integrated. Energy primary fuels are coal, oil, natural gas, nuclear, solar, wind, geothermal, biomass, ocean currents/tides, fuel cells and other elemental (primary) fuels. They

1 This book will use distribution as a generic term, regardless of voltage or volume, to mean all the equipment needed to transform and move electricity, heat, and chilled water energy from the production source to a building. Distribution is also known as transmission and transportation of energy. 2 Heat is used generically for steam, hot water, and any other heat energy.

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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3 Energy Supply Systems

Primary Fuels Supply

Production & Distribution Systems

i.e., coal, natural gas, etc.

i.e., electrical, heating, cooling

Primary Fuels Supply Contracts

Production & Distribution Systems

Building End-Use Systems.

Building End-Use Systems.

= Lowest Cost

Fig. 3.1 Energy system

also can come from waste, both liquid and solid. These fuels must be converted (in most cases burned) to produce electricity, heat (a.k.a. steam energy), and ultimately chilled water. Electricity, heat, and chilled water are considered generation/production and transmission/distribution systems. Each of these commodities (electricity, steam, and/or chilled water) is consumed to serve end uses – run equipment, lights, appliances, and heat and cool buildings.3 The selection of primary fuels, the selection of equipment to produce and transmit electricity, heat, and cooling, the selection of the location where the production/distribution systems are built – all impact the cost to the consumer and the efficient output of the primary energy consumed. Traditionally, the U.S. has attempted to reduce consumption and provide incentives to improve the efficiency of the end-use. Heat and cooling systems have also been lumped into end-use. While it is important to improve the efficiency of the end-use consumer, the largest single consumer of energy is in the production of electricity. (In the U.S., due to monopolistic policies, the largest single energy consumer is the electric utility.) Common practice is to think of electricity as a primary fuel. It is not. The greatest gain in energy efficiency is to improve the efficiency of the electric, heat, and cooling production and distribution systems. In the process of burning or converting primary energy to produce electricity, two-thirds of the energy content of the primary fuel becomes heat and thrown away by electricity producers. To gain efficient use of primary fuels, as much of the fuel content of the primary fuel must be converted to usable energy and not thrown away. The measurement of efficiency determines how much of the energy content of each unit of primary fuel used is realized in energy output. The best possible outcome is that the useable output of each unit of energy consumed will be as close as possible to 100% of the initial Btu energy content of the primary fuel.4 3 This explanation is simply stated. Compressed air and other industrial energy are not overlooked but not included at this time. 4 Electric utilities have invested in natural gas fueled combined cycle generation which can reach fuel efficiency levels of 55 %.

3.2 Definition of Energy Supply Systems and Ownership

3.2

21

Definition of Energy Supply Systems and Ownership

In order to achieve energy and cost efficiency, it is important to not only understand the component parts of energy supply systems, but also to know who makes decisions regarding the design, location, and operation of the various parts of energy supply systems, especially electrical systems. Figure 3.2 – Traditional energy supply system – below, pictures how primary fuels are used to produce electricity. Electricity is then distributed to homes, businesses, and institutions. Waste heat is evaporated into the air and nearby water sources. Primary fuels are also burned to provide heat energy at customers’ sites.

3.2.1

Electricity System

Coal and natural gas supply two-thirds of the electricity generated in the U.S.5 Simply stated these fuels are burned to produce steam which turns generators to produce electricity. An electrical power grid transports electricity from power plants to high voltage substations and transmission lines to other substations.

waste heat meter coal

commercial

natural gas

heating substation natural gas

nuclear

coal

electric power plant

substation & meter

industrial heating

wood

wind substation solar electricity other renewables

oil

residential meter

heating

other renewables

1. 67% wasted heat energy in electric production 2. 7% wasted heat energy in electric distribution 3. Additional burning of fuels for production of customer heat energy 4. Utility ownership of electrical energy production & distribution 5. Customer ownership of heating & cooling systems

Fig. 3.2 Tradtional energy supply system

5 Official Energy Statistics from the U.S. Government as reported by the Department of Energy, Energy Information Administration show Existing Capacity by Energy Source, 2006. See Table 3.1.

22

3 Energy Supply Systems

The second substation reduces the voltage and the power flows through distribution lines, transformers and regulator banks to the electricity meter at the customer site. For most residences, businesses, and institutional customers, electric utilities own all the equipment and facilities that are used to produce, deliver, and measure (meter) electricity to customers’ properties. For large institutional and industrial customers like universities and industrial operations, the electric utility meter may be at the substation. In this instance, the customer will own the substation and electric distribution systems. Energy supply contracts (also known as your monthly bill) state the conditions and charges that customers pay for the purchase of electricity. The electricity costs include money spent to build power plants, electricity grids, and storage facilities including the capital costs for substations, transmission lines, and other energy transportation as well as measurement (metering) equipment. Energy fuel, operating, administrative, and maintenance costs to operate energy supply systems are also part of the cost of electricity.

Table 3.1 Existing capacity by energy source, 2006 (megawatts) Energy source

Number of generators

Generator nameplate capacity

Net summer capacity

Net winter capacity

Coal [1] Petroleum [2] Natural gas [3] Other gases [4] Nuclear Hydroelectric conventional [5] Other renewables [6] Pumped storage Other [7] Total

1,493 3,744 5,470 105 104 3,988 1,823 150 47 16,924

335,830 64,318 442,945 2,563 105,585 77,419 26,470 19,569 976 1,075,677

312,956 58,097 388,294 2,256 100,334 77,821 24,113 21,461 882 986,215

315,163 62,565 416,745 2,197 101,718 77,393 24,285 21,374 908 1,022,347

[1] Anthracite, bituminous coal, sub-bituminous coal, lignite, waste coal, and synthetic coal. [2] Distillate fuel oil (all diesel and No. 1, 2, and 4 fuel oils), residual fuel oil (No. 5 and 6 fuel oils and bunker C fuel oil), jet fuel, kerosene, petroleum coke (converted to liquid petroleum, see Technical Notes for conversion methodology), and waste oil. [3] Includes a small number of generators for which waste heat is the primary energy source. [4] Blast furnace gas, propane gas, and other manufactured and waste gases derived from fossil fuels. [5] The net summer capacity and/or the net winter capacity may exceed nameplate capacity due to upgrades to and overload capability of hydroelectric generators. [6] Wood, black liquor, other wood waste, municipal solid waste, landfill gas, sludge waste, tires, agriculture byproducts, other biomass, geothermal, solar thermal, photovoltaic energy, and wind. [7] Batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, tire-derived fuels and miscellaneous technologies. Notes: Capacity by energy source is based on the capacity associated with the energy source reported as the most predominant (primary) one, where more than one energy source is associated with a generator. Totals may not equal sum of components because of independent rounding. Source: Energy Information Administration, Form EIA-860, “Annual Electric Generator Report.”

3.2 Definition of Energy Supply Systems and Ownership

23

Finally as electricity supply systems investments are evaluated, emissions and waste disposal must be part of the total costs. The environmental emissions costs from burning fossil fuels, biomass, and waste fuels are not included in the cost to the customer. The full costs of nuclear waste disposal have not been factored into the consumer price. Also, not included in electric costs is the money spent by government for research and other support services to the electric industry. In addition to the energy burned to produce electricity, energy is used to mine, process, and transport natural gas, coal, nuclear and other fuels to power plants.

3.2.2

Customer Systems

On the customer’s side of the meter, energy production systems are designed, built, operated and owned by the customer. Once electricity gets to a customer’s site, fuses and circuit breakers located on the customer’s property are safety devises. Electricity flows through building electrical panels and wires to outlets. All this is needed to keep refrigerators running or turn on lights. Customer electrical generation, with some exceptions, has been traditionally limited to standby generators to meet critical operating needs when the electric grid goes down. Customers generally, burn oil, natural gas, wood, and electricity to produce heat energy for manufacturing, space heating, hot water, sterilization, air conditioning, and/or other uses. Most customers have these production systems in each of their homes or buildings. Customer energy production and distribution equipment include furnaces, air conditioners, boilers, chillers, pipes, pumps, wires, ducts, and other equipment. Customer distribution systems transport electricity, hot water, steam, and chilled water to buildings where these forms of energy are used to provide comfort and light, manufacture products, run equipment, support sanitary, cooking, and other services. Because of the location of central electric plants, customers are unable to use waste heat from electric generation and must burn additional fuels, including electricity to provide heat and cooling energy. Medium or large customers like colleges, universities, industrial complexes, large retail centers, medical centers, large urban centers, military bases, and other customers may have combined their production systems into a central plant and district energy system instead of having separate heat and cooling production systems in each of their buildings. These district energy systems produce steam, hot water or chilled water at a central plant and pipe the energy to multiple buildings for space heating, hot water, and air conditioning. Figure 3.36 – District energy system – is shown below.

6 Combined heat and power plants are also called trigeneration – electricity, heat, and cooling are produced.

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3 Energy Supply Systems

com m ercial coal

natural gas

other sources

district energy plant

industrial

cooling hot water / steam

residential

Fig. 3.3 District energy system

Often district energy systems can reduce the energy used in customer production systems by as much as 50%. If each building has its own heating and cooling equipment, the variation of temperature over the day, month, and year often results in the building equipment being operated partially loaded. This means that large equipment has to be operated for a small amount of heating or cooling. Even the most efficient equipment that is run partially loaded is inefficient. By having multiple boiler and chiller equipment in a central plant, fewer pieces of equipment are needed to operate during the time when demand for heating and/or cooling is low – thus saving energy and capital costs. District energy plants often have the flexibility to change primary fuels as price and technologies change. Some customers have combined heat and power plants (CHP) called cogeneration (or trigeneration). Electric generators located at customers’ sites are sized to use the waste heat from electrical production to heat and cool buildings in a surrounding area through a district energy system. Cogeneration is possible due to the demand for heat energy close to the source of the electric production. Industrial processes will sometimes cogenerate by using high pressure waste heat to produce electricity. Proper location of power plants to heat loads means that the efficiency of electricity generation can be doubled or tripled. Because all energy systems costs are born by the customer, the customer should be most interested in making sure that all decisions to design, build, locate, finance, operate, and maintain electric, heat, and cooling production and distribution systems are integrated and efficient. Society is certainly interested in reducing emissions caused by operating energy supply systems.

3.4 Efficient Electrical Infrastructure Development

3.3

25

Decentralization

Electrical generating systems in the early 1900s were located in small towns and urban centers where the waste steam from electricity generation was distributed to nearby residences and businesses for heat. Technology advances in generation and transmission equipment led to the development of larger plants located distant from urban centers. Development of U.S. district heating systems declined. With the exception of a few cities like New York City, electric utilities left district systems to decay. Waste steam was no longer an important energy commodity. Due to the efforts of companies like Trigen Energy Corporation (Trigen),7 some old city district systems have been renovated and are currently providing electricity, steam, and chilled water to multiple users. Primary fuel efficiencies are over 70%. Our current electrical systems were built during a time of perceived “unlimited” resources. Central power stations were built with increasing economies of scale and declining unit costs. Investors did not consider the capture of waste heat to be economically important. By the early 1970s, energy costs were rising and the economies of building centralized electricity generation declined. By design, U.S. power plants could not gain the full use of the energy content contained in the primary fuel. Due to the long distances that electricity is transmitted to reach customers, additional losses also occur. These are usually called line losses. Increasingly the problems with electricity brownouts and blackouts are due to limitations and problems with the electrical grid. Electricity customers can also suffer huge increases in electricity costs largely due to electrical generators gaming (manipulating) the electrical grid.8 When electrical generation is located remotely from customer facilities and the waste heat is thrown away, customer electricity costs must still include the cost of the wasted energy. Customers must burn additional fuels to produce heating and industrial process energy. Higher costs and more pollution result from the burning of all forms of energy.

3.4

Efficient Electrical Infrastructure Development

Recognition of resource scarcity is now a common economic consideration. Add environmental pollution costs to the equation, and the costs grow even higher. 7 Trigen Energy Corporation has fourteen district energy facilities in major cities throughout the U.S. which operate at over 70% primary fuel efficiency. www.trigen.com 8 Restructuring of electricity production in California resulted in giving some producers the strategic capability to limit production in a manner that caused high electricity costs to the consumer. Production in areas, like San Diego where there isn’t sufficient electric production capacity to meet local demand, could be turned on and off in a manner that would impact price. This is called “gaming the grid”.

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3 Energy Supply Systems

electric power plant

coal

commercial

combined heat & power production

industrial

natural gas thermal storage other sources

residential electricity cooling hot water / steam

Fig. 3.4 Integrated energy supply system

Electric and customer energy supply systems need to be built in a design that integrates electric, heat, and cooling systems either on customers’ sites or in a district energy configuration. Figure 3.4 – Integrated energy supply systems – below shows a combined heat and power plant producing the electric, heat, and cooling energy to serve multiple buildings. Combining electrical production development in coordination with customer heating, cooling, hot water and process systems allows for the use of the waste heat from electricity production to be transferred to the customers production/distribution systems. Waste heat can substitute for having to generate heat and cooling with other fuels. This allows for a high portion of the Btu content of primary fuels used for generation electricity to be useful energy. In addition, less burning of fossil fuels reduces greenhouse gas emissions. Integrating cogeneration with district heating and cooling systems adds another level of energy efficiency. Integrating production and distribution of energy commodities does not mean that separate electricity production is not needed. Local generation, however, reduces the need for new central plant investments and allows time for larger scale electric generation from renewable fuels.

3.5

Discouraging Supply-Side Efficiency

The 1978 National Energy Act encouraged development of combined heat and power plant called cogeneration. Unfortunately, electric utilities have largely worked since that time to discourage this landmark legislation. Other books have

3.6 The High Costs of Peak Demand

27

been written recounting the stories of utility dealings that prevented cogeneration development in the U.S. It is enough to say at this time that utilities did not want independent ownership of electric generation because it caused competition and took away their control and profits. As energy infrastructure investment is presented in this book, the reader will learn that utilities can gain improved profitability by working with the customer to create reliability and energy efficiency.

3.6

The High Costs of Peak Demand

Resource scarcity is just a part of the growth in electricity costs. Utilities have traditionally been required to serve the customer whenever the customer demands energy. Electric utilities’ “obligation to serve” means that it has to have sufficient generation to meet customer load requirements at any time. High costs are directly related to peak demand. Energy needed for heat and cooling is often seasonal. Price is impacted by the time of day that customers demand electricity. For example, electricity is used to provide air conditioning. Air conditioning (AC) has seasonal fluctuations in how much electricity is needed. AC also has daily changes in electricity demand. Figure 3.5 – Purchased electricity usage costs – presents hourly purchased electricity usage costs for January 1997 and July 1997. Notice how seasonal demand for electricity differs substantially. The highest peak demand in July costs $1,400 per hour compared to about $600 per hour in January. The higher price is due to the utility having to provide electricity for a very short period of time to meet the customer’s air conditioning load. Daily Averages for January & July $1,400 $1,200

Cost per Hour

$1,000 $800 Jul On-Peak Avg Jul Off-Peak Avg

$600

Jan On-Peak Avg Jan Off-Peak Avg

$400 $200 $1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Day of Month

Fig. 3.5 Purchased electricity usage costs

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3 Energy Supply Systems

Most hours of the day, the customer’s electricity demand is relatively constant. Equipment operation, weather and other factors can cause demand to go up considerably. The supplier is obligated to serve the customer’s peak demand, but for the rest of the day, the electrical generator might sit idle. Short-term high demand for air conditioning can add significantly to the need for more generating plants. The cost of the additional generation capacity needed to serve short-term loads must be spread across fewer units of energy sold. Higher unit prices result during system peaks.9 Waste heat from district systems can also be used to fuel air conditioning equipment. In order to select the most efficient combination of generating and air conditioning equipment to meet customer electrical and air conditioning loads, electricity and chilled water use and unit costs must be properly mapped and communicated to system operators. Mapping of the customer’s time of day costs for electricity helps to determine unit costs for electricity, heat and cooling. Accurate and timely data allows the people who purchase and operate energy systems to select the right sizes of equipment and know how to operate and maintain them in coordination with one another. Information technologies exist to support this effort but rarely are in place due to perceived funding constraints. Figure 3.6 – District cooling customer demand profile – is an excerpt from the International District Energy Association web site. (International District Energy

1600 1400 1200

1994 – Before District Cooling

kilowatts

1000 800 600

1995 – After District Cooling

400 200 0 Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Fig. 3.6 District cooling customer electric demand profile

9 The vast majority of electric ratepayers do not have meters to show the electricity cost during different times of the day, nor are electric rates based on time of use. Customers do not have the knowledge or incentive to reduce electricity use when the cost is high.

3.7 Back to the Future

29

Association 2007) The graph shows the change in electricity demand that resulted from putting in a district cooling system in Cleveland, Ohio. The project not only displaced the need for two electric chillers but it reduced the peaking effect of its electricity needs. The electric utility could avoid building generation and transmission capacity to serve the peak 700 kW load. In addition, the utility could sell 800 kW of electricity all the time, thus optimizing the value of its plant output. While the utility would still need to serve customers when their equipment is down for maintenance, having numerous customers and coordinating the scheduling of maintenance would reduce risks associated with outages and maintenance. Use of waste heat and other technologies to meet seasonal and short-term air conditioning loads helps utilities avoid building large generating stations that run only fractions of the time. In addition, having a small generator (called distributed generation) close to the customer reduces the load on the grid.

3.7

Back to the Future

An integrated energy supply investment recognizes resource scarcity where it takes more and more energy to obtain useable energy. The costs of energy production inefficiency and associated pollution have impacted our financial and physical wellbeing. The time is now to admit that our energy supply systems, especially electricity production and distribution, are hugely inefficient. In order to accomplish resource efficiency and reduce investment costs, customers and energy suppliers must upgrade their aged and inefficient energy supply systems by working together. Resource scarcity has brought us full circle back to investing in energy supply systems that integrate electricity generation with customer heat, cooling, and manufacturing systems. By investing in integrated supply systems both suppliers and consumers profit from increased reliability and resource efficiency.

Chapter 4

Funding Problems

Abstract The high investment price tag perceived by suppliers and customers to pay for energy supply system capital has led to funding practices that abort the opportunity to gain efficiency and realize lower costs. The author presents the central focus of the book – how to finance the upgrade and expansion of energy supply and consumption systems, reduce energy costs and emissions and earn profits. Keywords Capital costs • Finance energy supply and customer systems • Funding problems • Profits

4.1

Piecemeal Approach

Design, construction, operation, and maintenance as well as replacement of energy systems are traditionally done piecemeal. The energy generation, transmission, production/distribution, and end use sectors are all created and run independently. Not only is each sector owned by different entities, but also within each sector, decisions for selection, acquisition and operation of individual pieces of equipment and fuel purchases are done one piece at a time. For example, a university needs to replace a new boiler to adequately heat its campus buildings. Recommendations for selection of the boiler size, fuel type to operate the boiler, location on campus and operating requirements are usually made by the utility operations staff. Design engineers, procurement, financing, capital planning staffs and others add their functions for the selection, installation, and operation of the equipment. These functions, performed by various staff, are often independent from the operations people and of one another. Ultimately, all of the assumptions regarding costs of buying and operating the boiler are not coordinated and out of control. Trying to solve the boiler problem independently from other infrastructure needs adds to the costs and operations problems. In order to realize goals of least cost and most efficiency, specifications for the type, size, fuel type, and operations of the boiler need to be considered relative to electrical and other systems changes. L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

31

32

4 Funding Problems

If electric generation were located close to the steam needs of the university, they could use the waste heat. Use of waste heat could dramatically change the boiler requirements and impact the price of steam. A great deal of this book will demonstrate the importance and value of an integrated approach to energy systems investments.

4.2

No Money!

When I first arrived in Dade County to create the Office of Energy Management, I asked if the County had surveyed its buildings to identify energy efficiency and/or other cost savings measures. The answer was no. The County had not done energy surveys of its buildings. Because there wasn’t money to fund the changes needed, staff didn’t want to embarrass the County by printing reports. My initial reaction was why create an Office of Energy Management? I realized that the real mission of the Office was to find ways to fund building upgrades without going to the Board of County Commissioners for new appropriations. The staff of the Energy Office worked to create funding projects that paid for themselves through energy and maintenance savings. With the help of the Offices of Budget, Finance, and Computer Services, automated utility bill accounting, revolving investment funds, master lease financing and private sector performance-based financing were created. Millions of dollars of projects were implemented that used savings on utility bills to pay for new roofs, chillers, lighting, and other capital needs. The best story came from contracts with an energy service company that invested $1 million in seven County buildings and split the energy savings with the County. We updated seven buildings and reduced their budgets. The savings in energy costs not only paid for equipment and new roofs, the County received additional savings to reduce its budget costs. The only glitch occurred in two correctional facilities, especially, Dade’s main jail. Due to prisoner overcrowding at the time, the way to control prisoner disruptions was to make them cold by lowering the temperature. Obviously, this increased the use of electricity for air conditioning. Because this situation was unfair to the service company who relied on reducing the energy budget to earn profits, the County eventually paid the service company for its investment and assumed the financial risk of paying for the equipment from savings. In all the 25 years that I worked in the energy field, I was hired to help energy consumers find ways to pay for infrastructure upgrades. Most companies called infrastructure upgrades deferred maintenance. Often the needs went beyond deferred maintenance to finding money to pay for expansion of energy and water supply systems. My clients knew that investments in more efficient equipment could create energy budget savings but did not know how much or how to gain the support of their financial managers to commit to an investment that would pay for itself out of operating budget savings.

4.3 Financial Burden or Investment Opportunity

33

In addition to the stress caused by aged energy systems, facility managers wanted to be able to control their annual costs of energy. Often the budget appropriated for paying the energy bills didn’t go far enough to get them through the entire year. How to control energy costs was a major problem. The real question regarding no money is whether consumers are willing to invest their own money in energy supply systems? In October, 2006, Claudia Deutsch reported in the New York Times, that companies like General Motors, Alcoa, Whole Foods Markets, Staples as well as school districts and municipalities cannot support large capital investments in anything but their core businesses. (Deutsch 2006) While investments in energy efficiency and renewable generation are viewed as important, especially with concerns about climate change, large energy infrastructure investments will not gain funding.

4.3

Financial Burden or Investment Opportunity

The central focus of this book is how to finance the upgrade and expansion of energy supply and consumption systems. Human cries from all households, institutions, and businesses in the U.S. reveal that all sectors of energy systems are aged, unreliable, and inefficient. Utility blackouts and inadequate natural gas supply systems are occurring more frequently. Customers report that their boilers are aged, water pressure won’t meet fire protection requirements, and buildings’ heating and cooling systems are old and inadequate. Life/safety is a problem often for hospitals and universities. Businesses with old production/ distribution systems lack the ability to compete. Even the U.S. government mandated that all branches of the military sell their base utility systems to private companies so that they don’t have to fund billions of dollars of base utility infrastructure needs. In unison, everyone choruses that they cannot get money to do major maintenance and upgrades. When money is available, investments are made piecemeal. Utility infrastructure costs are seen as a financial burden that requires more money. Institutional and business decision-makers believe that they have to divert money from their primary business needs to fund maintenance. “Let’s put scarce appropriations into education and hope the boiler will last a few more years. After all who wants to endow money to get their name on a boiler?” But we all would like to be recognized for reducing operating costs and saving lives, which these upgrades will do! Working with dozens of colleges and universities, medical facilities, and other customers as well as Navy bases that represent nearly two-thirds of the U.S. Pacific fleet, it has been demonstrated that energy supply efficiency upgrades can pay for infrastructure upgrades and operating budgets can be reduced. If energy suppliers are willing to partner with customers to invest in the full potential of energy efficiency, they have the potential to earn substantially more returns than they earn just building power plants and selling electricity. Future chapters discuss how much.

34

4.4

4 Funding Problems

Summary

The common perceived view of having aged, efficient energy supply systems is that this situation is a huge problem. Customers and energy suppliers have practiced funding policies of patch, patch, patch and one piece at a time. Only limited investments have been made in replacement of aged supply systems. The high capital costs of investing in customer heating and cooling systems upgrades discourage funding. The heart of the opportunity in the new energy supply investment era is upgrading aged and inefficient electrical, heat and cooling production and distribution systems and balancing loads as an integrated system. Only then can we gain the greatest Btu energy value and unit cost control. Only then can the cost savings achieved by efficiency and integrated energy supply systems’ management pay for the cost of investment and earn returns. Let’s learn how to make this happen.

Chapter 5

Energy Supply Investment Planning Methodology

Abstract In order to build and sustain a business relationship between energy suppliers and customers, the author establishes the business planning, communication and evaluation process. The reader is given a detailed five step methodology on how to develop an integrated energy supply business investment plan and compare a status quo plan with alternative technology, implementation, financing and ownership options. The author uses an Opportunity Assessment™ pyramid structure and Opassess software application to help the reader catalog all the assumptions that must be included in a full life cycle investment plan as well as the process and reports needed to make sound business decisions. Anecdotes of experiences at the University of Maryland, College Park, Illinois State University, the University of Iowa and the Department of Defense provide meat to the planning process and give evidence of the financial benefits of integrated investments to both customers and energy suppliers. Keywords Alternative technologies • Assumptions • Baseline • Business planning • Communication • Evaluation process • Business relationship • Energy supply investment planning methodology • Financial benefits • Implementation • Investment opportunity • Life cycle • Opassess • Opportunity Assessment • Ownership • Real time • Reports • Software application

5.1

Trust and Collaboration

In order to build and sustain energy supply investments on both sides of the electric meters, suppliers and customers must trust one another and be open to collaboration. A standard energy supply investment methodology must be adopted. All stakeholders must have easy access to not only the basic assumptions that make up a business investment plan, but be able to see the impact of changes in those assumptions over time.

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

37

38

5 Energy Supply Investment Planning Methodolgy

Before a decision is made to pursue an investment, drawings and directions must be identified on how to build a specific design for all facilities and equipment with stipulated performance requirements. Life cycle investment costs and revenues must be defined to determine how the investment will be paid as well as the value of the investment compared to other investment options. With the investment plan will be assumptions regarding who will implement, finance and own the investment. Tax issues may come into play. Operating and maintenance costs are projected. In order to answer all the many questions associated with making a decision about an investment, comprehensive planning is required. Stakeholders – suppliers, service providers, investors, and consumers – must agree on the methodology and assumptions upon which their energy supply systems will be integrated, updated, operated, maintained, financed, and owned. In addition, they must agree on how they will split the benefits and who will manage the risks. Successful business investment is accomplished by careful, clear business planning. In addition, it is essential to identify the areas of the business plan where changes are likely to occur and to provide for updating that information and measuring the resulting impacts on the total investment plan. Given the dynamic nature of the energy marketplace, without the capability to see the impact of changes in assumptions, it is impossible to sustain the economic value of the energy infrastructure investment. As mentioned in Chapter 4, customers’ energy managers know about the efficiencies of combined power and heat, but do not have the kind of information to convince financial officers and other decision-makers to approve large energy infrastructure investments where the debt is paid based on the performance of the new equipment. Customers are not experts in energy supply investments. They may be putting their jobs at risk with no capability to manage the risks associated with performance-based investment. In turn, electric utilities are daunted by lack of information on what to anticipate customers demand will be in the future. There are lots of options for energy supply systems to be built independent of electric utilities. Therefore, electric utilities shy away from investing in new supply systems. In monopoly situations, where electric utilities have an obligation to serve customers whenever the customer requests electricity, utilities fear not having sufficient capacity to serve load but may not be able to predict when and where this may occur. Many large customers, especially industrial customers, have built their own energy supply systems and reduced or eliminated their need to buy from the local electric utility. Some States have passed laws that allow customers to purchase electricity from different suppliers. Building central station power plants and distribution systems has been very limited in the U.S. since the 1970s. Commitment to build large generating plants can be very risky. The solution to gaining efficient energy supply investment decisions and managing risk is collaboration to build trust. The technologies and knowledge about building efficient energy supply systems are not new ideas to energy professionals. Inaction to implement energy supply efficiency comes largely from lack of trust caused by lack of communication and timely information. As the energy infrastructure investment planning process is explained, risks will become clear as well as the importance of using web-based tools to control the risks.

5.2 Basic Business Planning

39

This chapter and Chapter 6 detail the methodology and information systems needed to accomplish collaboration to build, operate, and sustain energy efficient supply systems. Future chapters will address cultural, legal, and regulatory barriers that need to be changed to accomplish energy efficient infrastructure.

5.2

Basic Business Planning

In the decade of the 80s, as Director of Energy Management for Dade County, I was immersed in business and regulatory problems associated with a cogeneration power plant and district cooling system project. The cogeneration plant provided electricity, heat, and cooling to five government buildings in Dade’s Downtown Government Center as well as the Miami Sports Arena. The experience taught me about energy supply development especially financial pro formas,1 power plant business structuring, and risk management. More importantly, it reinforced the financial disaster that can result from not having the business goal of efficiency. The electric generator ultimately selected and installed by the contractor at the Dade County Government Center was too large for the electrical and thermal needs of the County facilities and did not gain the greatest energy value from natural gas to efficiently serve Dade’s electrical and thermal requirements. Lessons learned also included my exposure to the incredible influence that electric utilities have in the political and regulatory arena. I’ll never forget the day that an important cogeneration bill was to come before the Florida House Energy Committee. The bill promoted cogeneration and energy cost control for the phosphate and sugar industries, the large counties in FL, and others. Getting the bill to committee had been a long, grueling fight against the electric utilities in FL. I stopped to confer with the committee chair just before the meeting and was asked to come into his office and sit down. He confided that he could no longer support the bill. He needed to look after his retirement. Think what could be accomplished if utilities and customers were working together! By 1990, I started working with a private sector company called Kenetech. Kenetech and its subsidiary companies were in the business of developing independent power projects. Projects included building power plants fueled by wind, wood waste, and other renewal fuels. The company also made investments in energy efficiency for customers as well as installed generation equipment at customers’ sites so that waste heat could be used to fuel customer energy requirements or produce electricity. Kenetech efficiency and cogeneration companies made money from creating value for the customer. They provided efficiency improvements and guaranteed energy budget savings to the customer. Although I chose to leave Kenetech after a few years, this experience helped to create the

1 Description of financial statements that have one or more assumptions or hypothetical conditions built into the data; often used with balance sheets and income statements. Source: www.investorwords.com/3889/pro_forma.html

40

5 Energy Supply Investment Planning Methodolgy

business investment methodology that is the basis of the integrated approach planning process. My energy supply investment knowledge was tested at Mission First Financial (MFF a.k.a Edison Capital). We combined power plant development and customer supply system development for application to hospitals, universities and industry. Discussions with MFF’s sister company, Mission Energy (a.k.a. Edison Mission Energy), reinforced that the energy supply business planning methodology contained the functionality of a standard energy supply investment planning process. By combining business decisions to build electric generation with customer energy supply systems, the methodology integrates all energy supply systems – primary fuels, production and distribution systems, and end-use – and seeks to gain the lowest Btu unit cost. The integrated approach works using a pyramid planning methodology called Opportunity Assessment™ or OA. The purpose of presenting this methodology is to show how energy supply business planning is just basic business planning. It also demonstrates the necessity of involving all technical and financial professionals in the process of planning, communication, and decision-making. Although energy and equipment terms are presented in the exhibits, detailed knowledge of all the engineering terms and formulas are not needed to understand the energy supply investment planning process.

5.3

Where to Start the Planning Process

To achieve lowest-cost, reliable energy, customers and suppliers must first understand the economic benefits that can be achieved by investing in generation close to or on the site that the energy will be used. Further, the selection of primary fuels – natural gas, coal, solar, and other fuels – needs to be assessed to gain the lowest energy unit costs (capital, energy, and O&M) to serve the needs of the end-user. Optimal energy costs must consider integrated electricity, steam, hot and chilled water generation and distribution to the customer site. Customer load management and fuel switching technologies are incorporated into the investment plan. The amount of additional electricity needed to support the customer service needs can then be identified and integrated into the electricity supplier’s central plant generation and transmission system strategy.

5.4

Building Blocks

Building an energy supply business investment plan is much like a game of building blocks. As we stack the blocks, the blocks that are higher up are unstable. If we remove a block from the lower level, the upper blocks are probably going to fall and the whole pyramid may crumble. It can be very unstable if the investor does not

5.5 OA Methodology

41

provide the supports needed to manage their energy supply systems. The instability, what investors caller risks, are largely mitigated by giving all the people involved in the business plan the opportunity to provide their input to the plan and to communicate changes in the plan assumptions as they occur. Later chapters will address communication and risk mitigation options.

5.5

OA Methodology

Figure 5.1 – Opportunity assessment™ methodology, shown below presents five stages of energy systems business planning. This five-level pyramid reflects how an energy investment plan is built from bottom to top. As the OA Methodology is explained, a format for web-based data input is presented. A web-based tool, called Opassess, details the essential data needed to be included in each box of the pyramid. The base of the pyramid, especially levels one and two, start with baseline assumptions. Essentially, baseline begins by establishing a base year. By projecting the growth that is planned for a facility and the cost escalation associated with the growth and historical trends, the customer can build a long term cost escalation of what costs are likely to result if he does not make a new investment. Demand growth relative to equipment capacity can also be derived. Alternative utility equipment selections, operating strategies, fuel costs, implementation, financing, and ownership assumptions built in levels three and four are greatly impacted by the assumptions in the lower levels. Financial assumptions in level four must be consistent with stated goals in level one. Weak information at any level of the pyramid decreases the accuracy of the reports produced at the top of the pyramid.

Step 5

Step 4

Step 3

Step 2

Step 1

9. Building Efficiency Measures

14. OA Reports: Operational Calculations, Pro Forma & Executive Summary

13. Project Financing, Ownership & Implementation Options 10. Production & Distribution Options

6. Baseline Energy Usage, Demand & Costs

1. General Facility Description

2. Business Goals

11. Fuel Costs

7. Existing Equipment Specifications

3. Budgets

12. Operations & Maintenance Costs 8. Baseline Operations & Maintenance Costs

4. Growth & Escalation Rates

5. Tax Information

Source: Solmes, Leslie. "Integrated Energy Systems: Reliability and Lowest BTU Cost." In Encyclopedia of Energy Engineering and Technology, Editor Barney Capehart. Taylor and Francis, 2007.

Fig. 5.1 Opportunity assessment methodology

42

5.6 5.6.1

5 Energy Supply Investment Planning Methodolgy

The Baseline – Steps 1 and 2 General Facility Description

Step 1

1. General Facility Description

2. Business Goals

3. Budgets

4. Growth & 5. Tax Information Escalation Rates

In any doctor’s office, the first thing that we are asked to do is to provide the doctor with information. We are given a form that asks for our name, address, telephone number, age, height, weight, previous medical conditions, allergies, family medical history, current medication and other information. Step 1 in the pyramid is the same concept only the information that needs to be provided is about the residence, business, or institution generally know as the facility. The first block in the pyramid is Facility General Description and is illustrated in Fig. 5.2 shown below. The customer gives his name, address and other details and tells us about the property that is being examined. The business property is called the facility. The facility can be a single building, a multiple of buildings collocated like a military base, university campus or industrial complex, or buildings not collocated like a number of banks in a geographic region. Buildings that are part of the facility can be any kind of structure including stadiums, substations, the chemistry building, a residence hall, office buildings, hangers, apartments, homes … Step 1 – Block 1 Facility Description

Current Systems

Potential Efficiency Improvements

Baseline Year

Self Generation

Facility Use

Central Steam

Self Generation

City

Sub Station

Variable Pumping

State

Direct Buried Distribution

High Efficiency Motors

Year Established

Central DDC System

Thermal Storage

Gross Square Feet

Condensate Return

Economizers

Number of Buildings

Central Chilled Water

Centralized Systems

CFC Description

Electrical Distribution

Operations

IAQ Description

Utility Tunnels

Boiler Upgrades

Comfort Description

Compressed Air

VAV Conversion

Code Description

Back up Generation

Lighting

Other Description

Sub-Metering

• • •

Includes environmental concerns Identifies existing systems Identifies potential/existing efficiencies

Chiller Upgrades

Condenser Upgrades Controls Upgrade Distribution Upgrade Recommissioning Load Management

Fig. 5.2 Facility general description

5.6 The Baseline – Steps 1 and 2

43

As we proceed to develop the building information size, age, number of buildings, operating hours, and other basic information will be added. Notice that in addition to identifying the facility and providing basic information, the planning process requires that a baseline year be identified. The baseline is a snapshot in time of what the facility looked like during one historical year, usually the most recent full fiscal year for which complete data is available. The costs, equipment, operation, budget, and other assumptions associated with the baseline year are the data from which future investment options are compared. Like the doctor’s office, we want to know any existing operating or environmental concerns. Are there problems with indoor air quality, leaky pipes or equipment failures? What operating changes have occurred? In physical terms, we could have taken up tennis or dieting. In facility terms, we have a new chemistry lab under construction and 20 new tenants. In simple terms, we want to know the physical characteristics of the property and what’s happening now? As an initial step, it is important to indicate some of the current systems that exist at the facility. For example, having an existing central plant that produces steam might lead to a cogeneration investment as the planning process develops. The third column in this figure is to catalog the potential energy efficiency measures that facility professionals have already identified or have implemented. These measures should not only be benchmarked, but they should serve as a guide for development of the investment plan. Although the examples used in this book are for larger facilities, do realize that energy supply investment planning works for you in your home or business. The same planning process applies.

5.6.2

Step 1

Business Goals

1. General Facility Description

2. Business Goals

3. Budgets

4. Growth & Escalation Rates 5. Tax Information

As we sit down to see the doctor, we report that we want to win a tennis tournament next week but have a very sore knee and are concerned that the knee will give out. We need to win to afford to pay the mortgage and feed our family for the next 3 months. Obviously, we got the doctors attention. More importantly, we’ve stated our goal and the importance of the goal. In order to answer the second block in Step 1, we need to know the Business Goals that are planned for the facility. A business goal might be to increase the size of the production output by double in 5 years. Oh, by the way, we have no money to pay for replacement and expansion of our air conditioning systems so our business goal is to purchase and install new air conditioning equipment but have no increase in the annual budget. We need a new water main but don’t have any more capital dollars. We want

44

5 Energy Supply Investment Planning Methodolgy Step 1 – Block 2

• • • • • • • • • • • • • • • • • • • •

Upgrade existing infrastructure & central plant Upgrade aged infrastructure within current energy operation budget Guarantee long-term energy operating budget cap Minimize financing costs Achieve off-balance sheet accounting Effectively sustain & improve the investment performance over the debt term Have performance guarantees Shift capital appropriations into non-energy-related programs Automate real-time energy measurement & financial information management systems Buy energy at lowest unit cost Achieve reliable energy supplies Improve environmental & comfort conditions Ensure energy procurement & growth flexibility Achieve lowest life-cycle cost Control financial & operational risk Adhere to the facility’s mission & its community, economic, social & environmental responsibilities Double the facility’s investment in deferred maintenance & energy upgrades over a two-year period Comply with codes Fully commission systems Ensure maintenance staffing, training, & standards

Fig. 5.3 Business goals example

to reduce our energy budget by 10% so we can hire more qualified personnel. Yes, our air emissions don’t meet current environmental standards so we can’t permit new equipment additions. We don’t want to incur any new financial risks. Having this background knowledge in advance of beginning to create the investment plan will direct the plan investment strategy, especially, options for selection of equipment, operations and maintenance (O&M), and implementation. Figure 5.3 – Business goals, shown below, list some examples of business goals that have driven technical and financial solution options.

5.6.3

Step 1

Facility Budget

1. General Facility Description

2. Business Goals

3. Budgets

4. Growth & 5. Tax Information Escalation Rates

The Facility Budget is the amount of money that is set aside at the beginning of the baseline year to pay for operating and maintaining the facility. Within the total budget are line items for purchase of electricity, natural gas, fuel oil, and/or other needed fuels to service the facility requirements. In addition, the funding appropriated to pay for water, wastewater, waste disposal, staff management, maintenance,

5.6 The Baseline – Steps 1 and 2

45

cleaning, and other operations and maintenance costs as well as capital dollars are parts of the base year budget. At this stage of planning, it is important to benchmark the service providers and rates for each of the energy fuels. It is interesting how often facility managers want to fill in the budget with amounts that are actually spent, not with the amount that was budgeted for the base year. Since we are trying to convince financial decision-makers to approve investments that will reduce budgets, the right numbers are those that were budgeted for the baseline year.

5.6.4

Step 1

Growth and Escalation Rates

1. General Facility Description

2. Business Goals

3. Budgets

4. Growth & Escalation Rates

5. Tax Information

Information to complete Growth and Escalation is a combination of educated guessing and common sense. We’ve answered what buildings are in the facility, what the longer term business goals are for the facility, and have been given a base year budget from which to calculate future budget requirements. Now we have to determine what yearly changes in the energy use of the facility will occur based on the business goals. This means that if we add a new wing to a building next year, double the manufacture of paper over 5 years, and 7 years later plan to demolish a building, the energy impacts of these business goals need to be shown in the year that they will occur. The budget cost escalation needs to be consistent with the business goals. For example, if the new hospital wing is being built, there will be an increase in energy costs. Business goals show no increase in the operating budget for utilities for the next 2 years so the annual budget increase for utilities has to be zero. We have a labor contract that commits us to a 3% increase annually. This must be shown. Because we are mapping a business plan, we also need to establish a number for inflation. The value of money will change over time. If we want to evaluate business investment alternatives, operating changes, and other options, we will want to compare these investments to other ways to invest our money so we can gain the greatest benefit. In order to project the costs and savings of operating and maintaining the facility if no investment is made compared to all investment options, it is necessary to project the annual growth in energy demand based on the business goals. What are the annual increases or decreases in electricity, steam, heat, and/or air conditioning requirements based on business goals? In addition, to the increases and decreases in growth for electricity, natural gas, or other energy commodities, cost escalation assumptions for electricity, commodities, water, maintenance, budget escalation, and inflation must be projected. A format may look like Fig. 5.4 – Growth rates/escalation percentage – shown below.

46

5 Energy Supply Investment Planning Methodolgy Step 1 – Block 4

Consumption Growth Rate Year 1 %

Year 2 %

Facility: Commodity: Year 3 %

Steam/heat

Electricity Year 4 %

Year 5 %

Year 6 %

Year 7 %

Year 8 %

Chilled water Year 9 %

Year 11 % Year 12 % Year 13 % Year 14 % Year 15 % Year 16 % Year 17 % Year 18 % Year 19 %

Cost Escalation Percentage

Electricity

Natural Gas

Fuel oil

Coal

Water

O&M

Gen’linflation

Budgetary

Year 10 %

Year 20+ %

Other Fuels

Year 9 %

Year 10 %

Year 11 % Year 12 % Year 13 % Year 14 % Year 15 % Year 16 % Year 17 % Year 18 % Year 19 %

Year 20+ %

Year 1 %

Year 2 %

Year 3 %

Year 4 %

Year 5 %

Year 6 %

Year 7 %

Year 8 %

Fig. 5.4 Growth rates/escalation percentage

Note that the commodity block for growth rates requires data for each year of growth that is planned for each commodity – electricity, heat, and chilled water. The first year is the year following the baseline year. The escalation box requires the user to input the percent of cost growth for each of the energy purchases that apply to the facility. These might include: electricity, natural gas, fuel oil, coal, or other fuels. Cost escalation is also projected for water, inflation, O&M, and budgets. Projection of annual energy cost increases are often the greatest areas of risk in developing an investment plan. Trying to predict what the costs will be for energy over the life of an investment that can be 20 years or more is almost magic. Chapter 9, Risk Assessment will address ways to mitigate and manage this risk.

5.6.5

Step 1

Tax Information

1. General Facility Description

2. Business Goals

3. Budgets

4. Growth & 5. Tax Information Escalation Rates

The fifth block in the pyramid base, Tax Information, wants to know if you are taxable or non-taxable entity. Governments, educational and other institutions generally don’t pay taxes. The rest of us continue to find ways to reduce our tax burden

5.7 Step 2 – Baseline Energy Use, Costs, and Equipment

47

Step 1 – Block 5 Facility: Federal tax rate percentage State tax rate percentage State gas tax rate Gross receipts tax rate Business receipt tax rate Sales tax rate percentage Property tax rate percentage Property tax basis Property tax limit

Fig. 5.5 Facility tax and payment information

through depreciation and other tax credits. The tax status often has a significant cost impact on the business plan. If tax status does not apply, no information should be included. However, often U.S. tax law gives depreciation benefits to private companies who own energy supply equipment. Some investments may benefit financially by having private sector partners who can take advantage of these tax benefits. Figure 5.5 is an example of some of the Facility tax and payment information that might apply. Completion of the data entry for the first step in the pyramid summarizes the business situation for the facility. Step 2 of the pyramid will summarize the facility energy infrastructure efficiency and unit costs for purchasing and/or producing electricity, heat, and chilled water for the baseline year.

5.7

Step 2 – Baseline Energy Use, Costs, and Equipment

Step 2 of the pyramid is the second phase of baseline data energy. It places three large blocks on the business base. These blocks add the base year facility’s energy, equipment, operations and maintenance situation, consumption, and costs to the base business plan. Where Step 1 provided the facility business situation, Step 2 builds the facility technical situation. As the planning process continues beyond the baseline phase to comparing new investment alternatives, new projects will be identified and changes will be made in Step 2 to show the characteristics of the new equipment and energy situation.

48

5.7.1

Step 2

5 Energy Supply Investment Planning Methodolgy

Baseline Energy Usage, Demand, and Costs

6. Baseline Energy Usage, Demand & Costs

7. Existing Equipment Specifications

8. Baseline Operations & Maintenance Costs

Three Opassess data entry illustrations are provided for baseline energy usage, demand, and costs. The following figures are examples of how to show the primary fuels, including water, and the electricity which were purchased for the baseline year. If the facility produces electricity, steam, and/or chilled water that are consumed for the base year, an illustration of the important information needed to list the energy and cost is provided for each commodity. To complete the first two figures, Fig. 5.6 – Fuel/water purchases and Fig. 5.7 – Electrical purchases, collect all facility energy bills for the base year and detail the monthly amounts of electricity, natural gas or other fuels that were used and the monthly costs. For electricity, demand or the highest kilowatt use is requested. Figure 5.6 – Fuel/water purchases – shown above asks the user to pick the primary and secondary fuel used by the facility for the base year. Primary is simply the most fuel that the facility consumes. The figure shows monthly cost and consumption for natural gas and water. The facility did not consume any other primary fuels so no data is shown. Step 2 – Block 6 Primary

Natural Gas Secondary

Fuel

Other

Fuel

Water

Supplier Natural gas Fuel oil #2 Fuel oil #4 Fuel oil #5 Fuel oil #6 Coal

Contact Phone Fax

Propane Water Diesel Steam other

Email Cost ($)

MM Btu

Cost ($)

MM Btu

Cost ($)

January

481553.00

99488

0.00

0

0.00

0

0.00

0

February

287666.00

77682

0.00

0

0.00

0

74516.00

20289

March

158066.00

67837

0.00

0

0.00

0

0.00

0

April

128133.00

54534

0.00

0

0.00

0

129350.00

35257

May

101376.00

38428

0.00

0

0.00

0

0.00

0

June

139470.00

43714

0.00

0

0.00

0

118486.00

36252

July

109989.00

35251

0.00

0

0.00

0

0.00

0

August

115330.00

48014

0.00

0

0.00

0

108805.00

31126

September 109607.00

44492

0.00

0

0.00

0

0.00

0

October

250193.00

75351

0.00

0

0.00

0

185719.00

52046

November

383881.00

84212

0.00

0

0.00

0

0.00

0

December

481553.00

99488

0.00

0

0.00

0

119839.00

32661

Fig. 5.6 Fuel purchases example

MM Btu

Cost ($)

Gallons

5.7 Step 2 – Baseline Energy Use, Costs, and Equipment

49

Step 2 – Block 6 Total Utility Cost ($)

On Peak Usage

Mid Peak Usage

Off Peak Usage

On Peak Demand

Mid Peak Demand

Off Peak Demand

January

334527

2636558

0

3622456

11690

0

11057

February

344236

2865131

0

3508527

11607

0

10978

March

328409

2413808

0

3730473

11161

0

10630

April

374619

2828457

0

3650635

12357

0

11452

??? May

386471

2975955

0

3704051

12302

0

11614

June

453078

2419488

0

4454930

13071

0

12925

July

461620

3642526

0

4571974

13304

0

13094

August

482980

3179656

0

5835672

16151

0

15587

September

471723

3308411

0

4918525

15458

0

14734

October

370535

3186886

0

4048535

13258

0

12677

November

329047

2641132

0

3801710

11833

0

10929

December

328682

2251532

0

3432723

11461

0

1093

• Rates do not change for mid-peak • Automatic update of usage & cost, real time

Fig. 5.7 Electrical purchases example

The Electrical purchases figure asks for monthly kilowatt hours consumed and costs as well as the peak demand for on peak, mid peak, and off peak times of the day. If the facility has automated time of use meters, the data entry for this information should be automated. The complexity of completing data entry for the consumption, demand (a.k.a. load), and costs for electricity can often command the need for detailed metering and mapping. For example, in the late 1990s, the University of Iowa (UIowa) was conducting rate negotiation with their local utility, MidAmerican. UIowa was on three rates. More about UIowa will be discussed in future chapters. However, the detail of Fig. 5.8 – UIowa electricity usage and costs graphs, illustrates the data needed to begin to chart energy efficiency and unit costs. UIowa is a perfect candidate for installation of automated meter reading where electricity usage, load, and cost information is electronically recorded, communicated, and reported into the investment plan on a real time basis. Most facilities produce heat (steam) – many produce chilled water for air conditioning – some produce electricity on site. Each of these commodities must be recorded monthly or in real time in terms of quantity of production as well as maximum and minimum loads. The data input example is Fig. 5.9 – Energy production. Although each of the commodity production data is entered using the common production terms – kilowatt hours, kilowatt demand, thousand pounds and pounds per hour, and tons and ton hours – the energy quantities will ultimately be converted to Btus. Determining the amount of energy, demand, and unit costs for producing and distributing steam, hot and chilled water and other energy commodities is not always easy. Although facility managers often have equipment logs and operating data in

50

5 Energy Supply Investment Planning Methodolgy

Electricity Usage 50000 45000 40000 Hourly kW

35000 30000 25000

Purchased Sub U

20000

Purchased Sub L

15000

Generated (Sub L)

10000 5000 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 0

0 Time

Electricity Costs $1,800 $1,600

Cost per Hour

$1,400 $1,200 $1,000 On-Peak

$800

Off-Peak

$600

Generated (Sub L)

$400 $200 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100 2200 2300 0

$0

Time

Fig. 5.8 UIowa electricity usage and costs graphs

their equipment management systems (EMS) software, it is rare to find a facility manager who details this information especially for multiple pieces of equipment. In 1992, I started the California operations for a Tampa, Florida based mechanical/ electrical engineering firm called Bosek, Gibson and Associates (BGA). The firm specialized in doing energy analysis and design for medium to large businesses and institutions. Without exception, the information needed to analyze energy efficiency

5.7 Step 2 – Baseline Energy Use, Costs, and Equipment

51

Step 2 – Block 6 Self-Generated Electricity Production (kWh)

Steam Production

Peak (kW)

Minimum (kW)

Production (KLbs)

Peak (Lbs/Hr)

Minimum (Lbs/Hr)

Chilled Water Production Production (Ton-Hrs)

Peak (Tons)

Minimum (Tons)

January

0

0

0

77991

147000

68000

0

0

0

February

0

0

0

55886

168000

37000

0

0

0

March

0

0

0

50512

140000

35000

0

0

0

April

0

0

0

39495

102000

30000

1594692

2358

0

May

0

0

0

31057

70000

29000

2226283

5335

0

June

0

0

0

33850

70000

32000

2236100

7730

0

July

0

0

0

25892

64000

21000

2501383

7764

0

August

0

0

0

43162

85000

48000

1668517

8685

0

September

0

0

0

37251

90000

33000

997825

5793

0

October

0

0

0

31027

98000

20000

614208

2176

0

November

0

0

0

53641

117000

41000

0

0

0

December

0

0

0

66459

144000

66000

0

0

0

• No self-generated electricity

Fig. 5.9 Energy production example

investments required not only the basic information included in Step 1 of the pyramid, but often BGA’s engineers had to spend significant time calculating the base year loads and consumption of energy for heat and cooling. As in the case for electric energy, metering equipment for steam/hot and chilled water equipment is essential. For example, in order to gain the lowest Btu unit cost for production of chilled water, the facility manager needs to know the unit production costs for operating the site electric chillers compared to absorption or steam chillers. Electricity costs change based on the time of day and production options. The manager will want to know real time costs in order to make decisions about which equipment to operate.

5.7.2

Step 2

Equipment Specifications and O&M Costs

6. Baseline Energy Usage, Demand & Costs

7. Existing Equipment Specifications

8. Baseline Operations & Maintenance Costs

Descriptions of the facility production and distribution equipment – type, age, size, operating characteristics and operation and maintenance costs are displayed in four figures found below. The forms detail the information needed to benchmark the unit costs for self-generation, steam and chilled water production and distribution systems. Because the data requested in the figures is intended to apply to any baseline or new

52

5 Energy Supply Investment Planning Methodolgy

project situation, a lot of data input options are provided. As each existing facility equipment situation or new project applies, only the data needed for the specific equipment must be entered. Let’s start examination of Fig. 5.10a and b – Self-generation example part 1 and part 2. In addition to the energy primary fuels, electricity, and water purchased for annual consumption, the consumer may also generate electricity and consume it on site.

Step 2 – Block 6 Fuel Driven Generation GT/Engine Fuel Rate Fuel Type Output (kW) (MMBtu/ hr)

Name

Fuel Generator

Availability (%)

Capacity Factor (%)

88

92

0.0

0.0

0.0

0.0

0.0

0.0

Availability (%)

Capacity Factor (%)

5000

56

Primary

Steam Driven Generation Name Cogen #1

ST Output (kW)

Flow Rate (Lbs/hr)

Pass (1 or 2)

Inlet Steam (Enthalpy)

Outlet Steam (Enthalpy)

Turbine Efficiency (%)

1

57

350

56

99

85

77.4

80

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Step 2 – Block 6 Basic Assumptions Elevation Ft. Gas Pressure Req (Psig) Emission Control Descr Engine Sizing

Fuel Consumption 0 290

Dry NOX Electric Base Load

0

O&M Unit Cost ($/kWh)

.0000

St Fuel Rate (Lbs/Hr)

0

SMSS Average Cost ($/kWh)

.0460

HRSG Supp. Firing (MMBtu/Hr, LHV)

0

Overhead Period (Years)

5.00

Steam Injection (If Applicable)

Transmission Losses

2.00

Steam Injection Rate (Lbs/Hr)

Adjustment for Conditions (%)

5.00

Injection Hours

Auxiliary Loads (kW) Electrical Retail Price

0 0.00

Generation Costs

GT Engine Fuel Rate (MMBtu / Hr., LHV)

Injection Impact (kW)

0.00 0 0.00

Inlet Cooling (If applicable) Inlet Cooling Cooling Hours

Primary Fuel Cost ($/MMBtu)

3.1400

Secondary Fuel Cost ($/MMBtu)

.0000

Other Fuel Cost ($/MMBtu)

.0000

Emergency Generation Total Capacity

0 0

Total Number Fuel Type

0 0 Nat’l gas

Peak Shaving

0

Shave Savings

0.00

Fig. 5.10 (a) Self-generation systems example part 1. (b) Self-generation systems example part 2

5.7 Step 2 – Baseline Energy Use, Costs, and Equipment

53

Figure 5.10a – Self-generation, part 1 – is at this stage intended for baseline data. As new projects are inputted, it may also be a future investment option. Data is required to define the fuel, equipment, and efficiency. Terms such as availability, capacity factor, enthalpy2, and others are needed for engineers to calculate the energy output and costs created by the generation. The second part of the data entry for self-generation, Fig. 5.10b – Self-generation, part 2 – shown below requires more detailed description of the multitude of engineering, geological, operating, consumption, costs, and other factors which engineers will require to calculate the output and costs associated with each type of generation. Not all data is required but data entry depends on the specific type of self-generation. Figure 5.11 – Steam supply systems – invites a list of existing boiler types and ages and asks for information to calculate energy steam output and efficiency for each boiler as well as the combined boiler performance. Similar to the data entry for steam supply systems, chilled water supply systems, Fig. 5.12 asks for the names of individual and group chillers including equipment operation, age, efficiency and other details to determine the cost of production of chilled water. Included in the data entry sheets for electric, steam, and chilled water production are operations and maintenance costs for each type of production. Step 2 – Block 6 Steam Sizing and Performance Boiler or Group

Type

Fuel Type

Capacity Efficiency (Lbs/Hr) (%)

Year Installed

Pressure

Utilization (% of use)

Prduction (Klbs)

Boiler#10

Standard

Primary

1996

35000

81.00

Intermediate 15.00

54622

Boiler #6

Standard

Primary

1971

85000

78.00

Intermediate 10.00

81933

Boiler #7

Standard

Primary

1971

85000

78.00

Intermediate 15.00

191178

Boiler #8

Standard

Primary

1995

85000

81.00

Intermediate 35.00

136556

Boiler #9

Standard

Primary

1996

65000

81.00

Intermediate 25.00

81933

Primary Steam Quality Pressure (psig) High

Assumptions

(°F)

Enthalpy (Btu/Lbs)

Temperature

Condensate Return Percent

75.00

Makeup Water Temperature

80

.00

.00

1203.00

Makeup Water Enthalpy

50

Intermediate

125.00

400.00

1189.00

Distribution Losses

5.00

Low

50.00

200.00

203.00

Supplemental Heat Rate

0.00

.00

.00

.00

Supplemental Utilization

0.00

220.00

85.00

5.00

O&M Unit Cost

1.5000

HRSG O&M Unit Cost

1.0000

Hot Water Condensate

Fig. 5.11 ISU Steam supply systems

2 Availability is the amount of time that a generator is operational. Capacity refers to the amount of energy output that a generator can produce. Enthalpy is a term with energy units that combines internal energy with a pressure/volume or flow work term.

54

5 Energy Supply Investment Planning Methodolgy Step 2 – Block 6 Chilled Water Sizing & Performance

Chiller or Group

Year Installed

Capacity (Tons)

Type

Efficiency (COP)

Inlet (Pressure

Outlet (Pressure)

Production (Ton-Hours)

Existing Unit

1991

Electric

1500

5.1

New 1000 (2)

1996

Steam

2000

0.90

New 2000 (2)

1996

Electric

5000

6.00

5784213

0.0

0.0

0.0

0

1577513 Intermediate

Chilled Water Requirements

Low

3155025

Operations & Maintenance

Total Chilled Water (Ton-Hours)

15000000

Chilled Water Temperature °F

42.00

Design Temperature Differential °F

16.00

Distribution Losses %

3.00

O&M Unit Cost

0.0100

Fig. 5.12 Chilled water supply systems example

Step 2 – Block 6 Electrical Distribution Power k V

4.65

Voltage k V

4.65

Power Factor k V

0.94

Steam Distribution Condensate Temperature °F

220

Condensate Pressure psig

5

Condensate Enthalpy Btu / Lb

0

Primary Pumping Efficiency

0

Secondary Pumping Efficiency 0 Chilled Water Distribution Cooling Tower Efficiency kW/Ton 0.15

Fig. 5.13 Distribution systems example

Finally, information is requested about the facility’s electric, steam, and chilled water distribution systems. Figure 5.13 – Distribution systems – presents some of the important information needed to describe these systems. The four figures discussed above detail the kind of information required for engineering and maintenance staff to catalog on-site electric, steam, and chilled water generation and distribution systems. These professionals will know the data entry that applies to each system.

5.8 The Baseline Results

55

The purpose for Step 2 of the OA Methodology – cataloging the energy use, equipment types, operating performance and costs, and other technical factors—is to calculate and report the full unit costs to deliver each of these energy types for the base year. The growth and escalation assumptions contained in Step 1 can then be applied to determine what it will cost to continue to operate and maintain the facility in future years. This exercise may require help. BGA often worked with facility managers and engineers to help catalog this data. These calculations not only determine the operating efficiency and use of existing heating and cooling production equipment, but the calculations identify the average unit cost for producing heat, cooling, and electricity on-site as well as the unit cost for electricity purchases. The operator can select the optimal equipment operation based on total integrated energy systems’ costs. Investment software systems must integrate the engineering formulas necessary to translate the data into cost per unit of output.

5.8

The Baseline Results

We’re now ready to run a budget projection that shows what the customer is going to have to spend if business continues as usual. Perhaps the easiest way to reflect this situation is to show a slide developed by the U.S. Army shortly after they were ordered to privatize their base utility systems in late 1997 (Fig. 5.14). The lowest curve on the graph reflects the Army’s baseline budget projection over the next 20 years. The highest curve shows how much funding they estimated will be needed

Projected Cost of Utilities Upgrades $400 $350

Billions/ year

$300 $250 $200 $150 $100 $50 $0

99 000 001 002 003 004 005 006 007 008 009 010 011 012 013 014 015 016 017 018 019 020 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

19

Status Quo Operating Cost

Cost of Privatization

Fig. 5.14 Military capital and operating cost considerations

Integrated Capital + Operating

56

5 Energy Supply Investment Planning Methodolgy

to continue their base operations and complete the capital investments required to upgrade old, inefficient and unreliable energy, water, and wastewater systems. Note that the capital cost was projected to increase their 1999 budget by more than two times with huge cost escalation over the next 20 years. The middle curve was a guess of what it would cost for operations and upgrades if the utility systems on the Army bases were privatized. Privatization meant selling the current utilities to a private sector entity which would have to upgrade the systems and provide reliable utilities services to bases at negotiated rates. The privatization solution also results in increasing the funding needs by two-fold. Your first reaction might be that the Department of Defense has a big problem. The problem translates into increases in our taxes. Add all branches of the military to this chart, and the numbers are in the trillions.

5.8.1

What Will Happen If No Investments Are Made in the Facility?

The most important steps in planning for investments are to determine what will happen if no investments are made in the facility for the next 20 or 30 years. First recall that equipment invested in energy supply and other utility systems have useful lives of 20 years or more and can be financed for these terms. The second reason for identifying the existing facility cost and operating efficiencies is that there are often opportunities to improve the efficiency and cost control without new investments. During my tenure with Dade County, I initiated facility manager training and preventive maintenance programs. While conducting energy investment analysis of facility buildings, my staff realized that the County had opportunities to improve the operating efficiency of existing equipment, improve comfort levels for occupants, get on better rates with the electric and natural gas utilities, as well as reduce and control facility operating budgets. If facility managers and occupants did not have the information and knowledge to operate their facilities efficiently and measure and control costs, they were not ready to begin the process of making investments. The Energy Office immediately began providing operating cost information to facility operators and occupants. The County’s information technology department designed software that allowed the County to receive tape to tape billing from the electric utility. Unfortunately, it took more than 12 years for the fifth largest electric utility in the U.S. to deliver this service. While the County was waiting for the utility to provide electronic billing, it scanned all paper bills into the accounting and bill verification software. Approved bills automatically were paid by the County’s financial accounting system. Monthly reports and training programs for facility managers and occupants resulted in as much as 50% reduction in electricity consumption in some facilities. In addition, the Energy Office instituted and paid for a new preventive maintenance program to improve equipment operation and facility energy efficiency.

5.8 The Baseline Results

57

The program not only paid for itself from energy cost savings but also demonstrated the cost savings from avoiding equipment breakdowns. In order to gain the greatest efficiency and cost control to manage and maintain existing facilities, facility and utility managers should complete Steps 1 and 2 in the baseline business planning process. So much savings come from having the day to day information to operate and maintain facilities that the efforts pay for themselves each budget year. The business, household, or institution now is ready to compare the value of new energy systems investments. In the late 1990s, BGA was hired by Pacific Gas and Electric Company (PG&E) to conduct an energy investment survey of its corporate headquarters building in San Francisco. PG&E wanted to assess the cost benefit of contracting with another company who would invest in energy savings measures in PG&E’s building and pay for the investment from savings. BGA found the experience amusing, serious, and potentially profitable for PG&E. The amusing part was that the facility was not on the most cost effective electric utility rate. Major new equipment that had been purchased to provide air conditioning was at risk of major failure unless proper controls were installed. The combined annual savings that would result from more efficient equipment investments had a simple payback of 3 years. BGA reported these findings to PG&E and suggested that the investment in efficiency was so good that PG&E should look at all its facilities. The important message is that two of the three outcomes from the PG&E assessment were related to actions that required no investment. The finding that PG&E’s investment opportunities offered significant investment returns was an additional bonus.

Chapter 6

The Real Investment Opportunity

Abstract In order to build and sustain a business relationship between energy suppliers and customers, the author establishes the business planning, communication and evaluation process. The reader is given a detailed five step methodology on how to develop an integrated energy supply business investment plan and compare a status quo plan with alternative technology, implementation, financing and ownership options. The author uses an Opportunity Assessment™ pyramid structure and Opassess software application to help the reader catalog all the assumptions that must be included in a full life cycle investment plan as well as the process and reports needed to make sound business decisions. Anecdotes of experiences at the University of Maryland, College Park, Illinois State University, the University of Iowa and the Department of Defense provide meat to the planning process and give evidence of the financial benefits of integrated investments to both customers and energy suppliers. Keywords Alternative technologies • Assumptions • Baseline • Business planning • Communication • Evaluation process • Business relationship • Energy supply investment planning methodology • Financial benefits • Implementation • Investment opportunity • Life cycle • Opassess • Opportunity Assessment • Ownership • Real time • Reports • Software application

6.1 6.1.1

Case Studies Navy Utilities Privatization

The military budget cost increase presented in the last chapter projected that to update base infrastructure, the government would have to fund more than twice their current budget and escalate the budget over time. Not true! In the late 1990s, my company, LAS & Associates (LAS), began work with the Navy Public Works Center (PWC) in San Diego. The Department of Defense had ordered that all military L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

59

60

6 The Real Investment Opportunity

Step 5

Step 4

Step 3

9. Building Efficiency Measures

14. OA Reports: Operational Calculations, Pro Forma & Executive Summary

13. Project Financing, Ownership & Implementation Options 10. Production & Distribution Options

11. Fuel Costs

12. Operations & Maintenance Costs

Source: Solmes, Leslie. "Integrated Energy Systems: Reliability and Lowest BTU Cost." In Encyclopedia of Energy Engineering and Technology, Editor Barney Capehart. Taylor and Francis, 2007.

Fig. 6.1 Opportunity assessment methodology steps 3 through 5

bases should be privatized unless it could be demonstrated that privatization would result in a problem of security or that privatization was not cost effective. LAS worked with an excellent team of professionals at PWC to determine what would be the cost to update the utility systems for six major naval bases if the Navy were to implement the investments. PWC sought to be able to establish the baseline data (OA Methodology Steps 1 and 2) that all potential private sector partners would use to calculate and complete their business proposal to take over the utility systems and provide reliable energy to the bases. In addition, by identifying what the Navy could do for itself (OA Methodology Steps 3 and 4) PWC had a basis upon which to determine the cost effectiveness of the private sector business proposals. The analysis approach included all facilities and equipment that were aged and inefficient as well as expansion requirements needed to meet each base’s mission. The approach used the OA Methodology as the process for developing the baseline and the Navy’s investment plans. As the OA Methodology, Steps 3 and 4 in the planning pyramid were completed to identify the costs to upgrade and expand facilities’ infrastructure, each base’s existing budget showed that it could pay for millions of dollars of capital upgrades as well as for long term operation and maintenance of the facility from the savings in energy consumption and unit costs that resulted from investing in on-site, highly efficient combined heat and power generation and purchasing supplemental electricity from the electric utility at higher prices. Each naval base was able to reduce its current and long term operating budgets below its annual baseline or status quo projection. In addition, each base’s baseline budget would pay for a full upgrade of their utility systems. Although energy efficiency measures in buildings were incorporated into the total investment, the larger energy and cost savings came from investing in highly efficient production and distribution of electricity, heat, and cooling energy. Electricity generation was sized to maximize the use of waste heat and avoid the need to burn more fuel to provide heat energy.

6.1 Case Studies

61

Technologies like absorption chillers, which use waste heat as fuel, and thermal energy storage flattened electric loads and in turn, unit energy costs. Millions of dollars of capital upgrades could be invested in the San Diego Navy bases without increasing their baseline energy budget. Unfortunately due to changes in staff, problems with the command structure, and the onset of 9/11, PWC’s work was not implemented. Unfortunately, the Navy in San Diego was hit later by a tripling of its electricity charges caused by poor California electricity restructuring policies and lack of federal government control.

6.1.2

The University of Maryland, College Park Funding Goal

The University of Maryland, College Park offers an example of a facility situation and special funding goal that led to an energy supplier/customer partnership. In 1996, the University of Maryland College Park campus, (the facility) had significant needs to update and expand its heating, cooling, and electrical systems. Decision-makers in Maryland indicated that public money was not available and directed the University to seek private sector funds to finance the upgrades. The University conducted an extensive effort to determine how much of their 1995–1996 operating budget (over $21 million) could be saved by strategic procurement, implementation, and management of improved utility supply systems, efficiency upgrades, energy contracts and controls to pay for the cost of the infrastructure investments. The project approach sought to assess the amount of capital investments that could be funded without new appropriations and to identify the operating budget funding levels that could be preserved to pay for the cost of campus utilities and capital through the term of the debt. Underpinning the funding goal were a number of other University objectives. These included: Reliable long-term delivery of energy to University users Lowest life cycle cost Financial and operational risk control, especially non-performance Flexibility in long term energy use and supply procurement Adherence to the University’s mission and its community, economic, social and environmental responsibilities · Off-balance sheet debt · · · · ·

These objectives ultimately meant that the university needed a partner to finance, operate, and manage utilities at no risk to the university, but first, the University needed to educate itself on how to determine what is a good deal. They completed the baseline planning in Steps 1 and 2 of the pyramid and then used the integrated approach to evaluate alternative infrastructure and financial solutions based on what it would cost the university to go it alone and take all the business risks. They then initiated a competitive procurement process where they could compare their business

62

6 The Real Investment Opportunity

options to numerous energy supplier proposals. Chapter 9 outlines a competitive procurement process. As an aside, initial projections from two separate companies showed that UMCP could fund over $70 million in new capital improvements. Increases in the base year budget were only for new campus facility and student growth. In April 21, 1999 the following excerpts for a Trigen-Cinergy Solutions (Trigen) press release announced the results of the University of Maryland College Park deal. UNIVERSITY OF MARYLAND COLLEGE PARK TO SAVE $120 MILLION BY OUTSOURCING ENERGY SERVICES TO TRIGEN–CINERGY SOLUTIONS Baltimore, Md. – April 21, 1999 – Trigen-Cinergy Solutions (TCS) announced the signing of a contract, with an initial term of 20 years, for providing utility services to the University of Maryland College Park (UMCP) campus near Washington, DC. TCS will be responsible for all distribution of steam, chilled water and electric generation on the 35,000-student campus. TCS will assume responsibility on or about July 1 for the existing steam plant and will install 26 MW of electric cogeneration equipment to meet virtually all the University’s electric requirements. Heat from the on-site electric generation plant will be used to provide heating and cooling for 150 buildings on the 1,350 acre-campus, with a combined area of 10.5 million square feet. TCS expects to achieve an annual efficiency of 75%, more than double the national average efficiency for central electric generation. Governor Parris N. Glendening said, “Contracting for utility services at UMCP, which will save an average of $6 million per year, is a major step for Maryland in our continuing efforts to keep educational and energy costs under control. This is the second project in Maryland in pursuit of the U.S. Department of Energy’s goal to double combined heat and power (CHP) capacity in the U.S. by the year 2010. We take pride in providing national leadership in this area of improving efficiency and reducing environmental emissions.” “Maryland is showing the country how electricity and energy competition can be a win for taxpayers, the economy and the environment,” said U.S. Energy Secretary Bill Richardson. “This is exactly the kind of entrepreneurial step that the Energy Department hopes to encourage with our proposed comprehensive electricity competition legislation, announced last week.” “The selection of Trigen-Cinergy Solutions was based on their comprehensive solution to the University’s broad needs, their relevant experience and industry leadership, and their competitive price,” Frank Brewer, UMCP’s Assistant Vice President of Facilities Management commented. “The University will receive over $120 million in savings over the term of the contract, including $71 million of new capital improvements. We look forward to a long-standing partnership with TCS.” “This is the fifth Trigen-Cinergy Solutions project announced in the last nine months,” commented Steve Harkness, chief operating officer of TCS. “This project alone will reduce regional emissions of nitrogen oxide by 9,800 tons and carbon dioxide emissions will be reduced by 3.5 million tons over the initial 20 years.”1

1 The press release noted, “The statements in this press release relating to matters not historical in nature are forward-looking statements that involve important factors that could cause actual results to differ materially from those anticipated. Cautionary statements identifying such important factors are described in reports, including the Form 10-K for the fiscal year ended December 31, 1998, filed separately by Cinergy Corp. and Trigen Energy Corporation with the Securities and Exchange Commission.”

6.2 Step 3 – Energy Supply System Technical Proposal

6.2

63

Step 3 – Energy Supply System Technical Proposal

How do entities like the Navy and College Park accomplish the investment discussed above? Let’s raise the bar to the third level of the pyramid. OA Methodology, Step 3 begins the process of identifying equipment changes that are needed due to age, inefficiency, reliability, and business growth requirements. In this step, it is time to select and evaluate alternative new equipment, energy procurement, and operating options. Ultimately the new energy supply system operating characteristics and costs can be compared to the baseline or existing situation.

6.2.1

Step 3

Demand-Side Energy Efficiency Measures and Adjusted Baseline

9. Building Efficiency Measures

10. Production & Distribution Options

11. Fuel Costs

12. Operations & Maintenance Costs

Before starting the selection of energy supply system equipment requirements, the business planner needs to update equipment and install efficiency measures in the facility buildings. Demand-side (a.k.a. end-use) energy efficiency measures can include: improving the use and maintenance of existing equipment; insulation of roofs, windows, walls, heaters, pipes, and ducts; installation of more efficient lighting and sensors to turn lights off when no one is in the room; improvements in air handling equipment, pumps, and motors; more efficient appliances; building controls and other improvements. Any engineer who does analysis of building efficiency measures must do an “integrated” analysis. Energy efficiency investments can impact the consumption and load requirements for energy depending on the measure that is implemented. For example, if more efficient lighting is installed in a building, the heat produced by lighting declines. Energy requirements for electricity and building cooling will also decline. Due to the reduction in lighting heat output, more space heating may be needed. An integrated investment in all building energy efficiency improvement causes an adjustment of the initial baseline consumption and demand for electricity, steam, and chilled water. Example of this interrelationship is illustrated in Fig. 6.2 – Adjusted baseline. It is always a better economic decision to size utility generation and distribution equipment based on updated and efficient end use. Identifying end-use

64

6 The Real Investment Opportunity

Electricity Demand Growth Including Adjusted Baseline 16 14

Megawatts

12 10 8 6 4 2 0 1997 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Baseline Demand

Adjusted Baseline Demand

Fig. 6.2 Adjusted baseline

energy efficiency measures (EEMs) and maintenance opportunities will impact how large supply systems must be to reliably service future loads and can result in reducing the size and therefore the cost of the proposed production and distribution equipment. The U.S. Department of Energy currently sponsors freeware, called DOE2,2 which is commonly used by engineers to calculate the integrated impact of implementing a full upgrade of building utility systems.

2

DOE-2 is a widely used and accepted freeware building energy analysis program that can predict the energy use and cost for all types of buildings. DOE-2 uses a description of the building layout, constructions, operating schedules, conditioning systems (lighting, HVAC, etc.) and utility rates provided by the user, along with weather data, to perform an hourly simulation of the building and to estimate utility bills. The “plain” DOE-2 program is a “DOS box” or “batch” program which requires substantial experience to learn to use effectively while offering researchers and experts significant flexibility; eQUEST is a complete interactive Windows implementation of the DOE-2 program with added wizards and graphic displays to aid in the use of DOE-2.

6.2 Step 3 – Energy Supply System Technical Proposal

6.2.2

Step 3

65

Production and Distribution System Solutions

9. Building Efficiency Measures

10. Production & Distribution Options

11. Fuel Costs

12. Operations & Maintenance Costs

Now that the costs and potential savings for building efficiency measures and other upgrades are recorded and the electricity, heat, and chilled water baseline adjusted, the next step is to update the energy supply system production and distribution equipment. Remember the business goal is to provide reliable services at the lowest energy unit cost. The lowest energy unit cost includes the capital, fuel, and operations and maintenance (O&M) costs to produce and distribute electricity, heat, and chilled water at any point in time. To accomplish the lowest energy unit cost, a number of technology solutions must be considered in the evaluation of investment options. Management and control of energy unit costs supported by automated metering and measurement must be integrated with operating systems software to report unit costs on a real time basis. To gain the greatest efficiency from every energy unit consumed, on-site electricity generation and recycled heat energy technologies should be examined. Essential in this process is to size equipment for optimal use of energy. Optimal equipment sizing for electricity production usually means that some purchase of electricity from the grid will be needed. However, use of waste heat for heating and air conditioning will result in flattening the electric load and enable a high percentage of electricity to be purchased 24/7 thus improving the efficiency of the energy supplier’s generating station. Optimal sizing can mean selection of multiple smaller size production equipment instead of single large production units. For example, in spring and fall, demand for heat is likely to be lower than in winter. Operating one or a number of smaller boilers at full load is more efficient that operating a large boiler for limited hours or partially loaded. Numerous other equipment, O&M, and fuel investment considerations can contribute to greater cost control over the project investment life. Due to the long life of equipment, anticipating the need to be able to switch fuels depending on fuel costs at any point in time can impact equipment selection. Load management infrastructure, like thermal energy storage, which allows chilled water to be produced when electricity capacity is available (off peak) should be evaluated. Location of energy production equipment relative to distribution systems needs should be mapped to minimize capital, operating, and maintenance costs. Equipment selection will also be driven by the primary fuels available. All viable fuel options, especially renewable fuels and waste by-products, should be inventoried and assessed. Built into the selection of equipment are often opportunities to reduce fuel and O&M costs. Equipment automation and full year fuel purchase contracts can reduce costs. Often it is easy to forget that water treatment and distribution requires a lot of energy. Another investment option is to consider using off peak electric generation

66

6 The Real Investment Opportunity

to treat water. Combining electric generation investment with water desalination can reduce energy costs for water and for electric generation.

6.2.3

Illinois State University Investment Scope

In 1997, LAS worked with facility and financial staff Illinois State University (ISU) to conduct a preliminary assessment of the investment opportunity. ISU’s proposed energy supply system upgrades included: · · · · · · · · · · ·

A 5 MW gas turbine Steam and condensate lines Boilers, boiler structure, and plant upgrades Chillers, chiller structure, and plant upgrades Cooling towers Chilled water distribution systems and building loop upgrades Thermal energy storage Electrical distribution systems upgrades Substation, transformers, and related electrical equipment upgrades An energy information management system Asbestos abatement

Notice that not all investments at ISU were related to efficiency. ISU required millions of dollars to be spent on electrical and thermal distribution systems upgrades including an electrical substation, building additions, and asbestos abatement. Asbestos abatement alone was estimated to be $5 million. Fuel, operations, and maintenance costs for all equipment planned for ISU’s energy supply systems were calculated. A number of energy supply system alternatives were compared to determine the best solution. In order to compare the new technology investments and associate fuel costs to the baseline, a new project was named. The assumptions for existing equipment, fuel, and operation and maintenance requirements were inputted (OA Step 2) in order to evaluate the costs and benefits of the new investment systems compared to the baseline or do nothing situation.

6.3

Step 4 – Project Financing, Ownership and Implementation Options

Step 4

13. Project Financing, Ownership & Implementation Options

6.3 Step 4 – Project Financing, Ownership and Implementation Options

67

Step 4 of the planning process is to determine how the new investments and operational changes will be engineered, procured, constructed, permitted, financed, owned, as well as other necessary costs to complete the building and installation on the investment project.

6.3.1

Construction Information

Critical to project economics is that the project be built on time and on budget and demonstrate that the investment meets the operating performance anticipated. Figure 6.3 depicts project construction information. Target dates must be established for when the construction will start and the completion date. Data input is provided for how the construction financing will be accomplished. Incorporating the costs associated with engineering, procurement, and construction (EPC) as well as other project implementation costs is critical to evaluating the costs of alternative strategies to complete EPC. Institutions who choose to do their own EPC often need to increase their capital cost estimates by as much as 25–100% to cover these costs due to public procurement rules and multiple agencies trying to each do a piece of the work. UMCP viewed that due to their procurement rules, the University would incur a very high cost risk for EPC if it was to implement the investment itself. UMCP’s solution was to outsource this risk to Trigen.

6.3.2

Long Term Debt

Shown below, Fig. 6.4 – Long term debt, is a list of economic considerations that might be included in project financing, ownership, and implementation costs. Potential data ranges from selection of debt term, equity, and financing fees, to Step 4 – Block 13 Facility-Project Construction Date

Jan 01 1999

Operation Date

Jul 01 2000

Construction Loan Rate %

9.5

Construction Loan Fees %

1.25

Construction Debt Load %

100

Engineering, Procurement & Construction %

10

Contingency %

10

Fig. 6.3 Construction information example

68

6 The Real Investment Opportunity

Step 4 – Block 13 Facility - Project Debt Term (years)

Utility Interconnect ($)

Finance Rate (%)

Gas Pipeline Lateral ($)

Equity Position (%)

Operation /Training ($)

Partner Equity (%)

Start Up Supplies ($)

Interest On Reserve (%)

Start Up Fuel ($)

Debt Service Reserve (years)

Equipment Spares ($)

Financing Fee (%)

Business Development ($)

Term Commitment Fee (%)

Quality Control ($)

Floatation Fee (%)

Environmental Permit ($)

Investment Banker Fee (%)

Lender’s Engineering ($)

Equity Commitment Fee (%)

Legal (Financing) ($)

Land Development ($)

Outside Counsel ($)

Project Management ($)

Financial Fees ($)

Construction Management ($)

Working Capital ($)

Fig. 6.4 Long term debt

permitting, land development, and legal fees to construction management, utility interties, and start-up materials. Especially important are project debt term, financing, and ownership assumptions as they blend business goals with the goal of lowering the total cost of the project. For example, if the facility owner is tax-exempt but wants to finance the project so it is off his balance sheet, planners need to consider a financing structure that will accomplish this goal at the lowest cost. The UMCP example accomplished this goal. The solution was to finance through the Maryland Economic Development Corporation that offered tax-exempt (low interest) financing and assumed the debt obligation. In addition, the profit motive for Trigen was to do the maximum amount of investment from the baseline year budget savings. Trigen and the University wanted to keep financing and ownership costs low. Low-interest financing benefitted both partners. While finding technology solutions to development of the business plan can be relatively straightforward, customers struggle with how to mitigate financing, ownership and implementation risks. Again, more about this will be discussed in Chapter 9.

6.3.3

Long Term Debt Payment

In structuring the financing of a project, the annual cash flow may show negative balances in some years. If the business goal is to always have a positive cash flow,

6.4 Step 5 – The Energy Infrastructure System Investment Plan Reports

69

one solution is to structure annual payment principal and interest in a manner where no negative annual cash flow occurs.

6.3.4

Depreciation

Finally, depreciation of the project equipment is an important accounting practice. The financial evaluation should include a percent of the total project cost, using straight line or modified accelerated cost recovery system.3

6.4

Step 5 – The Energy Infrastructure System Investment Plan Reports

Step 5

14. OA Reports: Operational Calculations, Pro Forma & Executive Summary

The assumptions that populate the baseline situation have been documented. A new energy investment project has been scoped. The time is now to present the energy infrastructure investment project plan to decision-makers who will approve or deny implementation. Critical to gaining decision-makers’ approval is to present reports that communicate the full financial and technical strategy in a manner that will give them confidence that the investment will result in the financial situation projected. Five reports are presented below that show the results of ISU’s proposed project investment – Executive Summary, Pro Forma, Operational Calculations for Selfgeneration, Steam, and Chilled Water. The reports demonstrate the costs and benefits for the proposed investment solution compared to the option of doing nothing or to other technology, implementation, and financial solutions.

6.4.1

Executive Summary

Figure 6.5 – Executive summary (Solmes 2008), shown below, summarizes the kind of financial information needed to evaluate energy infrastructure investment 3 The U.S. Internal Revenue Service allows private sector entities to depreciate investments using an annual fixed percentage or Modified Accelerated Cost Recovery System (MACRS) which could have different percentages of depreciation depending on the equipment.

70

6 The Real Investment Opportunity

opportunities incorporating highly efficient production and distribution systems on the customer’s site. The starting point of the presentation of ISU’s project, proposed that the University fixed its baseline (current) year’s energy budget, an amount of over $7.8 million, for 20 years with escalation only for planned expansion of campus facilities and student population. The fixed budget appropriation will serve as revenue to pay for the infrastructure investment Energy Cost Savings due to project efficiencies are summarized by system. The end-use building upgrades and efficiency measures were projected to result in a

Current Utility Budget

$ 7,833,897

Energy Cost Savings

$ 1,264,034 $1,880,989 $ 392,913 $ (89,549) $0

Facility efficiency recommendation Electrical generation Steam production Chilled water production Water Total Utility Budget Savings Percent of Current Utility

$ 3,448,386 44.02%

Project Costs

$ 3,595,110 $ 2,625,000 $ 4,260,000 $ 10,707,100 $ 7,100,000 $ 5,657,442 $ 2,069,200

Facility efficiency recommendation Electrical generation Steam systems Chilled water systems Infrastructure Engineering / contingencies Additional project costs Total EPC Cost Annual debt service Energy Budget Savings :: Debt Service

$ 36,013,851 $ 3,049,409 113.08%

Unit Energy Costs:

$ 0.046/ kWh $ 0.043 / kWh $ 6.994/KLbs $ 0.312/ Ton-Hr

Average cost for purchased electricity Average cost for cogenerated electricity Average cost for steam Average cost for chilled water FINANCIAL

Capitalization

Term Debt Debt Service Rsrv Total Debt Equity Total Capital

Proforma Assumptions Term Interest Rate Equity Partner Equity Effective Tax Rate Interest on Reserves

Fig. 6.5 ISU executive summary

$36,013,851 $ 1,550,863 $37,564,714 $0 $37,564,714 20 5.85% 100% 0% 0.00% 0.00%

NPV Before Tax After Tax

Debt Coverage Average Minimum Maximum

@ 8% $12,927,353 $12,927,353

@ 10% $10,547,035 $10,547,035

1.55 1.29 1.69

@ 12% $ 8,718,363 $ 8,718,363

6.4 Step 5 – The Energy Infrastructure System Investment Plan Reports

71

combined, integrated, annual energy budget savings of $1.264 million. On-site electricity production, including projection of higher costs for purchase of electricity from off-site suppliers, resulted in annual energy budget savings of $1.881 million. Upgrade of ISU’s steam/heat system equipment reduced the baseline budget by $.393 million. Chilled water production annual costs caused an increased cost of nearly $90,000. Total combined annual baseline energy budget savings were conservatively4 estimated to be $3.448 million dollars. Recall, ISU’s proposed capital investment included a 5 MW gas turbine, new boiler and structure/system upgrades, electric chiller, thermal energy storage system, new chiller structure and system upgrades, lighting conversions, air-side HVAC (heating, ventilation, air conditioning) upgrades, new equipment controls, system recommissioning, electrical distribution systems upgrades, a new substation, energy information management system, and $5 million in asbestos abatement. Total capital costs were estimated to be over $28 million. Broken down by system, the project proposed costs were: · · · · ·

Building efficiency recommendations Electricity production Steam system Chilled water system Infrastructure

$3,595,110 2,625,000 4,260,000 10,707,100 7,100,000

Engineering, procurement, construction, and contingency cost assumptions were $5.6 million with additional costs for permitting, legal fees, start-up, and numerous other project costs estimated at over $2 million. Total EPC costs were estimated at over $36 million. Due to the long operating life of utility investments, the financing term was set at 20 years with an interest rate of 5.85% and debt service reserve of $1.5 million.5 ISU would own the project as a not-for-profit entity. Total debt would be nearly $37.6 million. Annual debt service would be $3.05 million. Compare the annual savings of over $3.4 million to the annual debt service of $3 million. Often investors will want to see the savings to debt ratios and well as a range of debt coverage. For ISU, one of the most important set of numbers was the net present value of the investment based on an earnings range of 8–12%. Not only did the $37.56 million investment pay for itself from annual budget savings, ISU could pay for the debt, and create $8.7 to $12.9 million in investment value. Note the area called Unit energy costs. Average unit costs including capital, O&M, and energy are averaged by system including costs for purchase of electricity. Change in the technology solutions to any system, impacts the Btu unit costs for the other systems. For example, if ISU were to purchase steam from another provider, the unit costs for electricity and chilled water would be impacted due to the change in the use 4 Conservative means that the proposed project assumptions energy savings were estimated on the low side and no operation and maintenance savings were included. 5 Note that due to the limited life of lighting, capital costs for lighting replacement were added again in year eleven.

72

6 The Real Investment Opportunity

of the heat energy. Note that the energy cost savings for the chilled water system was a negative number. This means that it will cost more for ISU to produce a unit of chilled water. However the energy cost savings benefit to the unit costs for steam and electricity were reduced due to reduction in electric load and use of waste heat. The combined energy unit cost for the entire facility was lowered. This Executive Summary represented one plan option. In order to gain the greatest Btu value at the lowest combined Btu unit costs, numerous project options should be compared.

6.4.2

Proforma and Operational Calculations (Solmes 2008)

Table 6.1 Pro forma reflects the 20 year cash flow of ISU’s energy infrastructure investment plan for the project Executive Summary described above. The pro forma details the full financial projection for 20 years to serve ISU’s energy requirements. Business plan assumptions and calculations are expressed yearly over the term of the debt. Each year, the income and cash flow are shown. Now that ISU has a technical and financial solution to its business goals, the solution can be compared to offers from other entities. Notice a positive cash flow in the first year of operation of nearly $4 million and continuing through the debt term to over $5 million. It should also be noted that lighting retrofits were done twice due to the limited life of the equipment. Also major equipment maintenance costs were added in appropriate years Additional reports showing the operating calculation assumptions associated with each project utility system reflect the detail behind the financial reports. Three reports – cogeneration, steam, and chilled water operating calculations are shown below in Figs. 6.6–6.8. These reports provide the assumptions and calculations behind the new project business plan for each system’s operations and serve as a reference to then compare other investment options. Each operational report shows the equipment, energy production, performance, and cost assumptions for the project equipment included in the financial reports. The operational report summaries also provide the cost breakdown per unit of production for fuel, operation and maintenance (O&M), and debt service and returns on investment. Because over time, these costs will change, software capability is essential to continuously communicate the energy unit cost changes so that facility managers can select equipment and fuel alternatives and report the results. Reports identify the baseline average cost for electricity, steam, and chilled water as well as the new project projected cost. In summary, the ISU investment plan reports shown above, project that ISU can fund an integrated energy investment project of $37.56 million, assuming a 20-year debt term at 5.85% interest. Implementation must be done in 2.5 years. Thirty-eight percent of the University’s 1995–1996 annual budget savings could be shifted to fund capital. The net present value (NPV) of the investment discounted at 8% was $10.8 million. The cost of the project could be paid for by fixing ISU’s 1995–1996 operating budget and escalating it with planned campus growth and general inflation. The operational reports show the projected savings associated with each energy

6.5 Energy Supplier Opportunity – The University of Iowa

73

system with and without debt service. These numbers are shown again on the Executive Summary and detailed annually in the Pro forma. ISU’s electricity load dropped from over 16 MW to fewer than 9 MW. The load curve for demand is almost flat. Steam usage declined about 8,000 pounds per hour and chilled water demand was reduced by 670 tons. By operating the cogeneration plant at full capacity, the University not only serves 5 MW of electrical load, but uses the waste heat to provide heating, hot water, and air conditioning energy. Not only could ISU add 5 MW of new electric generating capacity, but an additional 7 MW can be reduced through use of waste heat and load shifting – a 12 MW gain at no cost to ratepayers. More than half of the waste heat from electrical generation becomes useful energy. Due to ISU’s level load, the utility is able to gain greater full time use of its existing power plants. By working together, ISU and the utility can coordinate maintenance and other scheduled outages. If the utility and ISU should partner, the utility has the opportunity to meet or beat the annual cash flow of the investment to earn returns as well as earn money for financing, construction, operation, maintenance, and power marketing services. The key to partnership trust is that both the university and the utility are motivated to earn profits from efficiency. Trust results from commitment to use webbased tools to jointly communicate, manage, and report the status of the investment as market changes occur.

6.5

Energy Supplier Opportunity – The University of Iowa

UIowa was one of the most amazing projects that I worked on. In late 1997, UIowa began a business planning process to evaluate the potential to fund a major campus infrastructure upgrade. The overriding business goal was to reallocate energy savings to finance deferred maintenance projects. The capital funding would be created from utility budget savings resulting from a comprehensive, integrated investment in highly efficient energy production, distribution and consumption systems. The UIowa project team set a business goal of 30% reduction in its energy budget – an amount of nearly $4 million annual savings. As the project planning progressed, we learned that the University had a 25 MW coal-fueled power plant. Due to price incentives from their local utility (Mid-American) that were intended to discourage operation of UI’s power plant, the power plant only produced 8 MW. The utility had a staged rate that it charged per kilowatt-hour for UI purchases: · Under 14.5 MW – 3.3 to 2.4 cents · 14.5–35 MW – 1 cent · 35 MW – 10 cents in summer and 6–7 cents in winter. Since the production cost for operating the power plant was about 1.8 cents a kWh, it appeared that it was not a good economic decision to generate additional electricity when UI could buy it for 1 cent. However, UI was also involved in renegotiations of its electricity rates with Mid-American.

0

0

0

Development Fees

Service Revenues

Performance Revenues

−3,049

Deb Service/Lease

0

3,928

Operating Income

Debt Reserve Withdrawals

0

−13

Operation & Maintenance

5,741

800

Water

Total Operating Expense

0

Coal

Property Taxes

0

3,416

Natural Gas

Fuel Oil

15,38

Electricity

Operating Expense

9,669

0

Steam to Host

Total Revenue

0

Chilled Water to Host

9,669

0

Electrical to Host

Budget as Revenue Base

0

0

Power Sales to Utility

2001

Capacity Payments

Revenue

Income Statement

0

−3,049

4,046

5,816

0

−14

824

0

0

3,468

1,538

9,862

9,862

0

0

0

0

0

0

0

0

2002

0

0

0

0

0

0

0

0

0

−3,049

4,166

5,893

0

−14

849

0

0

3,520

1,538

10,059

10,059

2003

Table 6.1 Pro forma: Illinois State University

(Number in thousands of dollars)

0

0

0

0

0

0

0

0

0

−3,049

4,286

5,924

0

−15

874

0

0

3,573

1,492

10,210

10,210

2004

0

0

0

0

0

0

0

0

0

−3,049

4,405

5,958

0

−15

900

0

0

3,626

1,447

10,363

10,363

2005

0

0

0

0

0

0

0

0

0

−3,049

4,523

5,996

0

−16

927

0

0

3,681

1,404

10,519

10,519

2006

0

0

0

0

0

0

0

0

0

−3,049

4,640

6,036

0

−16

955

0

0

3,736

1,361

10,676

10,676

2007

0

0

0

0

0

0

0

0

0

−3,049

4,757

6,080

0

−17

984

0

0

3,792

1,321

10,837

10,837

2008

0

0

0

0

0

0

0

0

0

−3,049

4,794

6,205

0

−17

1,013

0

0

3,849

1,360

10,999

10,999

2009

0

0

0

0

0

0

0

0

0

−3,049

4,831

6,333

0

−18

1,044

0

0

3,906

1,401

11,164

11,164

2010

0

0

0

0

0

0

0

0

0

−3,049

4,867

6,465

0

−18

1,075

0

0

3,965

1,443

11,332

11,332

2011

0

0

0

0

0

0

0

0

0

−3,049

4,904

6,598

0

−19

1,107

0

0

4,024

1,486

11,502

11,502

2012

2014

0

0

0

0

0

0

0

0

4,971

6,878

0

−20

1,175

0

0

4,146

1,577

0

0

−3,049 −3,049

4,937

6,737

0

−19

1,140

0

0

4,085

1,531

11,674 11,849

11,674 11,849

0

0

0

0

0

0

0

0

2013

0

0

0

0

0

0

0

0

0

−3,049

5,005

7,022

0

−20

1,210

0

0

4,208

1,624

12,027

12,027

2015

0

0

0

0

0

0

0

0

0

−3,049

5,038

7,169

0

−21

1,246

0

0

4,271

1,673

12,207

12,207

2016

0

0

0

0

0

0

0

0

0

−3,049

5,070

7,320

0

−22

1,284

0

0

4,335

1,723

12,390

12,390

2017

0

0

0

0

0

0

0

0

2019

5,132

7,633

0

−23

1,362

0

0

4,466

1,828

5,161

7,795

0

−24

1,403

0

0

4,533

1,883

12,956

12,956

0

0

0

0

0

0

0

0

2020

0

0

0

−3,049 −3,049 −3,049

5,101

7,475

0

−22

1,322

0

0

4,400

1,775

12,576 12,765

12,576 12,765

0

0

0

0

0

0

0

0

2018

Book Income

−1,755

Tax Depreciation/ Amortization

Taxable income

0

Deb Reserve Withdrawals

Project After-Tax Cash Flow

895

0

895

Project Pre-Tax Cash Flow

Income Tax

760

Principal

Interest Payments

2,289

16

Return on Working Capital

Use of Funds

0

3,928

Return on DSR

Operating Income

CASH FLOW STATEMENT

0

3,394

Interest

Income Tax

3,928

2,289

Operating Income

Income Tax Calculations

0

790

Book Taxes

849

790

Book Income Before Taxes

0

2,289

878

Book Depreciation

Debt Reserve Additions

Interest Payments

Pre-tax Cash Flow to Equity

1,013

0

1,013

804

2,245

0

16

0

4,046

0

−3,630

5,431

2,245

4,046

953

0

953

849

0

2,245

997

1,134

0

1,134

851

2,198

0

16

0

4,166

0

−1,291

3,259

2,198

4,166

1,121

0

1,121

849

0

2,198

1,118

1,253

0

1,253

901

2,148

0

16

0

4,286

0

183

1,955

2,148

4,286

1,290

0

1,290

849

0

2,148

1,237

1,372

0

1,372

954

2,095

0

16

0

4,405

0

355

1,955

2,095

4,405

1,461

0

1,461

849

0

2,095

1,356

1,490

0

1,490

1,010

2,039

0

16

0

4,523

0

1,506

978

2,039

4,523

1,635

0

1,635

849

0

2,039

1,474

1,607

0

1,607

1,069

1,980

0

16

0

4,640

0

2,660

0

1,980

4,640

1,812

0

1,812

849

0

1,980

1,591

1,724

0

1,724

1,132

1,917

0

16

0

4,757

0

2,840

0

1,917

4,757

1,991

0

1,991

849

0

1,917

1,708

1,761

0

1,761

1,198

1,851

0

16

0

4,794

0

2,943

0

1,851

4,794

2,094

0

2,094

849

0

1,851

1,,745

1,797

0

1,797

1,268

1,781

0

16

0

4,831

0

3,050

0

1,781

4,831

2,201

0

2,201

849

0

1,781

1,781

1,833

0

1,833

1,342

1,707

0

16

0

4,867

0

3,160

0

1,707

4,867

2,311

0

2,311

849

0

1,707

1,817

1,869

0

1,869

1,421

1,628

0

16

0

4,904

0

3,276

0

1,628

4,904

2,425

0

2,425

849

0

1,628

1,853

1,904

0

1,904

1,504

1,545

0

16

0

4,937

0

3,392

0

1,545

4,937

2,543

0

2,543

849

0

1,545

1,888

1,938

0

1,938

1,592

1,457

0

16

0

4,971

0

3,514

0

1,457

4,971

2,665

0

2,665

849

0

1,457

1,922

1,972

0

1,972

1,685

1,364

0

16

0

5,005

0

3,641

0

1,364

5,005

2,792

0

2,792

849

0

1,364

1,956

2,005

0

2,005

1,783

1,266

0

16

0

5,038

0

3,772

0

1,266

5,038

2,924

0

2,924

849

0

1,266

1,988

2,037

0

2,037

1,888

1,161

0

16

0

5,070

0

3,909

0

1,161

5,070

3,060

0

3,060

849

0

1,161

2,021

2,068

0

2,068

1,998

1,051

0

16

0

5,101

0

4,050

0

1,051

5,101

3,202

0

3,202

849

0

1,051

2,052

2,098

0

2,098

2,115

934

0

16

0

5,132

0

4,198

0

934

5,132

3,349

0

3,349

849

0

934

2,082

2,128

0

2,128

2,239

810

0

16

0

5,161

0

4,351

0

810

5,161

3,502

0

3,502

849

0

810

2,112

76

6 The Real Investment Opportunity Operation Calculations Cogeneration Systems

Gas Turbine/Engine Fuel Generator #1 Steam Turbines

Capacity

Fuel Rate

5,000

56 Enthalpy

Capacity Inlet

Customer Annual Usage Wheeling

Outlet

68,892,296 kWh 0 kWh

Cap Factor 92.00%

Availability

Cap Factor

Availability

Retail Rate

Gas Turbine/Engine Generation Capacity Turbine Output Annual Fuel Usage Annual Fuel Cost Annual O&M cost Annual Steam Output Fuel Chargeable to Power

4,400 kW 35,460,480 kWh/ Yr 397,157 MMBtu $ 1,247,074 $0

35,460,480

Production

O&M Cost

Production (kWh)

(kWh)

0.000 $/kWh

Steam Turbine 0 kW 0 kWh/ Yr 0 MMBtu $0 $0

0 KLbs 0 Btu/ kWh

Cost Breakdown Fuel OYM Debt Service & Returns TOTAL

0.0352 0.0000 0.0077 0.0428

Current Avg Cost Projected Avg Cost Weighted Avg Cost

0.0558 $/kWh 0.0460 $/kWh 0.0444 $/kWh

Customer Savings from Cogeneration SAVINGS WITHOUT DEBT SERVICE

88.00%

O&M Cost $0.00

$/kWh $/kWh $/kWh $/kWh

Annual $ 1,247,074 $0 $ 217,297

$ 1,609,693 $ 1,880,989

Fig. 6.6 ISU cogeneration operating calculations

The solution to UI involved four initiatives. First, the project found needs in UI’s buildings to upgrade lighting, replace heating, air conditioning, and ventilation equipment, and install control systems. Another major opportunity was discovered in the campus residence halls. Although the power plant captured waste heat to provide heating and air conditioning to parts of the large campus, not all campus facilities were served. Campus residence halls had old steam radiators where the temperature was controlled by opening the window. The halls also had old window air conditioners and were not served by the campus district cooling system. The building energy efficiency measures are shown in Fig. 6.9 below. Notice that the simple paybacks on the lighting and residence halls upgrades were 15.3 and 163.6 years respectively. To most investors, these projects would never be included in an investment that pays for itself from savings. By integrating the lighting and extension of the central chilled water system to the residence halls, the efficiency of the power plant resulting in a $26.1 million investment and annual savings of 3.8 million. (See Fig. 6.10 Integrated Facility Investments.) All the facility investments were combined into one financing. The annual energy budget savings would pay back the capital cost in less than seven years (a combined 6.8 year simple payback). The University did not have an electricity grid to serve all of its campus facilities from its power plant. The cost of an electrical intertie to serve the full campus was

6.5 Energy Supplier Opportunity – The University of Iowa

77

Operational Calculations Steam System ASSUMPTIONS Cogen Steam Output: Fuel Used

0 KLbs 0 MMBtu 0 MMBtu $0

From Gt Supplemental

Cost Projected Steam Requirements Steam Required beyond Cogen Supply

Projected Steam Quality:

532,619 KLbs per Year 532,619 KLbs per Year

Enthalpy

Temperature

1,203 Btu/ Lb 1,189 Btu/ Lb 203 Btu/ Lb 0 Btu/ Lb 5 Btu/ Lb

High Pressure Intermediate Pressure Low Pressure Hot Water Condensate

Steam Production:

Capacity

STANDARD Boiler#10 STANDARD Boiler #6 STANDARD Boiler #7 STANDARD Boiler #8 STANDARD Boiler #9

35,000 85,000 95,000 85,000 65,000

Fuel Primary Primary Primary Primary Primary

Pressure

0 deg F 400 deg F 200 deg F 0 deg F 85 deg F

Efficiency 81% 78% 78% 81% 81%

0 psig 125psig 50 psig 0 psig 220 psig

Pressure

Production

Intermediate Intermediate Intermediate Intermediate Intermediate

54,622 81,933 191,178 136,556 81,933

SUMMARY Boiler Plant: Total Steam Capacity Annual Steam Output Consumption Cost

355,000 Lbs/Hr 546,222 Klbs 815,501 MMBtu $2,560,673

Operation & Maintenance

Cost Breakdown: Boiler Plant Fuel O&M Debt Service & Returns

1.50/KLbs

Annual 4.69/ KLbs 1.50/ KLbs 0.81/ KLbs

$ 2,560,673 $ 819,333 $440,276

6.99 /Klbs Steam from Cogen Fuel O&M Deb Service & Returns

Annual 0.00 / KLbs 0.00 / KLbs 0.00 / KLbs

Weighted Avg Cost/KLb Current Cost/ KLb Customer Savings from New Steam Production SAVING WITHOUT DEBT SERVICE

$0 $ 103,351 $0 $ 6.99 $ 6.91 $(105,714) $392,913

Fig. 6.7 ISU steam operating calculations

included in the project cost. The UIowa project results showed that the University could finance $43 million in investment value over 20 years. Discounted at 8% the net present value was $12 million. The ratio of annual savings to annual debt was 119%. Here was a university with an average kilowatt hour (kWh) cost of 3.2 cents per kWh. What happened? First we were able to reduce the amount of electricity needed to serve campus buildings thus saving electricity and reducing high air conditioning electrical loads during the summer months. Second, by adding the residence halls to the district cooling system, electricity costs for air conditioning were further reduced. By increasing use of the thermal energy from production of electricity, greater fuel efficiency was achieved.

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6 The Real Investment Opportunity

Operational Calculations Chilled Water System Assumptions Chiller Existing Units New 1000 (2) New 2000 (2)

Type Electric Steam Electric

Projected Avg Electrical Cost Projected Fuel Cost (Delivered to burner tip) Operation &n maintenance Summary Total Chilled Water Capacity Annual Production Consumption Cost Cost Breakdown: Fuel O&M Debt Service &

Equal to:

Electric 42,766,369 kWh $ 1,897,116

$ 0.18963/Ton-hr. $ 0.0100/Ton-hr. $ 0.1-52/Ton-hr. $ 0.3115/Ton-hr.

Capacity 1,500 2,000 5,000

COP 5.10 0.90 6.00

$ 0.0444 $ 3.14 $ 0.01

$/kWh $/ MMBtu $/ Ton

8,500 10,516,751 Gas 0 MMBtu $0

Production 1,577,513 3,155,025 5,784,213 10, 516,751

Tons Tons-hrs Steam 42,664 MMBtu $ 167,254

Annual $2,064,370 $ 105,168 $ 1,106,590

$ 25.96/MMBtu

Current cost per ton of chilled water

$ 0.177 / Ton-hr

Saving on Total New Chilled Water Production SAVING WITHOUT DEBT SERVICE

$ (1,196,140) $ (89,549)

Fig. 6.8 ISU chilled water operating calculations

Third, installation of the electrical intertie also added greater efficiency to the power plant generation. Now IUowa could distribute electricity to other parts of its campus. Following the negotiation with Mid-American, UI increased its electricity generation to 20 MW. Mid-American offered to transmit electricity for the University to other campus facilities and to pay UI for additional electricity generation when Mid-American needed the capacity to serve other customers. Figure 6.11

6.5 Energy Supplier Opportunity – The University of Iowa

79

Step 3 – Block 9 University of Iowa Example Facility Investments Annual Savings

Gross Investment

Simple Payback

Lighting

$185,585

$ 2.8M

15.3 yr

HVAC

$747,185

$ 3.0M

4.1 yr

Controls

$646,181

$ 2.3M

3.6 yr

HVAC UpgradesResidence Hall

$ 96,507

$15.8M

163.6 yr

Fig 6.9

Step 3 – Block 9 University of Iowa Example Integrated Energy Supply System Annual Savings

Gross Investment

Simple Payback

Facility Upgrades

$1.5M

$24.0 M

16.3 yr

Electrical generation

$1.6M

$ 0

0.0

Steam production

$0.7M

$ 0

0.0

$ 0.06M

$2.1M

35.8 yr

$3.8M

$26.1M

6.8 yr

Chilled water production Totals

Fig 6.10

Annual Consumption Purchased kWh

Annual Cost

Generated kWh

300,000.00 250,000.00 Annual Cost (thousands)

Annual kWh (thousands)

Purchased kWh

Generated kWh

$9,000

200,000.00 150,000.00 100,000.00

$8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000

50,000.00

$1,000 -

$-

Baseline Due to Btu efficiency.

Fig 6.11

Base Case

Baseline

Base Case

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6 The Real Investment Opportunity

below pictures the Changes in Purchased and Generated Electricity as well as the annual costs to UI. Mid-American has integrated the University’s energy supply system into its own electrical generation plan. It is relying on UI generation and efficiency investments. Although UI was willing to take all the risk in financing, constructing, and operating their energy supply systems, having the money to finance upgrades and take the risk that the savings will occur over time is not a standard practice for most institutions. The assessment of UI’s investment opportunities was conservative. Mid-American could have earned returns by taking the risks to complete the project, operate UI’s energy supply systems, purchase fuel, and provide electricity when the plant requires maintenance. As an aside, UIowa is now using waste oat hulls to fuel its power generation. Congratulations!!

6.5.1

Customer and Energy Supplier Benefits

Gaining energy supply with the fewest Btus and buying supplemental, maintenance, and stand-by electricity from the utility forms a basis from which all other technologies and business arrangements can be evaluated. Web-based information technology applied to customer energy requirements and supply options allows the customer and the energy supplier to communicate and optimize the dispatch of equipment. Integrating customer generation and load management with energy supplier generation and transmission allows for savings in energy and capital budgets that can pay the debt service on investments in customer infrastructure and offer greater use of energy supply capacity. Moreover, energy use reduction for the customer can significantly reduce the need for electric utilities to build more generation and transmission facilities. The integrated business plan enables consumers and energy suppliers to determine the levels of investment potential for their facilities that are possible by creating energy and maintenance efficiency improvements. Without this understanding, customers will not be able to compare the benefits of alternative energy fuels, technologies, and purchase agreements. Customers will be forced to find additional money to pay for replacement of aged energy infrastructure. Use of basic energy supply investment planning methodology in a comprehensive, integrated fashion not only builds trust but sets the stage to improve the economic situation for both the customer and the supplier. The methodology allows investors to understand what will happen if they do nothing and what will be the impact on their personal and business goals. Alternative technologies, contractual and financial solutions, can be compared. Cost impacts related to operating and maintaining the combination of electric, natural gas, heat, cooling and other energy supply systems can be managed. Energy budget savings become a vehicle to pay for infrastructure upgrades which do not save energy but need to be done. Most important, a database and plan exist that will allow the supplier to meet customer energy needs and reduce costs. Whether the supplier chooses to earn profits by becoming a business partner is a subject of Chapter 8.

Chapter 7

A “Living” Business Plan

Abstract Energy investment means high risk unless the business plan assumptions can be automatically updated and impacts reported. The author presents a financial tool where decision-makers can see the value of investments at any time and facility operators can direct operations of equipment based on real time price signals. The author introduces “living” energy supply systems financial models that update standard financial pro formas. A pro forma and four other reports from Illinois State University are presented as examples and each section explained. The California State University system, Dade County, Florida and San Francisco International Airport offer stories that highlight the important use of web-based software to update, communicate and report integrated energy systems investment status, especially over the term of the debt. Information flow diagrams highlight essential budget items and data that must be measured and communicated. The author introduces the term “performance-based” investment to reinforce the need for all the people who can impact a complex energy supply investment and the stakeholders who are taking the financial risks to share information, communicate what is happening and have access to timely results. Keywords Debt term • Financial tool • Living business plan • Measured data • Performance-based investment • Pro forma • Risks • Stakeholders

7.1

Information and Communication

In January 2002 as I was sitting at an Energy Policy Steering Committee meeting for the U.S. Navy in San Diego, I learned that nine different agencies impact energy costs for San Diego Region Navy bases. It seemed like there were fifteen million hats all with a job to do, but all working for different agencies, under different assumptions, without a common business plan. Energy supply contracting, capital planning, development of equipment and building project engineering specifications, L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

81

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7 A “Living” Business Plan

construction schedules, financing, construction management, utilities operations, facilities maintenance, to name a few functions, were scattered among different decision-making entities. Building occupants also contributed to the many changes taking place. Beyond the San Diego area, layers of decision-makers in Washington, D.C. and elsewhere exist who also create policies that impact costs. How does one keep all the different agencies’ information and activities straight? The most amazing question that was put to me from a member of the Steering Committee was, “Can you do this (implement Opassess) for us?” My answer was, “No. You have to do this for yourselves. The Navy at its highest level needs to make a commitment to integrated planning and communication. I can provide the vehicle and the process through Opportunity Assessment, but all Navy leaders and agencies would have to choose to make OA a standard business practice.” The Navy response to 3 years of effort and millions of dollars of investment opportunity was, “We had to deal with Navy paradigms and culture including turf ownership and individuals seeing things only from their view through the window in their individual box. In addition, the timing of the project was competing with many varied demands and issues in the 1999 through 2002 timeframe which made it very difficult to get their attention focused on tomorrow vs. today. Point is … most of the reasons why project did not implement are internal to Navy.” Unfortunately, my experience is that the same communication and leadership gaps that cause waste and high costs for the Navy exist in virtually every institution and medium to large business. The number of people who need to make decisions that will impact energy, operation, maintenance, and capital costs can be very large. For example, financial decision-makers ask, “If we support an investment that relies on savings in our energy budget, how do we know that we have achieved the savings?” Utility operating personnel want to know, “How do I know what the operating costs are during the day so I know when to turn equipment like chillers on and off?” Purchasing (procurement) is negotiating a new natural gas contract and needs to know, “What are the unique terms of the contract that will serve our operation and lower costs?” Imagine asking a group of people whose job is to provide service and control costs without giving them a common business plan. Conscientious staff will do the best they can, but people would be sailing without a chart and cannot possibly avoid running into one another. Up to date information and communication are essential to energy supply investment and risk mitigation. Once all the information is integrated into the business plan, people must communicate when assumptions change. If budget savings are necessary to pay for debt and operations, all the people whose jobs impact the business plan assumptions have to communicate and know the economic and reliability results of assumption changes as they occur. Financial decision-makers want to see the impacts on the bottom line.

7.2 Web-Based Financial Modeling Software

7.2

83

Web-Based Financial Modeling Software

The complexity of building a pyramid of assumptions to determine the economic value and strategy for updating and operating new energy supply systems is facilitated and managed by putting all the data and calculations into a web-based software program. Because energy marketplace and customer energy needs are dynamic, the energy plan assumptions must be updated based on real time data. Simply writing an energy investment plan on paper means that plan will be out of date from the beginning. Energy supply system financial modeling software is essential to gaining energy infrastructure efficiency. Integrated business analysis enables the user to evaluate investment project potential, secure financing, and conduct asset management over the debt term. The interactive nature of complex energy infrastructure requires a strong financial tool that can receive operating and energy data and assesses revenue and cost impacts. Financial models serve as tools to compare alternative assumptions and to establish the business terms that will result in a predetermined level of profit. In the last chapter, we reviewed ISU’s investment pro forma. Under the pro forma Income and Cash Flow Statements, revenues and expenses are listed for each year. As the reader is aware, a lot of data and assumptions were needed to create the calculations in each of the pro forma expense and revenue categories. For any single year, month, day and hour, an important assumption like the price of purchased electricity could change and impact the cash flow number on the bottom line. First, the supply systems operators need to know the time and duration of electricity cost change. They also need to see the impact of the price change based on current loads and equipment operating conditions. Equipment controls systems can be programmed to turn equipment on and off based on commodity price signals. A high unit cost signal for purchased electricity might result in turning on a chiller fueled by thermal energy (absorption chiller), or if the facility has installed thermal energy storage, the system might draw on stored chilled water to provide the chilled water energy to air condition. Any number of technology options might work for different facilities. The trick, however, is having the information in a timely manner so that financial impacts can be evaluated and operating options can be implemented. The importance of information technology in energy efficient investment can’t be understated. In fact, the integration of existing information technology especially equipment controls with new software is a huge business opportunity. In order to make integrated energy supply systems investments and operation successful, decision-makers must have timely information and communication. Building the business plan is not enough. The plan must be updated and managed as a living business plan. Decision-makers first need to compare the economic benefits of alternative technology solutions, operating strategies, financing and ownership structures, fuel options and risk abatement in order to select the best investment plan. Automation

84

7 A “Living” Business Plan

of all data and calculations enables decision-makers to not only evaluate the best solutions for investment but to track market changes so that continued optimum operation can be accomplished. Finally, automation of reporting will continue to demonstrate the impact on the bottom line to the financial decision-makers.

7.3

Energy Information and Management System Business and Functional Goals

In 1998, LAS worked with California State University (CSU) system energy directors to develop an energy information and management system action plan. The purpose of the work was to walk CSU professionals through the process of automated reporting. The initial goals were to reduce and manage energy prices and to manage the risks associated with self-funded, performance-based investments. Performance-based investments are capital investments where the debt is paid from energy operating budget savings derived from lower energy unit costs and consumption. CSU’s business and functional goal was to obtain an advanced energy information and management hardware and software system that would give them the ability to accomplish automation of the following business objectives: 1. To accurately measure, communicate, analyze and report real-time energy production, distribution and consumption data for electricity, steam and chilled water in discrete locations within facilities/systems and for all campus facilities on a coincident basis 2. To determine real-time building and production system (i.e. electricity, steam, chilled and hot water) energy baseline use, rates and billing parameters, especially discrete and integrated load data (supply side optimization and contracts) 3. To provide the foundation for energy operating, maintenance and financial accounting cost containment and controls 4. To conduct assessments and develop specifications on building and infrastructure systems upgrades for efficiency, unit cost control and reliability 5. To assess building and systems growth and new energy load capital expansion 6. To verify energy operating and maintenance budget savings to pay for capital upgrades 7. To obtain and manage reliable and cost effective energy supplies 8. To measure, analyze and manage energy production, distribution and consumption systems based on cost effective operations, maintenance and capital investments, energy purchase contracts and other cost control investment and operating decisions 9. To have software integration that allows the facility to communicate metered data from many metering systems in a manner where data can be analyzed, reported and controlled based on any selected integration of energy use compared to market price signals

7.3 Energy Information and Management System Business and Functional Goals

85

10. To track and validate energy savings and manage operating cost impacts resulting from real-time energy pricing 11. To have an open protocol communication system where all software talks to one another 12. To acquire and manage highly efficient energy system services and energy supply purchases to reduce costs 13. To have trained staff to operate the energy information and management system 14. To have compatible measuring technologies that are accurate and offer interoperability Think of the human body is an energy information system. Measurement occurs through nerve endings that receive data and transmit the data through the spinal column to the brain for processing and direction. Facility managers currently work without the central processor or brain. The brain is where the integrated energy plan resides. Timely input of new data can be calculated and compared to the initial investment plan. Built into the plan are equipment operating and controls options that can not only report financial impacts but control costs through automatically managing equipment. All kinds of measurement devices exist that record data – energy meters, energy management controls data-loggers and others. Some automatically transmit the data and control equipment, but most data that is currently gathered is limited. At best, the data needed to synthesize and direct integrated energy supply and demand systems is gathered and processed piecemeal by numerous different people who perform different functions – facility maintenance, procurement, financing, budgeting, engineering, construction, utilities operation, and the list goes on. Most of these functions do not work with the same baseline data as they create each of their business plans, budgets, and make day to day decisions. Central information systems are rarely available so that all the people performing functions that impact one another can communicate. In 2000, web-based software called Opassess was built. The intent was to provide the brain to facility and other decision-makers. The master energy investment and operating plan created by doing the OA would receive and integrate data from other facility measurement and controls information systems. By having the tool web-based, it would facilitate automation of new data and enable comparison of changes in technology, business, and the energy market. Opassess would be the brain or as the industry calls it top ware. The user could contract to use the OA software or could purchase the software to use internally. Data security was muscular enough to gain approval from the U.S. Navy to allow base data to reside in a site off base. Two simple figures, Figs.7.1 and 7.2 shown below, diagram how the equipment operating data and energy use data need to be retrieved, assessed, and reported automatically. Once the data are integrated into the central processor or brain, they can calculate and report what is happening and what the cash flow looks like. Further, they can direct energy control systems to take cost control measures.

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7 A “Living” Business Plan

REPORTS

Central Processor (automated collection, calculation & reporting)

Distribution Systems

Facilities Motors

Central Plant

Air Handlers Measurement

Lighting

Cogen

Wastewater

TES

Etc.

Pipes Wires

Boilers & Chillers Etc.

Fig. 7.1 Communication equipment operating and energy use data

Utility Systems Electricity Chilled Water Hot Water Natural Gas Steam Water Wastewater

Measured by: Single meter Virtual meter Facility/building System

Reported by: Unit consumption graphs Unit cost graphs Loads graphs

Time Sequence:

Trends & Escalations:

Instantaneously Hourly- Daily Monthly-Seasonally Yearly

Usage growth - Demand growth Unit cost escalation-Labor escalation General inflation Budgetary escalation

Fig. 7.2 Automated date retrieval, assessment and reports

Pump Etc.

7.4 Information Cost Control

87

Figure 7.1 – Communication of equipment operating and energy use data – provides examples of some of the equipment contained in buildings, distribution, and energy production systems where changes in anticipated operating performance can impact the bottom line. Figure 7.2 – Automated data retrieval, assessment and reports – presents the information flow to learn what is happening with the costs of energy commodities. Depending on the time criticality of the energy type, facility managers can select whether measurement needs to be automated as well as the frequency of measurement. It’s unlikely that budget escalation needs to be measured more than annually while electricity costs might require real time measurement. The reports largely need to track growth and escalation assumptions and compare them to the business plan.

7.4

Information Cost Control

There are many levels of information cost control. For example, before beginning a process of new investment, facility managers want to be sure that they are operating and maintaining their facility equipment efficiently and that they are on the best energy purchase rates. The importance of automating the detail of Dade County’s energy bills supported all County decisions to make energy purchases, to operate and maintain facilities, and to make investments in facility and equipment upgrades. With electricity costs, overwhelmingly the five hundred pound gorilla of the County’s energy budget, automation of this essential data allowed the County to begin to evaluate and understand the cost impacts of all County business goals, growth decisions, energy policy, and market changes. For example, the value of having an automated accounting system that had every rate that existed in FPL’s system, was most dramatically reflected when FPL sought to put a new nuclear power plant into the rate base. The Florida Public Service Commission (FPSC), who approved rate increases, directed that no residential, commercial or industrial rates could increase more that 38%. When the Office of Energy Management (OEM) ran the new structures of the rates proposed by FPL, the rates for the County hospital, jail, airport, and other large facilities went up 67%. This was a strong argument for fairness and saved the County millions of dollars. The automated energy information accounting system also supported a decision to implement performance-based investments. When I was told that the County did not survey its facilities to identify efficiency improvement because there were no funds available, this message only encouraged me to demonstrate the savings that resulted in efficiency. The Office immediately launched a technical and economic assessment of facility operation and maintenance needs. Five types of performance-based investment programs were implemented. The first was behavioral. The County Library Department Director agreed to have OEM

88

7 A “Living” Business Plan

provide training to library staff to explain their energy bills and show them how they could operate their energy using equipment and save money in their energy budget. The reward for demonstrated savings was to keep half of the savings for their own discretion. The day that OEM walked into the Coral Gables Library for training was a cool, rainy day and the staff was bundled in sweaters. The air conditioning was running full out even though the staff had tried to turn up the thermostat to try to shut off the air conditioning. As we gathered to examine the temperature setting, OEM discovered that the humidistat was set very low. The air conditioner was running to reduce moisture. We reset the humidistat to a proper level. Everyone began to be more comfortable, and we continued to discuss further measures in controlling equipment that would reduce their bill. The results of this library’s efforts were savings of 57% from the prior year. OEM then began training County facility managers. These personnel were responsible for operations of all major facilities. Untold hours were spent helping facility managers operate their facilities to be on better energy rates and improve the equipment operations to be as efficient as possible. This effort was essential to gain a good baseline of operating efficiency and energy consumption from which to determine the value of investing in equipment upgrades. As the training was taking place, small capital investments were funded from the revolving energy investment fund set up by the Budget Office. Tracking of energy and cost saving improvements like new lighting, pumps, motors, and preventive maintenance for designated buildings showed very quick paybacks. OEM made a deal with County departments that OEM would pay for the efficiency measures and in return collect the resulting savings for 1 to 2 years out of each department’s budget. The measures had such rapid savings that departments decided to pay for their own improvements and keep the savings. The energy fund ultimately provided the seed capital to pay for the first General Services Department preventive maintenance program. OEM demonstrated the cost savings that came for doing preventive maintenance and installing low cost energy efficiency measures. The success of the small performance-based investment led the County to agree to a test for making larger capital investments to replace aged and inefficient air conditioning and other essential building systems, even leaking roofs. Over a million dollars in private investment was made by an energy service company to make capital improvements in five buildings. The private company received a portion of the energy cost savings that resulted from the upgrades. The accounting system served as the means to track cost savings. Within a few years, the County decided to implement $15 million in energy infrastructure investment using a Master Lease financial structuring. The dilemma, however, was that County EPC was very slow and disaggregated. Once the investment money was turned over to another department to complete EPC, tracking the savings became impossible. Lest good County employees get a bad name, this problem exists for every institution in the U.S. As I have reported already, the costs associated with getting

7.6 Integration with the Local Utility

89

projects build on time and within budget where institutional employees have to manage engineering, procurement, and construction under existing procurement rules often increase capital costs (materials and manpower) by 25% to 100%. Many times, once the project is finished, it does not operate properly and continued funding is required.

7.5

The Bigger Picture

Whenever decisions are made about how to improve reliability and reduce costs, the foundation for making any decision is largely having the information to be able to manage and report the results of the decision. The Dade example provided above focuses largely on utility accounting, rate structuring, and energy efficiency improvements in buildings (demand side management). These energy efficiency initiatives and investments limited themselves to funding from savings in individual facilities and pieces of equipment. They were not integrated. The will to create energy efficient infrastructure means integration of all energy supply systems. At a minimum, the Opportunity Assessment methodology should be applied to all energy supply investments to build and rebuild electric generation and transmission systems combined with customer production and distribution systems. As electrical capacity needs are identified, the business investment planning process needs to follow the OA process. Automation of the data gathering and analysis allows the planning process to look at a huge variety of system technological and financial solutions. Once an investment plan is adopted, the stakeholders engineers, financial people, procurement, etc. all have access to the full plan as well as their performance parameters.

7.6

Integration with the Local Utility

San Francisco International Airport contracted with LAS in 1999 to conduct a business investment analysis of the Airport’s electric power reliability. When the electrical grid serving the airport went down, landside operations would go down. Blackouts had caused the Airport to lose millions of dollars a day due to inability to handle passenger and baggage flows. Essentially, the San Francisco peninsula is at the end of a transmission grid and is vulnerable to electric outages. Virtually all electric power has to be imported to meet the urban electrical demand. The “gateway to the Pacific” could handle planes but not passengers. With the expansion of the airport that was under construction, reliability was an increasing concern. LAS and airport staff agreed that the Airport could not control the grid so the only way to measure reliability was to define a local generation solution where the

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7 A “Living” Business Plan

Airport could serve itself. All other options that energy suppliers might offer needed to meet or beat the Airport’s self-generation option. The project goal was to develop a preliminary business plan that focused on what SFIA could do for itself to invest in 100% electric reliability at the least cost and risk. First, it was necessary to project the new demand for electricity, steam and chilled water due to the Airport expansion. Unfortunately, Airport personnel had already purchased heating and cooling equipment that would not take full advantage of the waste heat from electrical generation. The full technology solution included energy efficiency measures that reduced energy demand, three electric generators, an electrical intertie from a cogeneration plant located at United Airlines facilities next to the Airport plus energy information systems and other costs. The integrated energy investment project was estimated to be $167 million. More than $15 million of the Airport’s projected 1999–2000 annual budget could be shifted to fund capital. The project had an operating budget positive cash flow the first year after all expenses. An initial concern was that the Airport did not want to compete with San Francisco’s electric municipal utility, Hetch Hetchy. LAS’ response was, “Let Hetch Hetchy finance, build, and operate the Airport’s energy supply and guarantee reliability.” Enough cash flow existed in the project to share the benefits between the Airport and Hetch Hetchy as long as Hetch Hetchy could guarantee reliability. Integration of the Airport generation with the local municipal utility would be a win, win for both entities if the proper information and communication software was put in place to allow Airport and utility staff to work together.

7.7

Summary

A review of the pyramid planning process reveals the sensitivity of each layer of assumptions as they build on one another. Assumptions at the lower level of the pyramid may change. Automation is needed to evaluate the impact of changes as soon as possible so that management adjustments can be made. At the onset of the business planning process, all the people involved in the planning process must agree on the assumptions. Assumptions like escalation of electricity prices are market driven and dynamic. Information technology that will automate the update of market driven assumptions must be included in the total cost of the investment. The business plan assumptions and technical and financial data must be available to all people who created the assumptions and who will need to track and modify the assumptions over time. A web-based business plan enables everyone to see the integrated impact of individual changes on the total economics. Due to the need to manage unit costs for electricity, steam, and hot and chilled water on a time of use basis, the business plan software should automatically calculate these unit costs and direct control of equipment. For example, if electrical production of chilled water exceeds a designated

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91

cost threshold, an energy management system could automatically turn off the electric chillers and turn on thermal powered chilling equipment. Energy suppliers can track financial impacts and direct integration of energy generation and load management located at customer facilities with central plant and transmission dispatching. The financial benefits of integrating and managing all energy supply systems options can be optimized for both the customer and the energy supply company.

Chapter 8

Profits from Value-Added

Abstract Through the examples of three universities, Southern California, New Mexico and Iowa, the author presents how energy supply companies scope investment projects and benefit from value-added business arrangements. She explains how the goal of value-added is reached as well as other related financial benefits. The case experiences demonstrate how deals are structured and profits are shared. Specific evidence is given on how integrated investments in building equipment, heating, cooling and electric systems reduce capital, financing and implementation costs and risks and improve financial control and reporting. Finally, the author relates what happened, opportunities missed and the cultural hurdles to getting suppliers and customers to invest together in supply systems efficiency. Keywords Business arrangements • Cultural hurdles • Deal structures • Financial control and reporting • Value-added

8.1

Change

How do we change electricity producers’ goals from just profits derived from building more power generation and transmission and sales of commodities, to profits derived from saving energy and investments in energy supply systems on the customer’s side of the meter? The goal is to earn returns based on value-added. By implementing investments in customer energy systems, operating budget savings can result. If producers use their expertise and resources from the power industry to include customer energy systems as well, the customer savings can result in investment profits to the supplier. Perhaps the simplest way to demonstrate the changes in thinking that are necessary to make money from value added, is to tell the story of two university valueadded projects that were initially scoped by a company that invested in energy production facilities.

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

93

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8.2 8.2.1

8 Profits from Value-Added

The University of Southern California The Energy Investor’s Proposal

In August, 1995, the University of Southern California (USC) received a proposal from an energy investment company (the investor) to implement an integrated energy investment project. The offer was to partner with USC to effectively control energy supply costs, optimize campus efficiency, and complete substantial upgrades of aged and inefficient equipment. The proposal was to comprehensively evaluate, finance, and implement cost-effective upgrades of energy supply and distribution systems including electricity, steam, chilled and hot water. In addition, investments would include retrofitting campus buildings and installing automated management systems and energy financial accounting systems that would control, measure, analyze, and report energy consumption on a real time basis. The proposal was for USC University Park campus and was estimated to be an investment of $34.6 million. As a result of improved energy supply systems, the investor proposed that $34.6 million would be invested in USC infrastructure with no increase in operating budget costs for the University. The investor would align its business interests with USC and provide performance guarantees. Profits would be made from the 1995 energy budget savings resulting from more efficient production and distribution equipment. The investor would provide the technical and financial resources and business guarantees to expedite the upgrade and expansion of USC’s energy supply systems and facility equipment. The investor would acquire, construct, operate, and maintain these systems on a performance basis and contain energy costs at 1995 levels or lower. USC would gain immediate improvement in the environmental and comfort conditions for students, staff and visitors with no up-front capital. The preliminary scope of the investment included purchase and installation of a new central utilities plant structure, new chillers, cooling towers, pumps, motors, wiring, plumbing, a gas turbine, heat recovery steam generator and high voltage equipment. A new chilled water distribution system with trenching, piping, and landscape work would connect the cooling equipment with numerous campus buildings. In addition, building upgrades included lighting, heating and cooling distribution systems, controls, and metering equipment. Engineering, procurement, construction, financing, commissioning costs were included in the proposal.

8.2.2

Lowest Cost Investment Strategy

In 1995, USC was aggressively pursuing deferred maintenance and energy retrofit activities. USC needed to upgrade its heating and cooling systems and to install a water main to provide service to new buildings that were under construction. Consultant studies indicated that USC had a need for over $200 million in deferred

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95

maintenance. Approximately $80 million was related to mechanical, electrical, and other utility systems upgrades. The process that USC was following was to implement equipment and facility upgrades incrementally over time. Three different approaches were commonly followed. One approach was to replace aged equipment as it broke, was worn out, or was incurring high maintenance costs. The second was to upgrade systems like lighting on a system by system basis campus wide. The third approach was to complete energy equipment upgrades based on cost savings for all building energy conservation measures on a building by building basis. Traditionally, USC appropriated new capital budget funds to pay for deferred maintenance upgrades. For example, USC had approved deferred maintenance budget allocations of $8, 9, 10, and 11 million for 1995–1999. The University had also entered into a contract with an energy service company to finance and implement an energy retrofit of equipment in their Gerontology Building with third party financing. All of USC’s efforts gave evidence of the environmental and economic benefits that can result from energy efficiency investment. However, using an incremental (piecemeal) approach to complete the upgrade of energy supply systems and buildings did not allow USC to take advantage of the efficiency gains and financial benefits of an integrated and comprehensive investment approach. A piecemeal approach would result in foregoing the opportunity to pay for large energy supply equipment upgrades without increasing current operating budgets. In order to demonstrate the integrated cost/savings benefit, three economic examples are presented. Figure 8.1 – Energy Conservation Measure (ECM) costs and savings summary – for USC Andrus Gerontology, shown below presents the economic benefits of using operating budget savings that result from deferred maintenance upgrades like lighting and improvements in air distribution systems to pay for upgrades of equipment like a new chiller plant. Taken as an independent decision to replace the building chiller, the payback on the new plant would be over 14 years. The chiller was also the single highest building retrofit cost. USC could not avoid replacement due to environmental and reliability concerns. Although investment in individual upgrades such as lighting efficiency would result in energy budget savings, waiting to upgrade energy supply systems incrementally would not always allow rapid payback projects to pay for longer term payback projects like chilling equipment out of operating budgets. Figure 8.1 shows that the 2.5 and 4 year payback projects help to pay for the longer-term chiller investment and for important equipment additions that have no annual savings. Notice that by combining all the projects at Gerontology into a single investment, the simple payback is 7.33 years. If the project is scoped and financed over 15–20 years, the annual energy savings will exceed the cost of the debt and future maintenance costs for the life of the equipment. If the new chiller plant and cooling towers were implemented at a later date, the resulting operating cost savings would not offset the need for new capital budget funding. ECMs 7–9 show no energy savings. While these ECMs will result in some savings, the

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8 Profits from Value-Added

Net Cost ($)

Annual Energy Savings ($))

%

Simple Payback (years)

Lighting Retrofit

94,829

23,948

7.50

3.96

Double-Duct VAV & Fan VFDs-

81,190

32,742

19.20

2.48

Modification of Cooling Tower

10,286

1,755

1.10

5.86

New Chiller Plant

165,265

11,668

7.30

14.16

Controls

120,470

0

0.00

0.00

8,450

0

0.00

0.00

18,495

0

0.00

0.00

Monitoring Recommissioning Technical Audit Design Survey Totals

15,520

n/a

n/a

n/a

514.505

70,113

8.78

7.33

Fig. 8.1 Energy Conservation Measure (ECM) costs and savings summary

engineer chose to be conservative in his analysis. USC would have to budget more money to pay for these important cost control measures if each measure was funded and implemented piecemeal. The next full building retrofit for USC was planned for Olin Hall. A building retrofit analysis showed the investments to be very similar to Gerontology. Both buildings were reported by USC staff to be representative of the opportunities for efficiency investments campus wide. A good basis was established to invest in all building retrofit measures comprehensively and led ultimately to a building and energy supply systems integration strategy. Figure 8.2 – Optimal energy supply systems sizing, charts what was happening at USC by following an integrated systems investment strategy. By improving lighting and other efficiencies in Gerontology, the heat generated from lighting was reduced. The size of the new air conditioning equipment in Gerontology was able to be reduced from 280 tons to 200 tons. Not only was the capital cost to purchase the equipment reduced from $210,000 to $165,000, but the annual energy needed to operate the smaller chiller resulted in reducing electricity costs. Think about the impact of being able to reduce the size and operating costs of all building chillers. The energy service provider then assessed the cost/benefit of putting in central plant air conditioning and piping the chilled water to campus buildings (district cooling). The district cooling project was compared to replacing existing chilling equipment in individual buildings. While the pay backs for both chiller replacement approaches were over 20 years, the cost of the new central chiller plant and piping systems was nearly double the cost of retrofitting the building chiller equipment. Project developers and engineers then thought, “What would happen if we installed a small electricity generator where the waste heat from the electric generation could be captured to use for heating and cooling the campus buildings?” A preliminary assessment of a central integrated energy supply system that provided

8.2 The University of Southern California

97 Original

Optimal

Installed Chilled Capacity

289 tons

200 tons

Projected Replacement Cost * Includes 15% redundancy

$210,000 $165,000*

Fig. 8.2 Optimal energy supply systems sizing

Loads Integrated Benefits DSM/load reductions

current

Integrated

22 MW

Self-generated electricity

0

Steam generated by cogeneration

0

Chilled water systems*

7,041 tons

Project Costs

Energy Savings

16.8 MW

$12,000,000

$2,000,000

5-6 MW

$6,000,000

$1,600,000

15-20 mlb/hr 3,600 tons

Totals Simple payback

$0

$150,000

$14,000,000

$500,000

$32,000,000

$4,300,000 7.4 years

* “Must do” upgrades

Fig. 8.3 Integrating USC’s energy supply system

heat, cooling, and partial electrical service to campus buildings showed that it was economically attractive to accomplish the larger campus energy systems upgrade. Figure 8.3 presents the benefits from Integrating USC’s energy supply system by combining investments in building efficiency measures, electricity self-generation, and district heating and cooling. Notice that the campus demand for electricity was reduced over 5 MW. Chilled water demand was almost halved. Central chilled water production could follow the demand for air conditioning thus allowing equipment to be turned on and off rather than having to operate larger machines when only a small amount of air conditioning was required. While some investment costs like chilled water systems had huge paybacks (28 years), the integrated project investment of $32 million showed a simple payback of 7.4 years.

8.2.3

Lower Implementation and Capital Costs

The energy supplier proposal was to set up a separate business venture to implement the integrated energy investment project. A case was made that the integrated project would reduce USC staff and time requirements to implement a large portion of USC’s deferred maintenance projects. USC staff time and the cost of contracting incrementally under separate competitive bids would be reduced.

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The new business venture would lay off the risk of bringing the project in on time and budget by entering into a fixed price contract to engineer, procure, and construct (EPC) the integrated project. It was anticipated that the value would be 15% of the total project costs. In addition, the project could be done in 2 years rather than 5 or more years thus taking advantage of immediate efficiency savings and lower cost of capital. Staff time used to implement deferred maintenance work in-house, like lighting replacement, would no longer be required.

8.2.4

Reduced Business Risk

The energy investor offered USC vast technical and operational resources, financial experience, and guarantees of a multi-billion dollar energy supply corporation. The corporation and its affiliates had demonstrated ability to finance, develop, and operate energy supply systems on a performance basis. The investor committed to align its business interest with USC by making an equity investment in the project and by earning its return on investment based on performance guarantees. USC would gain a business partner who could provide long term, reliable, environmentally sound sources of energy commodities at competitive prices while retaining flexibility to respond to market changes. The project performance guarantee not only addressed the risk of insuring that the equipment and systems perform as specified but provided a 15 year guarantee of continued performance. Integral to operating cost control was the acquisition of wholesale gas purchases. Optimizing electrical service and control of real time energy use to reduce costs had to be integrated with the negotiation and purchase of supplemental and emergency electricity purchases. The investor committed to provide these services to help ensure long term reliable sources of natural gas and other energy commodities at competitive prices while retaining flexibility to respond to market changes. In summary, the investor proposed to take the major USC project risks. Primary risks discussed above included financing, bringing the project in on-time and budget, and insuring the project performed as planned both initially and over the term of the debt.

8.2.5

Improved Financial Control and Reporting

In addition to energy cost control and long term fuel procurement expertise, the project included installation of automated energy measurement, analysis, and reporting to effectively manage individual facilities, systems and equipment. Facility and equipment energy data would be measured on a real time basis. This information would be integrated with software that would allow management and reporting of the financial impacts of market changes compared to the initial

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99

business investment plan. For example, if the cost of producing air conditioning from electric chillers was cheaper than chillers fueled by waste heat, the operator would know which equipment to operate. The automation of the energy supply business plan would enable management to make decisions and provide internal cost control in a dynamic marketplace. Most important, by having the operating option to switch fuels for air conditioning from waste heat to electricity and vice versa, the system operator could reduce USC electricity demand. During the time when the University’s electric utility supplier has to turn on more electric generation to meet all customers’ demands, USC could reduce load, avoid higher electricity unit costs and reduce the utility’s system demand.1 Due to the combined benefits of greater energy efficiency, lower demand for electricity, use of waste heat, fuel switching capability and information technology, the amount of Btus of energy to serve USC and the Btu unit energy cost were reduced.

8.2.6

Financing Strategy

A key factor in keeping the USC project costs low was the method of financing. The energy investor and USC determined that their financial interests would be served by obtaining the lowest cost financing for the project over a term of 20 years. The lower the cost of the project debt, the more savings could be put into the project and profits. Initial project assessment showed that energy and maintenance savings in the 1995 operating budget would pay for future energy costs and the debt service on $34.6 million. The energy investor offered to structure financing as either taxable or tax-exempt. USC’s goal was to be able to not have the project debt on its balance sheet. A preliminary analysis showed that a tax-exempt financing solution for USC that achieved off-balance sheet financing was feasible. This solution would be accomplished by forming a special purpose non-profit corporation (NPC) to hold title to the project and supply steam, electricity, and energy conservation services to USC. The supplier would contract with the NPC to provide operation and maintenance services. The NPC could issue tax-exempt debt through a variety of established issuers. In order to reduce credit concerns that might happen with a new NPC, the investor proposed to buy 25% of the total project capital costs in order to gain lower cost financing for the larger capital debt. The second financing structure proposed was a leveraged lease. The supplier would use tax benefits associated with ownership of the project and pass on some of these benefits to USC through lower lease rental payments. Tax laws have changed, but the concept of creative structuring of financing and ownership remains important to lowering project costs. 1

The electricity purchase price was increased for the new project. Suppliers had a history of increasing supplemental, stand-by and maintenance electricity costs to customers who invested in their own generation.

100

8.2.7

8 Profits from Value-Added

Supplier Profits

In an energy investment project like the USC project described above, the profits to the supplier come in the form of returns from: ● ● ● ● ● ●

Equity investment interest Engineering, procurement, construction service fees Operating and maintenance service fees Power marketing fees from natural gas and electricity purchasing Sales of supplemental, maintenance and stand-by electricity A percentage of the annual budget savings resulting from implementation of the “value-added” projects

Often the bigger the project and the more savings that can be ensured, the greater the percentage of the savings that will go to the company taking the financial risks. Project internal rates of return to suppliers are often 25% or more after taxation. Traditional energy suppliers make profits just on sale of commodity. A business venture based on value-added gives suppliers, who choose to be investors and business partners with customers, a substantially greater investment opportunity with the potential of much higher profits. Energy supply investments are created from savings. The need for new power plants and transmission systems that will increase costs to the customer and cause increased environmental impacts will be dramatically reduced. More supplier economic benefits will be revealed as other customer investment stories are told.

8.2.8

What Happened at USC

Although USC was willing to pursue the project with the investor, the investor delayed the project until it was usurped by another company. Ultimately USC implemented parts of its value-added projects. The energy investor’s corporate culture was not yet ready to make the paradigm shift to make money from value-added.

8.3 8.3.1

The University of New Mexico The Problems

About the same time as USC was struggling with how to finance the renovation of its energy and water systems, the University of New Mexico (UNM) reported serious problems with antiquated infrastructure. While the expected life of a chiller is about 20 years, UNM’s chillers averaged 23 years with half of the capacity over 27 years old.

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101

Boiler life is about 25 years. Four of UNM’s five boilers were older than 25 years. Onethird of the UNM buildings could not be remotely controlled from their energy management computer systems because an obsolete part had failed and no replacement could be found. UNM’s energy demand exceeded its capacity to produce energy by 20%. Planned new campus buildings were projected to increase energy needs by another 20%. No new money was appropriated to expand the campus energy production systems. Frequency of failures of the distribution systems and plant production equipment was increasing. Historically, the University promoted investment in poor energy management systems use to limited incentives for energy conservation in design of buildings and management of energy systems. For example, the institution was funded by the State on actual costs of utilities. This means that when the University saves money due to efficiency improvements, the State reduces UNM’s budget appropriation. Therefore, UNM cannot fund efficiency projects out of savings. UNM’s energy procurement costs were high due to multiple electric utility metering and rates. Consolidation of all campus electric energy use into one bill would reduce the cost of electricity. Generally, the problem was inadequate support for investments in energy efficiency and in upgrading the campus energy purchases, production, and consumption. Plant maintenance never was given the budget or policy support needed to pay for costs for maintaining the infrastructure and addressing campus expansion. Depreciation allowances for replacement of the systems never appeared.

8.3.2

Manifestations of UNM’s Problems

UNM reported that the Campus had failures in its electrical distribution systems resulting in major failures in the main utility plant, Popejoy Hall, and the Medical Center. A tube rupture, which crippled one of the larger chillers (16% of capacity), cost $250,000 to repair and gave back a chiller in basically the same condition as when it failed. At the same time, two other chillers failed. This left UNM with 42% of its cooling capacity out of service and took nearly 6 months to completely repair. Three boilers had failed within the last year. One of these was a main boiler which was manufactured in 1967. It had failed and been repaired so many times that it was basically ruined. (University of New Mexico 1995). UNM staff are bright, hard-working, capable, and dedicated people. Their dedication had kept the University operating. By 1995, utilities staff had undertaken numerous initiatives to gain the ability to fund UNM’s infrastructure and reduce its operating costs. Like virtually every educational institution in the U.S., funding was not available from state budgets to pay for aged and unreliable utility systems. UNM concluded that, “Utility infrastructure deficiencies are a $60 billion national problem for colleges and universities. UNM’s problem could be as much as $100 million.”

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8.3.3

8 Profits from Value-Added

A Gold Mine of Opportunity

The same energy supply investment company that conducted the energy investment business plan at USC did a similar plan at UNM. Virtually no energy conservation investments had been made at UNM. Based on very conservative estimates, the results were staggering. UNM had a gold mine of energy savings opportunities. UNM problems were a terrific investment opportunity for energy supply investment experts. UMN could: ● ●

● ● ●

Upgrade and expand its chilled water and steam systems Add a 7.8 MW cogeneration facility including new structures and high voltage equipment Implement energy efficiency and other building upgrades Build a new campus electrical loop Install automated energy management and information systems

The estimated cost including 35% increase for EPC, contingencies, and costs of financing was over $48 million. The internal rate of return to the supplier was estimated to be 38.6% before taxes and 26.81% after taxes based on the same kind of deal as was offered USC. UNM’s annual energy budget was $9,590,000. The annual energy budget savings from implementing all projects were projected to be over $5.4 million, a savings of 56.76% of current energy budget. By using the reports of numerous energy supply investors as an economic case, UNM was successful in gaining State policy support to create a company called Lobo Energy. Lobo was established as a not-for-profit corporation owned by UNM Regents and assigned UNM utilities systems assets. The new utilities corporation could then finance and implement the upgrades of UNM utilities systems and provide utility services to all University entities. UNM wanted to retain total control of its utilities so that all financial benefits would accrue to the University. By setting up a separate corporation, the University was able to finance capital development off UNM’s balance sheet. The new entity provided procurement flexibility, improved documentation of corporate and service area responsibilities, and numerous other economic and management benefits. Most important, it was able to retain savings from efficiency measures to put back into new capital needs and/or lower utility costs to the University.

8.3.4

Addendum – Public Service of New Mexico (PNM)

The local electric utility serving UNM was Public Service of New Mexico. At the same time that UNM was seeking a solution to its old, inadequate, and unreliable energy systems, PNM was having trouble meeting the electricity demand in the Albuquerque, where UMN is located, largely due to limited electric transmission capacity. PNM had a lot of generation capacity, but they couldn’t get approval to build additional transmission lines to serve Albuquerque.

8.4 Utility Investment Incentives

103

It is still a mystery to me today why PNM was not able to make the electrical generation investment at UNM to not only solve the University problems but to improve service reliability to other customers in Albuquerque.

8.4

Utility Investment Incentives

This chapter began with the question, “How do we change energy suppliers’, especially electricity suppliers, goals from just profits derived from sale of commodities to profits derived from saving energy?” The stories about USC and UMN energy supply investment opportunities are just part of the larger investment opportunity for energy suppliers. Integration of energy production at customers’ facilities also has to be integrated with the energy production and distribution systems owned by suppliers.

8.4.1

Calpine – Opportunity Missed?

According to their web site, “Calpine Corporation is one of North America’s leading power companies – innovative, fully integrated and committed to fulfilling the continuing needs for clean, efficiency and reliable electricity in an environmentally responsible manner.” In addition to the 22,000 MW of electric generation capacity currently in operation, the company reported that it had 7,000 MW of capacity under construction. Calpine managers have a goal of seeking to sell 75% of its electricity production under firm contracts to customers. The benefit to Calpine was to increase the financial strength of its investment. Electric generators like to run and are most efficient under full load. Calpine makes very large investments in electric generation and likes to sell as much power from each plant as it can to earn a profit on its investments. If the new plants only had demand for electricity a few hours a day and didn’t fully use the plant generating capability, the business investment would suffer. Management’s quest was to get customers to sign up for a base amount of electricity. Integration of electricity production investments with combined heat and power production at customer sites can realize Calpine’s and its customers’ financial goals.

8.4.2

The First Rule of Financing

The first rule of financing new energy generation plants is to show the lender contracts that demonstrate the revenues that are guaranteed from sale of power. Most electricity suppliers want to have 100% utilization of their plant. That means selling

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all the power that can be produced 24 h a day, 7 days a week. Every time equipment has to run for only a short period of time or has to run partially loaded, the capital cost benefit and the energy efficiency decline. At the risk of being redundant, customers and suppliers want to experience flat line energy load curves on their heat and power systems, a constant generation and load all the time. The result is optimum use of the capital investment and reduced energy waste. Every time the customer or the utility has to invest in equipment that serves spiking peak loads, the capital and energy cost to serve the spikes goes up.

8.4.3

A Cascade of Load Reduction and Elimination of Spikes

What’s causing the spike? The most obvious example is air conditioning load. Most cooling equipment runs on electricity so during the seasons when the temperature is the highest, the customer’s demand for electricity is highest. Recall the University of Southern California (USC). Reduced heat load from lighting retrofits in the Gerontology Building also reduced the size of the air conditioner by about 25%. If USC put all its campus buildings on a district cooling system the size of the air conditioning equipment needed to serve the buildings could be reduced about 50%. The reason for this dramatic reduction is that equipment in each building has to be sized to meet maximum demand. If buildings are combined into a central plant, the diversity of the demand from multiple buildings is a lower number. Less production capacity can serve the same number of buildings. Electricity demand for air conditioning has been halved. Now add a small electric generator sized to provide the thermal energy to efficiently fuel steam or absorption air conditioning equipment. The electrical energy needed to serve the air conditioning spike is flattened. Waste heat is available to heat buildings when the climate changes. Smaller electric generation will serve twice the load and help the customer avoid the cost of the natural gas to fuel its boilers during the winter.

8.4.4

Maximizing Supplier and Customer Energy Supply Systems

The result of the efficiency investments in USC energy supply system and the installation of a small cogeneration plant flatten the price of purchased electricity for USC. The reason that the price is flattened is that the demand for purchased electricity at USC was flattened. If energy suppliers partner with their customers to make energy supply systems upgrades at the customers’ sites, they could maximize base load purchases. By integrating cogeneration, load management, and fuel switching technologies at the customers’ facilities with suppliers’ electricity generation mix, suppliers could

8.6 How Do Electricity Suppliers Make Money?

105

manage both supply systems in a manner that would enhance usage of the base generation and control the customer’s equipment that serves peak demand. Now the supplier can communicate and dispatch energy supply systems to optimize efficiency for generation stations and customer energy supply systems.

8.5

Information Technology – Again!

Information technology investments to accomplish optimization of energy supply and demand systems integration strengthen the communication and confidence of both suppliers and customers to work together and be rewarded.

8.6

How Do Electricity Suppliers Make Money?

The electricity supplier has just avoided having to build generation and transmission to serve the air conditioning spike, but he has also lost the opportunity to sell electricity to customers that is now produced at customers’ sites. What if the supplier owned and operated the electrical generator at customers’ sites as well as the thermal energy systems? Why would customers give up control of their utility systems? How might both customers and suppliers benefit? Fact 1: Customers have aged unreliable utility systems and do not want to use their money or debt to pay for the upgrade. Fact 2: Customers’ energy budgets can be reduced by putting in more efficient energy supply systems. Fact 3: Savings from customers’ budgets can pay for debt on utility systems upgrades. Fact 4: Energy suppliers have the knowledge, skill and resources to build, operate and maintain energy supply systems. Fact 5: Built into the energy supply investment plan are financial assumptions to pay: ●

● ● ●

● ●

Professionals for engineering, permitting, procurement, construction, contingencies, legal and financing fees, and other project costs Professionals to operate and maintain the utility systems Equity owners’ interest on loans or lease payments Marketers for purchase of supplemental, maintenance, and standby power electricity as well as purchase of primary fuels like natural gas Profits on purchase of equipment Developers returns on the development risk.

Fact 6: Each of the ways to make money that are listed above can result in profits of 8–10%. Development can be more.

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8.7

8 Profits from Value-Added

Summary

USC and UMN as well as the energy supplier showed the significant opportunities that are possible by working together to make multi-million dollar investments based on “value-added” or “paid from savings” approach to pay for debt service on the investment and for future operating costs. Energy supply companies who are willing to partner with customers can earn returns based on value-added. Value-added means that the energy and maintenance savings in existing operating budgets can pay for the cost of the modernization and management. Energy suppliers share in the total savings. Recall that the after tax return on investment for the energy supply company at the University of New Mexico was over 25%. Most customers are happy to leave energy generation to the experts as long as the energy supplier provides reliability at a low cost. In addition, suppliers can profit from improved operation of their existing generating facilities. The more savings potential that customers and suppliers can achieve together, the greater the economic benefits to both parties. What went wrong was not the concept but a fear of the unknown. Not only was this something new, but how could they be comfortable that the investment would be successful over time? Would they be able to evaluate and manage the risks associated with the investment? After all, who would put their career on the line without having a way to manage and report the energy supply systems results day by day, even minute by minute? Too many customers have reached the final planning stage, seen the opportunity and gotten cold feet for fear of the risks. Fear of the unknown in a complex financial, technical, and often political situation can be daunting. Energy supply investors are accustomed to very large investments and to having control. It costs as much to develop and finance smaller energy supply projects as very large projects. Often their appetite to spend a lot of money in developing an investment is discouraged by customer and/or supplier leadership who are uncomfortable with doing something new. Note: Energy service companies have been providing value-added services for more than two decades. Although these companies are often utility affiliates, like Duke Energy Solutions and Sempra, they work separately from their energy supplier parent or sister company. In fact, these companies are often structured in a manner that divides decision-making and investment into power quality, energy generation, power marketing, energy efficiency in buildings, and other divisions. Each division is a separate profit and loss center with little motivation to communicate and coordinate with one another thus denying the opportunity to achieve the integrated value. More about this later …

Chapter 9

Risk Assessment

Abstract The author details the assumptions that go into making decisions to invest in energy supply projects, and how success of the investment requires the capability to compare the initial assumptions to changing assumptions over time. She lists 24 investment risks. A decision-making tool is provided to help readers evaluate who will take each of the risks and what the cost impacts are likely to be on the total project. Energy supply industry analysis tools are presented to help readers consider the information needed to determine where the project investment falters and how to mitigate investment risks. Alternative standard energy supply industry mitigation agreements are described for the most sensitive risks. The author uses anecdotes and diagrams to demonstrate common sense solutions to risk management. The author shows how information and communication technologies can be used to control risks. She explains how confidence in securing risk solutions to specific situations is essential to gaining stakeholder confidence to implement energy supply investment and to make investment and operating modifications over time. Finally, the risk uncertainty in the political and regulatory arena is exposed. Keywords Common sense solutions • Compare and change assumptions over time • Evaluation tools • Investment risks • Mitigation agreements • Securing risks • Requests for proposals

9.1

Investment Plan Assumptions

The OA Methodology pyramid demonstrates the myriad of assumptions contained in building an energy supply investment plan. Just tracking real time energy data and equipment operation over time means untold numbers of data. Software programs like Opassess record and calculate the real time impacts on project investments, compare these impacts to a baseline or other selected project, and provide economic and operating reports. Based on these reports, effective management can be implemented. Opassess or its like is the risk management tool needed to sustain energy efficient systems investments.

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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Not only do investments require continuous tracking and updating of the project assumptions throughout all phases of development, implementation, and on-going operations, but as business goals, technology solutions, market changes, and other factors that impact the investment plan change, the software tool enables the user to compare the impacts of changes and opportunities to improve on-going decisionmaking.

9.2

Areas of Risk

All projects that LAS and Associates worked on with its many clients have shown tremendous savings in energy consumption, operating costs, reliability, emission reductions, and other benefits but few have been implemented. The primary reason is risk. Risks in investing in energy supply projects largely are related to the following concerns: 1. How to get the project built on time and budget including financing, engineering, procurement, construction? 2. How to control the costs over time for fuels used to generate electricity, heat, or cooling? 3. How to lock in the revenues or budget income to pay for the capital costs, operating reliability, and maintenance requirements of the energy supply systems? 4. How to insure that the new equipment integration operates at the level of efficiency assumed in the investment plan? 5. How to control the costs of operating and maintaining the equipment for the term of the debt? 6. How to control the costs for supplemental, maintenance, and standby power when additional electricity is required and/or on site generation is off-line for maintenance or unexpected interruptions? 7. How to control the cost of financing? 8. How to gain off-balance sheet financing? 9. How to manage changing laws, rules, regulations, and staffing? 10. How to address changes in end-use requirements? 11. How to get all investment stakeholders to work together over time? 12. How to respond to new technology and fuel opportunities?

9.3

Risk Mitigation

Since the Public Utilities Regulatory Policy Act (PURPA) was enacted, numerous companies began developing power generation projects. These company developers would often form separate Limited Liability Corporations (LLC). Based on the strength of the contracts to frame the economic boundaries of the risks detailed

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above, the new LLC was able to obtain the capital dollars to finance projects. Discussed below are some examples of how LLCs contractually mitigated risks.

9.3.1

Project Revenues

Most energy supply system’s investment projects start with the assumption that the consumer’s base year budget currently allocated for the annual cost of energy, capital, operations, and maintenance will continue to be allocated. Often, property owners want to fix that budget and pay for new capital from savings gained by putting in more efficient energy systems. Owners will often set other goals like trying to pay for infrastructure that does not create savings like asbestos removal, expansion of energy and water supply systems, cash flow to hire new employees, and other goals. The efficiency savings must not only pay for the project but also these goals. Before the project can be financed, the revenue stream that supports the project must be contractually defined. Developers who take the financial risks for building and operating investments on consumer sites will contract with the property owner to pay a pre-established price for delivered energy. Often within institutions separate corporations are set up to control budget appropriations and insure that budgets are not taken away for another purpose.

9.3.2

EPC Contracts

Often developers will work with separate construction companies to implement a turn-key construction of the project investment. Turn-key can mean that the construction company (contractor) will incur the short-term costs and risks to build the project. The contractor may obtain construction financing. In addition, the contractor will take the risk to complete detailed engineering, permitting, procurement, and construction of the project within a predetermined fixed budget and timeframe. Once the project is built, the contractor will demonstrate that the equipment operations meet the initial performance specifications. The project developer will then gain the long term financing for the project investment and pay the contractor the pre-arranged amount that was contracted for his services. I have experienced situations where public procurement rules are so difficult to implement engineering, procurement, and construction (EPC) that institutions must plan on increasing their project costs by 50% to 100% if they take the risk. In most institutions, the people who identify the need for new equipment, usually, the facilities or utilities department will request financing for new equipment based on their forecast of the equipment specifications and costs. Because procurement, engineering, capital planning, and construction management professionals often work for

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other agencies or departments, the project that was initially scoped and estimated changes many times over the term of its implementation. Cost control and equipment selection are moving targets. Ultimate operating performance is anybody’s guess. Although funding for the initial equipment is often based on representation that the investment will save money, financial and budget managers almost never see reports that show the benefits of the capital investments. Because companies and institutions have a lot of projects competing for capital dollars, they set investments in product expansion or improved services as priorities. Trying to update, expand, or replace energy infrastructure is a very low capital priority. Who wants to replace a boiler when they can hire more personnel or expand their businesses? Contracting with a construction company that will manage the risks to complete construction financing, engineering, procurement, construction, and commissioning of a project within a fixed budget, can limit capital costs to an 8% to 10% increase, the profit margin for the construction company. If the facility owner is realistic in estimating his cost for EPC in a project business plan, it will be easy to compare the cost benefits from partnering with an EPC company and establishing the performance requirements for the EPC contract. Opassess enables owners to compare what it will cost them to implement EPC to costs that they would pay to hire other companies to take the EPC risk. Opassess also allows actual EPC costs to be tracked and updated thus gaining new baseline data needed to begin operations.

9.3.3

Operations and Maintenance Contracts

Costs associated with changes in energy consumption can be mitigated in a number of ways. Real time reports that show the unit costs for electricity, heat, and cooling real time empower equipment managers to select equipment operation that will result in the lowest Btu unit cost at any time during the day. As part of the selection and procurement of new equipment, manufacturer’ performance guarantees should be warranted. Project developers will often contract with an operations and maintenance (O&M) company to manage the project over the long term. O&M performance and costs will be detailed in the contract with provisions for changes in customer demand. O&M companies earn an industry standard profit on their services and are usually incented to try to improve the equipment performance. They also take the down-side risk if they fail to perform. Again, a comparison of what costs and performance risks the facility owner will incur compared to hiring a separate company to take the risks, will help the owner make a decision on whether or not to pursue an O&M business partner. As actual costs update data on an annual basis, decisions for improvements and for out-sourcing O&M can be made and measured. Issues regarding unforeseen circumstances can be corrected and measured.

9.3 Risk Mitigation

9.3.4

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Primary Fuel Costs

In advance of the project financing, the developer will also seek to lock in the costs and volumes of the primary fuels selected to produce the electricity, steam/heat, and/or cooling. I worked on an electric power project in South Florida that proposed to use wood waste as fuel. It was essential to lock in the costs of wood waste processing as well as gain the contracts for enough wood to fuel the plant on a day to day basis. The developers ultimately did not proceed with the plant due to concerns over adequate fuel supply. In another project in South Florida, the developer was able to gain capacity in the Florida gas transmission pipeline. By having the ability to contract for purchase of wholesale natural gas and transport the gas to the power plant from a remote gas field location, they could control the cost of the primary fuel. Management of primary fuels as well as electricity, heat, and cooling unit costs will be driven by local generation, timely information, and communication.

9.3.5

Supplemental, Maintenance, and Standby Power

To gain the greatest energy efficiency for on-site generation projects, the property owner will almost always need to buy supplemental electricity from a utility or electricity supplier. Communication and contracting for purchase of supplemental electricity is often beneficial for both the supplier and the owner. Efficient energy supply systems usually level the owner’s electric load. This offers the ability for the supplier to sell electricity from his power plant at an even load and gain increased revenues without having to build new generation to meet peak loads. Electricity will also need to be purchased during times when the on-site generator is down for maintenance or during unexpected emergencies. Maintenance can easily be scheduled with the supplier during times when the supplier has plenty of capacity. Emergency power costs can be very high if the on-site generation outage happens during the supplier’s peak generation. Contract arrangements can be created that limit these emergency power cost impacts for both owners and suppliers. For example, MidAmerican contracted with the University of Iowa to generate more power from UI’s on-site power plant and reduce its campus load during times when the utility needed more electricity capacity. It works both ways.

9.3.6

Financing Costs and Off-Balance Sheet

Financing cost risk is related to the business goals and financial strength of the proposed owner/s. For example, having a business partner that can receive tax deductions may result in lower total costs to the investment.

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Developers are most likely to obtain a letter from a lending institution in advance of pursuing a project. The letter will indicate the costs of financing the project. This is essential so that the project economics can be evaluated and lenders will feel confident in lending money, often millions of dollars, to build a project based on the strength of the contracts described above. With any investment, the owner seeks to keep the financing costs as low as possible. Some owners do not want to incur more debt and seek off-balance sheet financing. A way to solve both low-cost and off-balance sheet financing was accomplished by the University of Maryland-College Park. They were able to finance their energy systems investments where the Maryland Economic Development Corporation assumed the debt with the payment risk transferred to Trigen. Project implementation and operation was outsourced to Trigen-Cinergy.

9.3.7

Environmental Permitting

Any time power generation projects are proposed, environmental issues and activists are encountered. Noise abatement, emissions standards, fuel storage, siting locations, and a host of other permitting and environmental costs need to be identified and incorporated into the project costs. Work with state power plant siting and local officials, environmental groups, property owners, energy suppliers, and others is an essential front-end effort. Not dealing with these issues early on can result in higher legal fees, delays in project implementation, and other problems. When I was working with local environmental groups in Miami to build the wood waste to energy plant, environmental consultants indicated that burning wood waste in a modern power plant compared to letting the wood waste decompose in a land fill reduced methane emissions by a ratio of 1:15, meaning the land fill option was 15 times more polluting. Local environmental groups were very supportive of the project. We were all disappointed that the project did not go forward. The good news, however, is that the wood waste that would have gone to the Miami power plant was collected, processed, and sold to FL sugar companies. Sugar companies use bagasse, a by-product of sugar production, to produce electricity. Wood waste fuel is substituted for the half of the year that bagasse is not available.

9.3.8

The Uncertainty of Policies and Regulations

No doubt the most difficult area of risk in any energy supply systems investment is the investor’s exposure to changes in laws, rules, and regulations. Generally, the most powerful political player is the electric utility company who is threatened by

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loss of market revenue. Electric utilities are not only the largest energy consumers, but they also are the most powerful lobbyists. They have huge influence with Federal, State, and local policymakers and unlimited money to influence policies that protect their interests. The best book that I have read that offers a solution to limit this influence is, Turning Off The Heat: Why America must double energy efficiency to save money and reduce global warming, by Thomas Casten (Casten 1998). Tom’s arguments for getting rid of electric monopoly protection and creating a Fossil Fuel Efficiency Standard will be discussed in more detail in Chapter 13. Many electric utilities have unregulated energy service companies that will serve as partners with property owners to implement integrated power, heat, and cooling projects. Some utilities offer incentives such as rebates, technical assistance, and financing to encourage investment in power, heat, and cooling projects. These programs are funded by a pool of money created from special assessments on consumer electric and gas bills.

9.4

Sensitivity Analysis

Chapter 6 presented five Opassess reports. Another report that is essential for investment decision-making is called a Sensitivity analysis. Shown below in Fig. 9.1 is a sensitivity analysis done for a hospital in 1995. Although the cost parameters no longer are current, it is an example of one risk assessment method. The Base Case represents the projected investment costs, savings, rates of interest on financing, electrical and natural gas cost assumptions. In order to see the impact on the total project net present value, the costs associated with each area of risk where escalated up and down by 5%, 10%, and 20%. The hospital wanted to assess how the proposed investment project increased or decreased in value based on what it viewed were the most volatile investment assumptions. The project turns into a negative cash flow at

Project cost

-20% $51.9 M

-10% $47.6M

-5% $45.4M

Estimate $43.3M

Interes trate

-20 7.02%

-15% 6.73%

-10% 6.44%

5.85%

Savings

-20% $2.3M

-15% $2.5M

-10% $2.6M

$2.9M

Electrical costs

-15% 4.27¢

-10% 4.09¢

-5% 3.90¢

3.72¢

Natural gas cost

-15% $3.45

-10% $3.30

-5% $3.15

$3.00

-$8.5M

-$2.6M

$2.3M

$6.5M

12% NPV

Fig. 9.1 Sensitivity analysis

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the 15% or mid-case scenario. The hospital could then determine where it would need to lay off risk and the value of partners who were willing to take the risks.

9.5

The Importance of Timely Information and Communication

Whether or not a facility owner chooses to contract with a business partner to assume the financial risks in the project, all the risks cited above must contain webbased business planning software that offers real time reporting. The people chosen to manage the asset must be able to see the impact of market changes compared to the initial project assumptions and initiate actions to manage these changes. In order to gain the lowest cost per energy unit, the facility manager must be able to see what the current cost is for production of electricity, steam/heat and cooling. For example, during different times of the day when the demand changes for each of these commodities, the costs to produce them can change. To sustain the lowest costs, energy systems operators may chose to operate different equipment and or change fuels. Tracking of construction, financial, and equipment operating details, offer contractors, financiers, technical professionals, facility owners, energy suppliers, and other project participants the ability to communicate and report what is happening that impacts the economic and environmental vitality of the project. Each member can see the impact of their specific area of responsibility on other team members and the larger project and take corrective action. Partners and team members all can track and report the economic results. The only means where I have been able to influence proposed policy changes that could cause increased economic risk came from having the information needed to demonstrate the impacts of these changes. Recall the story about Florida Power and Light Company’s (FPL) effort to include a newly constructed nuclear plant in the rate base, I intervened in the docket before the Florida Public Service Commission (FPSC). Dade County was not going to try to influence the total amount of the capital costs that would be included in the rate base, but it was concerned about how this increase would be spread among FPL’s different classes of customers. Due to the extensive data base contained in the County’s automated utility bill accounting system, the proposed rate increases could be examined. When it was discovered that large customers like the hospital and airport would have double the allowed increase for any customer, the County was able to report actual impact to FPL and to the Florida PSC. The rate case is only one small story, but it does support the case that information and communication can influence proper policies. As Thomas Friedman quotes Fadi Ghandour, CEO of Aramex, in his book, The World is Flat: A Brief History of the Twenty-First Century, “without on-line, real-time tracking and tracing, you can’t compete with the big boys” (Friedman 2005, 348). Aramex became a big boy by using the Internet to replace the tracking and tracing controlled by Airborne, a multi-national package delivery company.

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Figure 9.2 – Self-funded, performance-based investments, presented below, can be used in a decision-making process to evaluate 24 risks considerations related to an investment whose goal is to fund as much infrastructure as possible from operating budget savings. Notice the columns titled “Who takes the risk?” Options include the customer, an energy services company, and/or the equity owner. Once it becomes clear how the risks in the investment are to be allocated, an Opassess

Objective: To fund as much infrastructure investment as possible from operation budget savings with no downside risk.

Risks:Time, Performance, Costs

Weight (1=lowest; 5= highest)

Who takes the risk Customer

1. Energy system performance (reliability & comfort) 2. Technical compatibility 3. Energy Consumption 4. Energy load 5. Unit energy prices 6. Inventory replacement 7. Engineering costs 8. Capital prices 9. Construction Costs 10. Procurement costs 11. Operations & maintenance costs 12. Operations & maintenance standards & expertise 13. Depreciation reserve 14. Environmental costs 15. On-balance-sheet debt 16. Insurance liability 17. Equity returns 18. Future technology & other cost saving opportunities 19. Regulatory, political & social impacts 20. Interest rate 21. Energy budget appropriations 22. Project cash flow 23. Taxes 24. Labor disputes

Fig. 9.2 Self-funded, performance-based investments

ESCo

Equity Owner

Considerations

Cost Impact (+/−%)

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Mitigation Agreements

Energy supply price

1a 1b 1c

Lock in a cap on reserves & transportation Local self-generation Energy information & management systems

Energy consumption

2a 2b 2c 2d 2e

Energy baseline tracking, analysis & controls Manufacturer performance guarantees Construction commissioning ESCo performance guarantees Insurance

Financing costs

3a 3b 3c 3d 3e

Cap on interest rate from lender Equity participation Financial strength of customer & business partner Project set up as separate legal entity Aggregate investment

4a

Fixed-price, turnkey engineering, procurement, & construction with commissioning

5a 5b

O&M w/per formance standards Customer energy performance criteria

Engineering, procurement & construciton Operations & maintenance

Fig. 9.3 How energy supplier business partners mitigate risks and finance projects

tool enables decision-makers to understand what value-added is provided by partners willing to take investment risks. Key to lowest energy unit costs is to consider the financing and ownership solution as part of the technology solution. Figure 9.3 – How energy supplier business partners mitigate risks and finance projects, suggests some types of agreements that can assist the investors in mitigating energy supply investment risks.

9.6

Request for Proposal

In seeking to determine the value of proposals from potential business partners, the first step is to assess what the facility owner can do if he/she is willing to accept all the risks. Once a preliminary assessment is done, the facility owner might wish to transfer risks for all or a portion of the energy efficiency investment. In a competitive bidding situation where multiple proposals must be considered, it is essential to provide the same baseline assumptions to all parties. Here, again, the value of Opassess is evident. The baseline information contained in OA methodology Steps 1 and 2 provide the essential data needed by potential business partners to understand the business owner’s current business, facility, energy, and technology situation as well as facility growth and cost escalation assumptions. Proposers should be encouraged to challenge baseline assumptions and the impacts of business goals if they do not agree with the assumptions. By requiring proposals to be submitted using the same web-based planning model as the building owner, the proposals can be readily evaluated and compared to other proposals. Both facility owners and potential partners understand the basis

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of a future agreement and the value it offers to each party. As contracts proceed through implementation, all stakeholders can track and report what is happening. When I formed by company, LAS & Associates, Inc., its mission was to help facility owners and energy service companies close deals. Too many opportunities were left on the table. Hundreds of hours of time were spent trying to educate facility owners so that they could evaluate partnership proposals. Most owners did not pursue the deals due to not having a means to compare assumptions behind financial pro formas and measure future performance. Due to the complexity of energy infrastructure investments, LAS finally created Opassess. Unfortunately, the terrorist attacks on September 11, 2001 followed by the collapse of Enron took the U.S. attention away from a focus on energy infrastructure investment.

Chapter 10

Energy Service Companies

Abstract In addition to the traditional electric utilities, both private and public, a host of companies exist in the marketplace that provides the services needed to accomplish integrated energy supply investments. The author tells about demand and supply-side energy service companies and the history of energy service and software enterprise companies as well as equipment manufactures. She relates her experience with companies like Sempra, Chevron, Duke, Johnson Controls, Honeywell, Trane, Silicon Energy (now Intergy) and other companies who have the expertise, resources and financial goal to accomplish integrated energy supply investments. She illustrates the positive roles they play as business partners, where they fall apart, and how internal corporate profit and loss structures can be changed to improve profitability. She relays the problems that customers have in working with energy service and supply companies as well as the problems these companies have with customers. She reinforces through example the need for information, communication and asset management software as essential tools for business partnering and for realizing the full benefit of long term investments. Keywords Corporate profit and loss structure • Energy service companies • Essential business partnering tools • Problems working together

No book could be written about investing in energy efficiency without recognizing the incredible contribution made by energy service companies. Energy service companies (a.k.a. ESCOs) provide energy efficiency and renewable energy services including design, manufacture, financing, installation, and operation and maintenance of energy efficient equipment and infrastructure. Energy service companies have contracted with private and public sector consumers providing value-added services for over two decades.

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While serving as energy director in Dade County, I was asked by Martin Klepper, a trailblazing attorney, author, lecturer, and friend,1 if I would consider joining the Board of Directors for a new organization which Marty was instrumental in creating called the National Association of Energy Service Companies (NAESCO). I was to serve as its local government representative. Unfortunately, at the time, my office was requesting proposals from energy service companies to finance, engineer, procure, install, and maintain energy saving investments in five government buildings. I did not want to create what might have been perceived as a conflict of interest in the selection of the winning proposal and decided to decline the invitation.2

10.1

Demand-Side

In 2007, Terry Singer, Executive Director of NAESCO reported a membership of about 85 organizations. Singer stated in testimony before the federal government, “NAESCO members deliver about $4 billion of energy efficiency projects each year.” (Singer 2007). NAESCO members include international manufacturers of HVAC (heating, ventilation, and air conditioning) and energy controls equipment, many of the largest U.S. electric and natural gas utilities and utility affiliates,3 and other prominent national and regional independent members. Largely, energy service companies under the NAESCO umbrella have sought to address what the U.S. has referred to as demand-side energy efficiency investments. These include increasing the thermal efficiency of buildings, installing high-efficiency appliances and lighting equipment with sensors/controls, and improvements in heating, ventilation, and air conditioning equipment. ESCOs provide the expertise to conduct surveys of consumer facilities to identify the costs and savings of specific energy efficiency measures. As the basis for selecting what measures will be implemented, energy efficiency investments, generally, have short-term (1–4 years) simple paybacks in energy savings. Usually, the service company will purchase and install the energy saving measures and guarantee a level

1

Martin Klepper is a Partner with Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. He has worked to develop, finance, and acquire large infrastructure projects world-wide including representing developers and owners of power plants and gas pipelines as well as contractors, banks, underwriters, and equity investors in connection with acquisitions, joint ventures and project financing. 2 The initiative ultimately resulted in contracting with an energy services company that financed, engineered, procured, installed, and maintained over $1 million in energy efficiency investments in five Dade County facilities. The company earned profits based on sharing the savings in the facilities electric bills and guaranteed the savings. No new increase in budget appropriation was required. 3 Utility affiliates work separately from their energy supplier parent or sister company. In some instances, these companies are structured in a manner that divides decision-making and investment into power quality, energy generation, power marketing, energy efficiency in buildings, and other divisions. Each division is a separate profit and loss center with little motivation to communicate and coordinate with one another thus denying the opportunity to achieve the integrated value.

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of performance efficiency and energy savings. Although financing will vary based on the client, most energy service companies are willing to finance these kinds of energy projects and share the savings in utility bills with the client.

10.2

Supply-Side

Supply-side energy service companies are companies who build, operate, and maintain plants and distributions systems that produce electric, heat, and/or cooling energies. Supply-side energy service companies focus on producing local energy generation using efficient production technologies and recycled and renewable fuels. Because energy and economic efficiency rely on optimum sizing and operation of production and distribution equipment, some of these companies will incorporate demand-side efficiency measures in the over-all investment. Supply-side energy service companies may include some of the NAESCO members but are largely companies belonging to organizations like the U.S. Clean Heat and Power Association, the International District Energy Association, the American Council on Renewable Energy, and other industry and professional associations. The numbers of members are in the hundreds. It is interesting to read some phrases from the vision and mission statements of these associations: · Establish a national electricity system that achieves less pollution, lower costs, and greater reliability through the deployment of clean, local generation technologies. · Promote energy efficiency and environmental quality through the advancement of district heating, district cooling, and cogeneration. · Work to bring all forms of renewable energy into the mainstream of America’s economy and lifestyle. I am sure that the reader can deduce which phrases relate to which association. All of these associations include the key players who are ready, willing, and able to engineer, permit, build, equip, procure fuel, operate, maintain, and finance investments – on a performance basis.

10.3 10.3.1

Barriers to Implementation Market Inertia

Consumers are still reluctant to enter into agreements with energy service companies. In March, 2008, Johnson Controls, an ESCO with at least two decades of experience in providing energy efficiency investments, surveyed 1500 North American executives. The survey reported that “nearly three-quarters (72%) of organizations

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are paying more attention to energy efficiency than they were just a year ago. However, the percentage of companies expecting to make energy efficiency improvements, as well as their planned investment over the next year, has remained constant.” (Johnson Controls March 2008).

10.3.2

Transaction Complexity

Even with the huge contributions that energy services companies have made to accomplish energy efficiency and renewable energy investments in the U.S., the reality is that implementation of these investments are complex economically, politically, and environmentally. I have viewed too many really great investment opportunities that haven’t proceeded because decision-makers do not understand the business structure of the investment, had no confidence that the cash flows would be realized, and were afraid to “rock the boat” with their electric utility.

10.3.3

Changing Horses Mid-Stream

Another insight into working with consumers and ESCOs came from my experience with providing energy engineering analysis and design in CA. In the process of assessing, designing, and constructing energy efficiency projects, a common practice was to change engineering companies for each step in the process. One engineer would conduct the feasibility analysis. Another engineer would start over again with different data and do the detailed design. Yet another engineer would be hired to oversee the construction. While the investment projects generally sought to rely on energy savings to pay for the investment, the change in engineers and data made the project economics a nightmare. Without a common data base and an understanding of the assumptions that directed each step of the investment implementation process, each engineer started over. Project managers could not track the economic benefits of the project in any standardized format. Many projects were never implemented.

10.3.4

Communication of Financial Parameters

In 1993–1994, I worked with the facilities department for Contra Costa Community College located in Martinez, California. The College was seeking to select an energy service company partner to install energy saving measures at a number of its campuses. In trying to assist the College in evaluating the various ESCO proposals, I suggested that the College ask each ESCO to present its business assumptions in the form of a pro forma and detail the company’s proposed business contractual

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arrangement through the pro forma. At that time, no company was able to communicate the financial parameters of the proposed business arrangement. The ESCOs proposals may have been good deals for the College. The companies lost the confidence of the College when they couldn’t demonstrate the financial structures of their proposals and how the economic, engineering, energy-use, and many, many other assumptions would be updated, communicated, managed, and reported.

10.3.5

Limited Staffing and Technology

I also began to understand the limited staffing capability that the College faced to be able to collect and update its energy and equipment operating data. The cost to obtain the most important data needed for any investment planning and management was difficult to fund. More importantly, the solutions to measuring energy savings were based on formulas tracked manually creating a need to constantly spend untold man-hours trying to measure and verify energy and cost savings. At the same time that I was working with the Community College, I was invited to attend a meeting in Washington D.C. to discuss a new measurement and verification (M&V) protocol. The Department of Energy was trying to establish a uniform standard for M&V. I used the Community College as an example to raise the concern that consumers did not have the staff to implement the M&V protocol due to its manual nature.

10.3.6

The Importance of Applied Training

My experience at the Community College continued to a stage where in 1996, I formed LAS & Associates to try to help consumers and ESCOs implement projects worth hundreds of millions of dollars. Too many fabulous projects were left on the table frustrating consumers and ESCOs. The same year as I formed LAS, I was hired by the Association of Higher Education Facilities Officers (a.k.a. APPA) to conduct workshops in six regions of the U.S. for facilities directors, vice presidents of finance, and members of boards of trustees of colleges and universities. As discussed in Chapter 2, these academic institutions had a tremendous need to update old, inefficient, and unreliable infrastructure and could not gain the capital funds to make these investments. The Opportunity Assessment methodology became the training tool to show these institutions how to conduct comprehensive, integrated assessments of the energy savings that could be created to finance the massive infrastructure needs without new appropriations. The focus of the investment analysis was to finance the update of all aged infrastructure with electric, heat, and cooling systems properly sized to efficiently serve the institutions through the term of the debt. Participation in each region was impressive.

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10.4

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Data Collection – A Policy Priority

While ESCOs have continued to make great strides in implementing energy efficiency and renewable energy investments, they continue to struggle with tracking the implementation process. NAESCO’s Federal – 2nd Quarter 2008 Policy Priorities lists as one of four challenges – Tracking Implementation Progress. The report states, “Data collection is critical to every aspect of energy program success since establishing baseline consumption and monitoring ongoing energy consumption patterns is critical to establishing the metrics of energy reduction initiatives. In general, the agencies and individual federal facilities have not collected the type of data necessary for proper oversight and reporting requirements. Standardizing as well as streamlining information collection and reporting requirement is critical to the overall success of all federal energy initiatives. Therefore, our chief recommendation is to ensure the necessary data collection and reporting system is in place as quickly as possible.” (NAESCO 2008). I find it amazing that a commitment to basic data collection and reporting is still not the highest priority in any energy efficiency program. The old adage, if you can not measure it, you can’t manage it, is the foundation of energy management. The quickest returns on investment are in metering, measuring, and reporting real time energy data. The first rule of OA methodology is that the capital and management costs to meter, measure, monitor, manage, and report energy loads, use, and costs are the essential backbone to the investment and must be the first costs to be scoped and included in the investment plan. It is even more disturbing that all electricity rates for most consumers are not based on time of use cost signals. Small and medium size electricity consumers do not have meters that provide time of use and unit cost data. These consumers have no knowledge of the changes in electric energy unit costs and see no price signal that might motivate them to change their use of electricity during the day or different seasons or to invest in improved efficiency. In some areas of the U.S., electricity providers offer cheaper rates to customers if the customer will allow the provider to turn the customer’s equipment off during electric system peak demand. A friend in Minnesota who chose to enter into this rate experienced having her utility turn off her heating during the coldest times of the year (50° below zero). She also experienced having her air conditioning turned off during the hottest days of the year. Is this legal? It certainly isn’t humane. A much better way to encourage load management would be for electric utilities to provide time of use meters – better yet, the utility should install small-scale electric generation using renewable fuels and/or where the combined production of electricity and heat energy produced on site would solve the problem of high heating and cooling loads due to weather and at least double the efficiency of the primary fuel – all at a lower cost and reliability to the consumer. John A. “Skip” Laitner and Karen Ehrhardt-Martinez from The American Council for an Energy Efficient Economy (ACEEE) recently published a paper called, Information and Communication Technologies: The Power of Productivity,

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How ICT Sector Are Transforming the Economy While Driving Gains in Energy Productivity. The writers’ research demonstrated that “Information and communications technologies have played a critical role in reducing energy waste and increasing energy efficiency throughout the economy … Despite the significant energy-saving potential of ICT, they have generated a notable lack of recognition due to what might be called ‘the ICT energy paradox.’ The paradox is one in which more attention tends to be paid to the energy-consuming characteristics of ICT than to the broader, economy-wide, energy-saving capacity that emerges through their widespread and systematic application. Given the economic and energy challenges that await us, as a nation we should commit to the realization of the energy-saving opportunities that new ICT opportunities provide.” (Laitner and Ehrhardt-Martinez February 2008, Executive Summary) I challenge ESCO and ICT experts to work together to improve the format and capability of OA and Opassess to create software tools that will support the opportunities that Laitner and Ehrhardt-Martinez know are possible.

10.5

Progress

Progressive private and public businesses and institutions which have endured the difficult process to build and operate highly efficient electric, steam/heat, and chilled water systems should be recognized and congratulated. Even with all the barriers that exist to prevent combined heat and power investments, there is a lot of exciting news indicating increasing public policy support for investing in energy efficient infrastructure.

10.5.1

CHP – EPA Partnership

The Combined Heat and Power Association (CHPA) and the U.S. Environmental Protection Agency (EPA) have partnered to reduce the environmental impact of power generation by promoting investments in the integrated generation and use of combined heat and power (CHP). Numerous state and federal incentives are available for CHP including loans, grants, tax benefits, improved permitting and interconnection regulations.

10.5.2

International District Energy Association

The international District Energy Association (IDEA) represents 800 members who are district heating and cooling executives, managers, engineers, consultants, and equipment suppliers from 22 countries. Association members operate district

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energy systems owned by utilities, municipalities, hospitals, military bases, and airports in 38 states. These are just a few of the many, many companies, customers, and professionals who have worked hard and invested their convictions and financial security to build energy efficient infrastructure.

10.6

Implementation

For those institution, businesses and individuals who wish to pursue energy infrastructure investments and pay for the investments from efficiency savings on their utility bills, OA and Opassess offer a framework to build a plan for energy efficiency and cost control one piece at a time. Carrying out the full investment planning process might appear daunting, but the methodology is purposely presented in steps. In addition the data entry at each step will have varying levels of granularity.

10.6.1

One Step at a Time

OA Steps 1 and 2 establish a baseline. Just collecting and automating the information contained in these two steps will offer opportunities for cost control and efficiency actions. Opportunities at this stage of management include: 1. Defining business financial goals and policies 2. Integrating the facility business goals and financial situation with energy, operations and labor requirements 3. Interpreting the impact of long term business goals on energy budget and infrastructure needs 4. Identifying the energy billing situation and providing for validation of energy bills 5. Improving energy tariffs and/or fuel purchase practices and agreements 6. Automating energy measurement and billing information 7. Communicating real time costs to facility managers and occupants 8. Coordinating with facility occupants to control energy costs 9. Inventorying equipment conditions, operating practices and costs 10. Instituting and tracking preventive maintenance practices and costs 11. Improving equipment operation and maintenance scheduling 12. Integrating capital planning with equipment operation 13. Assessing fuel procurement options 14. Providing real time budget and financial impact reporting 15. Integrating life cycle costing into capital procurement policy 16. Cataloging environment conditions and concerns 17. Projecting equipment generation and distribution sizing needs The learning curve to just identify, sustain, evaluate, communicate, and manage energy, operation and maintenance results in rapid savings. OA data entries related to each facility’s baseline in Steps 1 and 2 are simply basic facilities management.

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The accumulation of the data for Steps 1 and 2 could be incremental and does not necessarily require Opassess. Numerous energy measurement and enterprise management software solutions exist in the market place. These software tools offer capabilities for real time tracking, systems integration, rate analysis and verification, and other important energy management capabilities. What is important is that the software has the capability to be inter-operable with Opassess or a similar total cost of ownership4 model. Running a project called baseline-no growth and escalation compared to baseline with growth and escalation assumptions based on business goals, contract and environmental requirements, and market experience is essential to business planning and cost control. The baseline life cycle cost projection is essential to begin proper selection and implementation of any new investment. Sizing of equipment, meeting business budget and financing goals, incorporating future labor or other contract costs are just some of the considerations to finding the investment solution that offers efficiency and reliability at the lowest costs over the life of the investments.

10.6.2

Levels of Granularity

Opassess allows the user to input the detail of projects and buildings at different levels of granularity. A first step in obtaining the metrics of energy use and costs might be to arrange measurement of major buildings. Keep in mind that a building can be defined at varying levels of granularity from a piece of equipment to multiple building systems. Opassess can be used for a project that is a single building, a group of buildings collocated together or geographically separate like a group of banks in a region. The level of granularity is usually driven by time and money as well as the goal of the facility owner. For example, ISU’ business goal was to determine how much campus infrastructure could be updated and financed from investing in energy efficient systems to pay for the updates. Before beginning to spend a lot of money on detailed engineering and financial analysis, a preliminary analysis was recommended. The project and building data input in the ISU investment plan shown in the Chapter 6 Opassess reports reflect the entire campus integrated as one project. Baseline data was fixed for a prior fiscal year, campus buildings were grouped into one building. To identify the investments and potential costs and savings, ISU’s campus buildings were broken down by building types- residence hall, academic buildings, laboratories … An integrated engineering analysis was conducted for each of these building types and the data inputted as a single building for calculation purposes. The reason for this high level of data entry was to gain a preliminary but conservative estimate of the benefits of implementing energy and other infrastructure investments structured based on the business goals of the University. Assuming that the preliminary assessment shows an investment project worth pursuing, detailed engineering and financial analysis would begin and the initial project data updated 4

For a definition and history of Total Cost of Ownership, check the internet. Two sources are http://en.wikipedia.org/wiki/Total_cost_of_ownership and www.12manage.com/methods_tco.html

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and compared to the detailed project. At the detailed development stage, more in-depth engineering would be conducted for each building. In addition, numerous other implementation assumptions might change due to more detailed analysis. The facility owner and project team can then continue to track, manage, and report the project through phases of: financing, procurement, construction, commissioning, on-going operation and maintenance, and future updates of business goals as well as facility growth, cost escalation, policy, and regulatory changes and other variables over the life of the investment.

10.6.3

Comparing Investment Options

Proceeding to identify the best technology, fuel, implementation, ownership, financing, and other options associated with an infrastructure investment can be initiated by a property owner or by an energy service company. The property owner might hire an expert engineering and financial team to work with the owner’s management team to identify alternative investment strategies that the owner can do for his own property if the owner wants to take all the investment risks. This means that all the assumptions in OA levels 3 and 4 are created by the owner investment team. As I worked with facility owners, I encouraged them to first identify what they can do for themselves so that they can then compare proposals from energy service companies which offer other technology and implementation approaches. The most important qualification in selecting technology and implementation alternatives is to be able to understand the value created by the service company to meet their proposed performance criteria. The obvious reason to enter agreements with energy service companies is to improve the project economics. All energy service companies will seek to obtain the property owner’s baseline data as a first step. If the owner has not completed development of the baseline data, then an energy service company will work with the owner investment team to identify and gain consensus on the baseline assumptions. Owners who already have a baseline should provide this information to the ESCO with the caveat that if the ESCO identifies a reason to change any baseline assumptions that the change be noted and justified. Changes might be the percentage of cost escalation for a primary fuel or a modification of the performance of existing boilers. Improvement in the assumptions will benefit everyone, but all must agree. Use of Opassess as a procurement evaluation tool simplifies the analysis process. Give all the baseline data in the software to any number of ESCOs. They can then create their own projects and present each of their solutions using the same tool with the same reports. ESCOs can also establish the level of performance risk that they are willing to take. For example, the owner should be able to sign a contract with the ESCO that confirms that the schedule, financing, engineering, procurement, construction, contingency assumptions contained within the ESCO’s proposal will be done on time and budget. The ESCO takes the risks for going over budget and

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may incur penalties for exceeding the schedule. It should also be assumed that the ESCO will be able to improve his profitability if the project is done under budget. Usually, the greatest project risk is in the cost of the primary fuel/s. An owner and an ESCO may decide to share a defined percentage of this risk. Not only is Opassess useful for comparing project solution alternatives, but it is a means to clearly delineate the terms of a partnership agreement and to track the progress over time. Another example is equipment operations and maintenance costs over time. The initial project assumptions will state these costs as well as the cost escalation. Contracts should assume that the ESCO is responsible for taking the cost risks on O&M based on specified levels of performance. Of course, the ESCO should be incented to improve on these assumptions if possible. In some circumstances, an ESCO may only wish to propose a limited technology solution like selling the owner some new boilers. The owner evaluation team can evaluate just this limited option as separate or a part of a larger solution. The boiler manufacturer should stand behind his equipment performance and fixed installation costs and provide a guaranteed cost of maintenance. Being able to fully scope, update, communicate, and report an infrastructure investment project between and among all stakeholders means that deals can be closed and efficiency created, measured, managed, and improved as new technologies and fuels offer greater efficiency, reliability, and profitability.

Chapter 11

Performance-Based Investment Financing

Abstract Mitigating risks associated with investments in energy supply efficiency require performance-based financing. The author writes about her experience with the US DOE Rebuild America program and how performance metrics and project financing are integral to energy infrastructure financing. Using stories from the Universities of CA Santa Barbara and MD, College Park, she explains the financial structures of traditional independent power projects and how they have been applied to integrated energy supply investments. She resolves client business goals with their perceived financing constraints and restates the real investment opportunity. She explains the motivation and the means to use existing state investment authorities like economic development agencies and joint powers authorities to provide low cost financing and diversify risk. Examples of how projects can be financed off-balance sheet are described as well as the benefits to customers and suppliers. Incentives for establishing investment funds that earn guaranteed rates of return are presented and a comparison made to the risks of traditional investment options especially for pension funds and other critical societal funds. Keywords Diversify risk • Financing constraints • Guaranteed rates of return • Independent power projects • Investment authorities/funds • Off-balance sheet financing • Performance-based financing • Performance metrics • Project financing

11.1

Rebuild America

The U.S. Department of Energy (DOE) Rebuild America program provides funding through State energy offices to develop and support community partnerships and assist them in meeting goals to increase the energy efficiency of commercial and public buildings. I don’t remember the exact year that DOE started the Rebuild America Program, but I do remember conducting a workshop for Rebuild America partners on financing energy efficient projects. It was a disaster! L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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My approach to the financing workshop was to direct the discussion to learning how to identify the risks associated with energy efficiency investments and to identify ways to mitigate the risks. My assumption was that by securing the major risks related to each project, the project developers would show the contracts to any financial institution and obtain funding. The actual financing could be a loan, lease, bond, grant, private equity, or other financing instrument and would be secured based on the lender’s perception of the financial strength of the project to pay for itself. Decisions regarding the type of financing would depend on the business goals of the parties involved in the project. For example, in order to achieve a goal of lowest cost financing, project developers would examine who would own the project based on public or private debt rates, tax benefits, and other considerations. My mistake in conducting the workshop was assuming that the people in the workshop understood performance-based investments. The business goal of investment is how to make money. Therefore, the ability of an investment to perform must be measured and managed. Although most people who seek to make energy efficiency investments will consider the annual budget savings that can result from the investment, the functions of measurement and verification are rarely based on measured real data due to the perceived: • Cost of installing measurement/metering equipment • Time associated with manually tracking, calculating and reporting savings • Difficulty of achieving information technology interfacing These perceptions are bulleted to highlight what may be the greatest barrier to implementing energy infrastructure investments – lack of investment in the hardware and software needed to collect energy data and integrate it into investment, operations, maintenance, financial, procurement, and other decision-making practices. In simple terms, this is lack of commitment to energy performance metrics.

11.2

Energy Performance Metrics

The first step in accomplishing infrastructure upgrades and realizing the investment potential fueled by energy savings is to set up a timely data gathering and integrated energy information capability. This does not mean that we should meter and measure to the moon. Make it practical and maybe phased, but do it. In conversations with John Woolard, who was founder and president of a software company called Silicon Energy (now Itron), John expressed his frustration at trying to sell the energy data management software and services to end-use customers. His view was that customers didn’t care, especially occupants of large commercial buildings where the buildings were master metered and customers have no incentive to save energy. He indicated the big purchasers of Silicon Energy Software were the electric utilities who wanted to track their industrial and commercial customers.

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In all the projects that LAS worked on, the first investment requirement was to install measurement devices and provide for the man-power to coordinate, analyze, and disperse recommendations and reports. John Thomas, Energy Manager for the Navy Public Works Center in San Diego, reported that the cost to install 3,400 demand interval meters which uploaded time of use and demand data once per day by resource efficiency managers resulted in a 50% return on investment. The information gave PWC the ability to properly bill base tenants – resulting in tenant behavior modification. Not only is investment in energy information a very good investment, but without it, the opportunity to self-fund much larger infrastructure investments is lost. An example of this situation is at Illinois State University. Ron Kelley, Director of Energy Management, has had great success in gaining funding from ISU to improve campus energy efficiency including installing two new chiller central plants. He has the wonderful financial support from his university leaders to invest in energy savings projects without having to prove the cost savings. The other side of the coin, however, is that the University has leaky steam pipes with asbestos. The OA project assessment conducted in 1997, provided for ISU to self-fund nearly $37.6 million in infrastructures upgrades including $5 million for asbestos removal plus numerous other capital upgrades that have no savings. By coupling investments that have no payback with energy efficiency improvements, energy efficiency can fund other needed infrastructure upgrades. The total infrastructure upgrade could be paid for without increasing ISU’s capital or energy budgets. I have to surmise that ISU’s asbestos removal will have to be paid for from an increase in capital financing rather that budget savings. The same kind of story came from John Welsh, Associate Vice President at the University of Southern California. Welsh, like Kelley, has done a yeoman’s job of investing in energy savings projects at USC including new lighting and central chiller plants, but has forgone an investment in the metrics needed to justify using operating budget savings to pay for systems upgrades. These efforts should be applauded, but they are not fully reaping the benefits of an integrated energy supply investment approach. By scoping energy infrastructure investments that include primary fuel, production/ distribution, and end-use technology alternatives, resource efficiency will pay for aged and new infrastructure needs. This kind of investment approach mandates documentation of the characteristics of the investment plan so that knowledge management can be shared among all the project stakeholders. Not committing to creating and sustaining the metrics of an investment plan, means that the investment risks for exceeding cost, time, and reliability estimates are much greater. Lack of metrics means limited planning, executive commitment, and organization chaos. The lack of capability to readily access, manage, and report efficiency related to real time operations is limited and time consuming. Top level management has to mandate the investment process objectives and provide for quantitative process performance to be measured, controlled, and optimized. Investment performance should not only be predicable and controllable, but continually improved through new technology, fuel, and financial changes or improvements.

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Energy production and distribution investment projects can be paid for from energy-related savings. These investments cannot be scoped, engineered, financed, built, and sustained without including the capability to measure, analyze, manage, and communicate all the business functions as integrated, properly timed financial reports. Due to the dynamics of the market place and to the complexity of the transaction and other assumption changes that can impact savings, even the most sophisticated customers have sought to gain new capital dollars as best they can. Unless ESCO partners are able to convince consumers that in taking the investment risk, the partnership will be a good deal, performance-based investments is limited. Business investment decisions are often made based on expected annual returns. The risks are associated with changes in the economic structures of investments as they occur through every phase of development and implementation. Every investor wants to know the value of the investment compared to any point in time. In addition the investor wants to be able to improve or add value to the investment. New technologies, fuels, and other business and market opportunities should be consistently evaluated to insure optimum value over time. Without a commitment to automating the data retrieval and integrated analysis needed to update the performance of an energy investment project, the huge investment opportunities that exist will not be financed and the value realized.

11.3

Project Financing

Excerpts from Wikipedia describe project finance as the financing of long-term infrastructure projects where project debt and equity are used to finance the project – secured by the project itself (all project assets including revenue-producing contracts) and paid entirely from its cash flow – a decision in part supported by financial modeling. Project finance is also known as limited recourse lending. Risk identification and allocation is a key component of project finance. (Project Finance 2008) Wikipedia states that limited recourse financing has been used from the times of ancient Greece and Rome to financing the Panama Canal and U.S. oil, gas, and electric utility infrastructure. It further states, “The need for project financing remains high throughout the world as more countries require increasing supplies of public utilities and infrastructure.” Citing PURPA and deregulation of electric generation, “The structure (project financing) has evolved and forms the basis for energy and other projects throughout the world.” (Project Finance 2008). Lenders seek to be assured that clients have the financial strength to meet their debt obligation. In most instances, individuals, businesses, and institutions have sought to obtain funding based on their own income and credit. Consumers generally assume that more income will now have to be set-aside or appropriated to pay for a new loan, lease, or some other debt instrument. My assumption at the Rebuild America workshop was that each participant would want to finance as much infrastructure investment as possible that would be paid from gains in energy efficiency. The business goal was to use budget savings to pay for debt. Current operating budgets would pay for future operations and

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for the debt obligation. Where the lender could confirm that the project would be profitable based on the risk mitigation contracts, the investment project could be approved and financed on the strength of demonstrating energy-savings or obtaining fixed-price performance contracts. A disconnect seems to exist about how to finance infrastructure investments using energy performance efficiency to pay for the investments. I am not talking about the concept of simple paybacks – meaning if light bulbs are changed, the investor may determine that the new lamps will reduce energy use and pay back the cost of capital and installation in two years. Investments in supply systems efficiencies are long-term commitments to infrastructure. Although efficient lighting may be part of a project, the big costs have lives of 20–30 years or more. Energy suppliers and service companies know how to do project financing. Most consumers are not interested. It is not their core business. Without on-going project metrics, ESCOs and consumers will not have the understanding and confidence to sign a deal and react as dedicated partners.

11.4

University of California, Santa Barbara (UCSB)

Not all consumers have the kind of support that Kelley and Welsh enjoy. I was asked by the University of California, Santa Barbara (UCSB), Facilities Department to help convince their financial administrators to fund a campus cogeneration project. As a start, I suggested that facilities and financing staff meet to discuss what could be done. Two considerations quickly surfaced. First, the University’s capital resources were limited. The priority was to fund new academic facilities. Second, where funding was made available for energy-saving investments, the financial staff never saw the savings. Everyone agreed that energy savings resulted in cost savings but were unable to document and report the investment benefits. The capital cost to update infrastructure and improve reliability does not mean that more money has to be budgeted. Debt financing is intended to be off-set by operating budget savings. UCSB may have wanted to finance its infrastructure investment off its balance sheet so that it did not have to use its own limited capital or maybe out-source the project to an ESCO. Some universities like the Universities of Iowa and New Mexico created new, non-profit corporations to finance, own, operate, maintain, and sell energy to the universities. Efficiency can pay for updating old, unreliable, polluting facilities. The solution for UCSB was to implement a software program like Opassess to gain real time financial reporting. Having the ability to detail the scope of an investment project and provide real time reports to financial officers and other decision-makers that show that a major investment project can pay for itself, not only will solidify support for funding, but will give the Facilities Department the ability to update, communicate, and manage changes in the project economics over time. If out-sourcing to a partner or setting up a new corporation is required, having a tool like Opassess will establish the contract details needed to scope the business relationship, financial obligations, and tracking and reporting structures.

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The Serious Cost of Unreliable Infrastructure

As I was doing workshops for the Association of Higher Education Facilities Managers (APPA), participants brought to my attention that their utility systems were so limited and unreliable that the problem wasn’t just one of efficiency, but life safety. Failed water and electric infrastructure serving hospitals, research facilities, and dormitories could cause loss of life. Efficiency investments not only lead to productivity, cost control, emissions reductions, improved comfort, but they can save lives and avoid disasters. By 2000, the Navy in San Diego found that efficiency upgrades of six major bases could pay for hundreds of millions of dollars of new infrastructure. Nothing happened. In 2007, North Island, a major base, went down due to a break in a water main that sent everyone home. The main could have been updated years ago and paid for out of energy budget savings. The notion that upgrading energy systems will require increases in budgets and/or higher costs is a barrier to the U.S. economy and security.

11.6

The Maryland Economic Development Corporation

The University of Maryland, College Park (UMCP), deserves special recognition. UMCP, discussed in Chapter 6, is the best example of a customer initiative to finance energy supply efficiency using energy budget savings to pay for upgrade of its campus energy supply systems. UMCP was also able to structure the infrastructure financing to gain off-balance sheet, tax-exempt financing and to shift the performance risk to an energy service company. In 1999, Trigen-Cinergy Solutions of College Park, LLC (now Suez Energy North America, “Suez”) was awarded a contract to supply the College Park campus needs for electricity and steam plus chilled water to 16 buildings in its campus central district. Suez is responsible for the operation, distribution, maintenance, and expansion of the University energy supply systems. The University serves as the agent to procure natural gas, fuel oil, and excess electricity when needed. Suez committed to invest $73 million in campus energy infrastructure upgrades including a base-load 27 MW tri-generation plant and electric, steam, and chilled water distributions systems. The plant generates electricity by burning natural gas and uses the waste heat to fuel the campus district heating and cooling systems. Its fuel efficiency is over 75%. Although College Park is cited as being very, very green – gaining enough efficiency to supply energy to 7,600 homes annually – the investment project deserves accolades for the manner in which the University provided project financing and risk management. In order to gain off-balance sheet financing, the University leased its pre-existing energy supply systems to the Maryland Economic Development Corporation (MEDCO). MEDCO issued tax-exempt bonds to finance UMCP’s

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energy systems improvements and contracted with Trigen-Cinergy Solutions, College Park LLC (limited liability corporation) – now Suez – for renovations, operations, and expansions of the College Park energy systems. Suez assumed the obligations to perform – getting the project built on budget, operating efficiently and reliability, and other risks to guarantee UMCP that they could pay for the capital and achieve energy budget savings for 20 years. MEDCO structures its transactions on a non-recourse basis. It receives no public funding for its operations. Frank Brewer, UMCP Associate Vice President for Facilities Management, reports that their relationships with Suez and with MEDCO have worked very well. The only unanticipated problem that the project encountered was due to the rapid rise in the price of natural gas compared to the price of electricity. This was partially caused by the Maryland Public Service Commission (MPSC) fixing the price of retail rates for electricity for a number of years to allow restructuring of electric utility generation in Maryland, Now that electric rates have risen to their market value, the project is performing well. In addition, UMCP is involved with purchasing fuel supplies in advance to hedge against rapid price increases. It is interesting to note that two other companies competed in the initial UMCP solicitation, both companies were electric utility affiliates. Brewer indicated that while the total investment proposals were somewhat equal – in the $70 million range – the affiliates’ proposals would cost UMCP $300 million more than the Trigen-Cinergy proposal. Three times UMCP has had to face the Maryland Public Service Commission to defend against their local utility’s claims that they should be paid stranded costs for UMCP’s reduction in energy purchases. Brewer’s view is that the utility sought to “drum up charges” and “would like to see the project cost ineffective”. The University is also looking at an additional energy generation investment fueled by wood-waste.

11.7

The World Bank

In May, 2006, the World Bank published a report called, Financing Energy Efficiency: Lessons from Recent Experience with a Focus on Brazil, China and India. Statements from the report reinforce that the opportunity for energy efficient infrastructure investment in the U.S. is the same worldwide: • “Currently many thousands of energy efficiency projects with strong financial rates of return remain unimplemented in the world at large. • The essential issue blocking development of the potential energy savings is the under-developed state of project delivery mechanisms. • Only a fraction of the potential has been tapped. • Renewed and strong efforts are required to develop investment mechanisms to operate in the market which can combine effective technical project development with financial products appropriate for dispersed investments with benefits concentrated in operating costs savings.

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• Focus is placed on how to expand investment in energy efficiency projects dispersed through economies, rather than those concentrated in a few very large companies, such as energy supply utilities. • Specific, customized efforts are required to develop project investment delivery mechanisms which can sustainably operate in local markets. • Lack of domestic sources of capital is rarely the true problem. Instead inadequate systems for accessing funds is usually the main problem.” (The World Bank – ESMAP Report May 2006, 1–4). I can continue to pick out statements from the World Bank (WB) report that reinforce the importance of energy infrastructure investment as well as the economic opportunities. The WB strongly recommended, “careful diagnostic work, appraisal, periodic reviews, and flexibility in design so that programs can be adjusted during implementation” (The World Bank – ESMAP Report May 2006, 12). WB saw that, “All of the above result in exceptionally high labor intensity for program management, operation and technical support, not only during preparation but also during program implementation.” (The World Bank – ESMAP Report May 2006, 12). While I agree with this statement if no proper information technology is used, having web-based, integrated, and open measurement and software systems in place addresses the problems cited above. Commitment to building energy efficiency investments means incorporating these asset management and communication tools from beginning to end.

11.8

Guidebooks

A host of books, manuals, and protocols have been written to instruct the reader in financing energy efficiency projects and measuring and verifying the savings. Three leading publications are listed below: • The World Energy Efficiency Association, Manual on Financing Energy Efficiency Projects (Anderson and Sullivan (eds) August 1995) • Shirley J. Hanson and Jeannie C. Weisman, Performance Contracting: Expanding Horizons (Hansen and Weisman 1998) • U.S. Department of Energy, International Performance Measurement & Verification Protocol These publications are excellent guides to the implementation of energy efficiency investments that are paid from savings and support the importance of being able to measure, manage, and verify energy savings. They contain the characteristics of the OA methodology and Opassess reports. Opassess provides the capability to translate these guides into timely, web-based financial information and reporting. Hanson and Weisman recognize the value of the Internet and encourage ESCOs to discover ways to add the Internet to its “business tools” (Hansen and Weisman 1998, 210). To truly achieve the opportunity in front of the U.S. and world-wide, software tools based

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on the characteristics and capabilities of these guides integrated into automated financial reporting is the first step to exploding the market potential. Although I abhor the word standard, for simplicity, I recommend that all energy efficiency investment financing software provide a process for people to have the capabilities to: • Collect, analyze, manage, communicate, and report real time data. • Calculate real time, Btu unit costs, including capital, O&M, and fuel, for heat, cooling, and electrical equipment, individually and as integrated systems. • Integrate technology, fuel, EPC, ownership, and financing solutions into a financial pro forma. • Compare infrastructure investment solutions to a baseline and to future baselines. • Provide workflow interoperability. • Be extensible. • Become a discovery agent to integrate other systems. • Perform reconciliation to map and correlate improved operational and fuel options. • Federate multiple utility systems and facilities. • Produce product catalogs and a software library. Opassess contains information, data, functionality, user interaction, thermodynamics, and financial models. It is a template from which supply-side energy infrastructure investment best practices can evolve. Long-term decisions to fund energy infrastructure need to analyze and compare all fuel and energy production, distribution, and end-use investment alternatives on a level playing field where all life cycle costs are considered and compared.

11.9

Better Than the Stock Market

I’m going to put out an idea that seems to make sense. Not only does investment in energy efficiency help to finance the upgrade of aged, unreliable infrastructure, provide jobs, reduce pollution, improve productivity …, commitment to energy efficiency as integral to infrastructure investments can offer much stronger investment returns. Let’s assume that a fund is set up as a pool to finance energy infrastructure investments. Let’s also assume that the investment is project financed and supported by a tool like Opassess where real time assessment and asset management exist. The energy pool is a revolving investment fund where investors are guaranteed interest on their investments. By pooling the projects and tracking real time asset management, the risks of investment now rely on measureable results and not emotive reactions. No one can manipulate the investment without being discovered. The diversity of investments strengthens the total fund and reduces risk. This is better than the stock market. I’d rather see my pension funds invested in pooled, capital funds to finance energy efficiency.

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States have varying kinds of financing authorities although they do not necessary have experience in pool financing and may need to gain statutory authority to create pool programs. Numerous electric utilities have energy efficiency programs that provide incentives for consumer efficiency investments largely through rebates. Some states have authorized Systems Benefit Charges (SBC) to fund certain “public benefit” activities that may include energy efficiency programs. SBC are paid by ratepayers in the form of a surcharge on electric bills. Joint financing and capital asset pool programs are not new. Two examples of joint financing entities are the National Rural Utilities Cooperative Finance Corporation and the Financing Authority for Resource Efficiency of California (FARECal).

11.9.1

National Rural Utilities Cooperative Finance Corporation

I met Dick Weber in China on a Yangtze River trip in late 1994. As we experienced the building of the Three Gorges Dam, the dismantling of the towns along the River which would become flooded, and the building of new cities, we talked about China’s rapid development of coal-power electric plants. (We could smell the coal pollution.) I wondered if the Chinese were taking advantage of the opportunity to build combined heat and power production to not only electrify the new cities but to also heat and cool them efficiently and reduce pollution. Weber told me about the work that he had done with the National Rural Utilities Cooperative Finance Corporation (CFC). I was excited to learn about CFC. It seemed to be a great example of a way to structure and finance pools of CHP projects. Formed in 1968, CFC is a not-for-profit financing institution cooperatively owned by U.S. rural electric cooperatives. CFC provides alternative private market financing and management expertise to over 1,500 members. Rural electric systems serve 12% of all consumers of electricity in the United States and its territories, account for approximately 10% of total sales of electricity and own about 5% of electric generation capacity. At the end of FY2007 (May 31, 2007), CFC’s total gross loans and guarantees were $19.2 billion, and its owners had invested nearly $4 billion in CFC securities. (National Rural Utilities Cooperative Financing Corporation 2007).

11.9.2

FARECal

Attending the CA Municipal Utilities Association conferences, I learned about FARECal. The Financing Authority for Resource Efficiency of California (FARECal) was formed in 1993. Seventeen members, largely municipal electric and natural gas utilities and water districts enjoy the ability to finance capital improvements and resource efficiency projects as a joint financing. FARECal’s web site says it all –

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FARECal has any and all powers authorized by law to two or more of its members relating to the planning, development, undertaking, purchase, lease, acquisition, construction, financing, disposition, use, operation, repair, replacement or maintenance of facilities for the generation, production, transmission, conservation, reuse, recycling, storage, treatment or distribution of electrical or other energy or capacity, natural gas, water, waste water or recycled water, and resource efficiency projects and facilities. (Financing Authority for Resource Efficiency of California (“FARECal”) n.d.). The following are listed as the “Advantages to FARECal”: • Programs that would otherwise be expensed during the year of expenditure can be capitalized and financed to spread the costs over the life of the program. • For the first time, energy and water conservation expenditures can be funded with borrowed capital and amortized over their useful life. • Projects that would have been too small to finance independently can be financed as part of a group and costs of issuance can be minimized, in certain cases. • Debt amortization can be included in operation and maintenance expenses, thereby minimizing burdensome debt service coverage requirements. • Financial market acceptance of funding these resource efficiency activities under this approach can be increased through joint education and joint action. • Issues dealing with tax-exemption, equipment on the customer side of the meter, private use, and other legal considerations can be dealt with jointly to establish financing criteria which protect the tax exempt status of the agency’s debt. (Financing Authority for Resource Efficiency of California (“FARECal”) n.d.). FARECal has financed about $66 million. The financing industry has recognized that capital asset pool programs can minimize issuance costs and streamline time frames associated with individual bond transactions. Capital asset pools can be strengthened by project financing especially where capital assets can be tracked with tools like Opassess. Further paid from savings investments allow the annual energy savings payments to revolve and provide funding for additional loans. Asking ratepayers to subsidize efficiency when utilities and energy service companies have the ability to profit from investing in energy efficiency and renewable on-site generation makes no sense. Instead create funds managed by financial experts who can raise capital, offer emissions credits, and create other practical instruments to stimulate infrastructure investment opportunities and enable the U.S. to rapidly and soundly turn into an efficient and sustainable economy.

Chapter 12

The Advancement of Energy Efficiency

Abstract The author cites policy and regulatory issues that have promoted and impeded investments in energy supply efficiency. She narrates the energy battle of the twentieth century between national energy policy to promote investment in energy supply efficiency and renewable resources and the regulatory arenas’ actions that discourage its application. The reader will learn how federal agencies, State legislatures and utility commissions and local governments were involved in battles against energy supply competition. The author’s experiences in CA and FL bring home the stories of how the war was fought on all fronts: franchise agreements, environmental impact review, land use policies, utility interconnection and standby power agreements, grid reliability and costs, social rate structuring, market access, control of transmission systems and finally, deregulation. Readers then learn how they can influence the outcome on the war to win energy supply efficiency through their leadership initiatives, and how they need to change their own organization segmentation to be successful. Again, the author provides anecdotes from client experiences including privatization of Navy utilities. The author outlines a policy and purchasing strategy on how to acquire energy supply investments and close deals with energy suppliers and service providers that result in successful and profitable partnerships. She explains how customers and energy suppliers can use information technology to reduce problems with decisionmaking, speed up the time needed to implement investments and keep all project stakeholders informed and on track. She challenges the software industry to partner with equipment manufacturers, engineers, financiers, fund managers, power marketers, energy supply companies and others to complete energy supply investment and management software that is the communication equivalent to the energy industry that Microsoft Windows is to world businesses. Keywords Competition • Deregulation • Energy impact review • Franchise agreements • Grid reliability • Interconnection agreements • Land use • Market access • Organization segmentation • Social rate structuring • Standby power agreements

L.A. Solmes, Energy Efficiency: Real Time Energy Infrastructure Investment and Risk Management, © Springer Science + Business Media B.V. 2009

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Status of Electricity Supply Systems

The USDOE Energy Information Administration (EIA) projects U.S. electrical load to grow at 1.5% per year (Energy Information Administration 2007). At the same time, it is no secret that a large portion of U.S. electric generating plants are old, hugely inefficient and polluting, and need to be retired or repowered. For example, coal fuels 50% of U.S. electric power. In 2004, 50% of the coal burned in the U.S. was in plants that are more than 30 years old (Trisko January 2006, 2 and 4). Under the U.S. Clean Air Act, these plants are exempt from carbon emissions regulations. The older the plant, the more inefficient it is – throwing away two-thirds or more of the energy consumed into lakes, rivers, the ocean, and the atmosphere.

12.1.1

The Electric Power Research Institute

The Electric Power Research Institute (EPRI) published a discussion paper in 2007 called, Power to Reduce CO2 Emissions – The Full Portfolio. EPRI proposed to limit growth in electricity demand to 1.1% per year and to reduce carbon emissions through implementation of the following technologies by 2030: · · · · · · ·

End-use energy efficiency Renewable energy Advanced light water nuclear reactors Advanced coal power plants CO2 capture and storage Plug-in hybrid electric vehicles Distributed energy resources (Electric Power Research Institute (EPRI) 2007)

EPRI says that energy efficiency and distributed energy resources provide cost-effective, near-term options for CO2 emissions reduction. They can be deployed faster and at lower cost and directly mitigate the need for new generation and transmission facilities. Energy efficiency and distributed generation are not viewed by EPRI as supplyside options. They are viewed as “buying time for incrementally cleaner and more efficient generation to come on-line” (advanced light water nuclear reactors and coal power plants with CO2 capture and storage). These statements appear to be gibberish. DG displaces central power generation and transmission facilities but is not considered a supply-side resource by EPRI. Their generation focus is to build new coal and nuclear generation which is called “incrementally cleaner and more efficient generation”. Does this mean that clean coal and nuclear can compete with DG on emissions and efficiency levels? Investments in electric generation from energy efficiency and distributed energy resources are projected by EPRI to be only 6.7% of the entire U.S. electric generation. The plan is to use modest investments in efficiency to give the monopoly interests

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time to develop new coal and nuclear powered central plants that continue to be inefficient – all at a cost of $36 billion. The U.S. may get reduction in carbon emissions, but how long will it take and at what cost?

12.1.2

Other Points of View

In 2002, the Rocky Mountain Institute (RMI) published a booked titled, Small Is Profitable – The Hidden Economic Benefits of Making Electrical Resources the Right Size. Amory Lovins and other RMI authors detailed the benefits of investing in resource efficiency. Lovins also details the many policy barriers and issues associated with investing in energy efficiency (Lovins and others 2002). Although Lovins has been an outstanding advocate for efficiency for over three decades, federal and state policy focus continues to support operation of out-dated, inefficient, and polluting centralized electric generation. Old school utility profits are still largely based on selling as much electricity as possible. Customers do not want to spend their own money and/or are fearful of investing in their own energy generation. According to Vijay Vaitheeswaran, environment and energy correspondent for The Economist, “By encouraging big nukes and big coal, America would be locking in old, dirty, inflexible, and inefficient technology for decades to come. By doing so, the country would choke off at birth such innovation as micropower and so forgo the chance to leapfrog ahead to the age of the Energy Internet.” (Vaitheeswaran 2003, 87). As Vaitheeswaran is explaining the resistance by the people of CA to allow siting of new central electric generating plants, he says, “If you added up the output of all the new micropower-in the shape of ‘captive’ power plants (those built by companies for their own use), solar panels installed by green consumers, and so on –added during the 1990s, it would produce more electricity than all of California’s nuclear plants combined.” (Vaitheeswaran 2003, 78) Pacific Gas and Electric Company (PG&E) in its July 2007 Cogeneration and Small Power Production Semi-Annual Report to the California Public Utilities Commission listed 78 cogeneration project in CA that Provided nearly 2,513 MW of electricity to the utility. This does not take into account the electricity used by consumers on their sites or the avoided electricity not needed due to use of waste heat. In August, 2007, David Roberts posted an interview of Tom Casten, on the environmental news and commentary web-site Grist.org. Roberts quotes Casten as saying, Can anyone name me another industry (electrical power) that hasn’t advanced its efficiency by a single percentage point (maxed at 33%) in 45 years and is still in business? People often ask me, is the problem with energy because of the Democrats or the Republicans? And I can give you an unequivocal answer: yes. In those 45 years, most states have changed parties back and forth, and nothing we’ve tried has improved the efficiency. How many more decades do you want to keep beating that horse before you say, we need to start thinking about a different species? … It is a mistake to think that all we’ve got to do is pour money into R&D, go to clean coal and so forth.

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“Public Service of Colorado has just gotten approval for a plant that will gasify coal and then run a combined cycle gas turbine … $2,500 a kilowatt to build that plant, and it will have a delivered efficiency of about 42–43%. (For) $1,500 a kilowatt, Jim Young put (a combined heat and power plant) in downtown Seattle, with a delivered efficiency of 85% … I’ve done a study on what would happen if the U.S. went all the way with power recycling. We could cut our electric fuel in half. We could drop CO2 by between 20–30%. And we could make money on the first 23% drop with today’s technology” (Roberts 2007). If electricity providers sought to create generation efficiency through partnerships with their customers to install, operate, and maintain on-site renewable generation including recycled energy, they would improve their efficiency and profits, reduce emissions, and gain greater utilization from existing plants.

12.2

Barriers and Incentives

In August, 2007, I attended a conference of the World Energy Engineering Congress and heard a presentation from a vice-president of Southern Companies express the need for his company to build new capacity to meet a surge in new electric load due to people migrating to the Southeast U.S. I wrote to him asking if he would use the web-based model to assess his generation investment options so that his company could compare the economic value of investing in on-site (distributed generation DG) as an alternative to investing in large central plants. He indicated that OA and Opassess only applied to consumers not to his company. I then suggested that his company was one of the largest consumers of energy, but got no response. Call it what you wish – combined heat and power, recycled energy, cogeneration, distributed generation, micropower – political leaders have known about the benefits of these energy supply investments for over 30 years. As has been discussed, in 1978, the U.S. passed the National Energy Act. As part of the Act, they included the Public Utilities Regulatory Policy Act (PURPA). PURPA encouraged by law the development of cogeneration plants that produce electricity as well as harness the heat that would otherwise be wasted. The law required electric utilities to buy electricity from cogenerators and from power produced from other renewable fuels.

12.2.1

Implementation of Public Utilities Regulatory Policy Act (PURPA)

While federal energy policy under PURPA promoted development of electric production efficiency and use of renewable fuels, the rules and regulations that would guide implementation of this landmark legislation were left to the State lawmakers and regulators – largely Public Utility Commissions (PUC, a.k.a. Public Service Commissions). These same commissions were set up to regulate electric monopolies.

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Now the U.S. wants competition to create more efficient electricity generation but does not enact a law requiring the companies charged with providing electricity to be efficient. This set up the battle between old school monopoly generation and independent power producers. Caught in the middle are PUCs trying to referee but in trying to protect ratepayers, the regulatory bodies end up trying to protect monopolies. I think that this is called a Catch 22. The U.S. needs to commit to Casten’s Fossil Fuel Efficiency Standard to include all its electric generation and retire those old coal-fired power plants. (How about 75% primary fuel efficiency?) Truly deregulate electricity generation and let the market work to reduce costs to consumers through efficiency. In addition to the PUC battles, new power producers sought to gain support from state legislatures. During the decade of the 1980s, I represented Dade County before the Florida Public Service Commission (PSC) to help guide PURPA implementation. I also provided testimony to the Florida (FL) legislature to try to gain State policies and rules for cogenerators and power plants fueled by renewable energy. The rumor was that the Florida utilities were so adamant that they not lose their competitive edge that they seemed to have one lobbyist for every legislator (paid for by the ratepayer, of course). The political muscle of the State’s electric utilities resulted in laws and rules to impede development of any perceived competition to the utilities. It was only the hardiest developers who survived to build efficient generation. The utilities have fought long and hard to discourage new power developers. Many of the laws and regulations that have hindered efficient generation across the U.S. were in the form of: · State laws and permitting regulations required to gain approval for power plant siting. · Strident rules and variable standards for interconnection to the grid. · Standby electricity and maintenance power costs far above the market rate. · Secret deals by utilities to sell electricity to consumers at below market rates. · Tax depreciation laws penalized efficiency investments. · Prohibitions to implement real time pricing to consumers. · Clean Air Act standards ignored the output benefits of CHP. One of the most fun victories for distributed generation (DG) occurred during a hearing at the Florida PSC regarding the reliability of DG to the grid. Of course, the electric utilities were intent on establishing that DG was unreliable. In the midst of the hearing, it was announced that the whole of South Florida was blacked out due to a fire in the Everglades that caused a major transmission line to fault. Of course, those businesses and institutions that had their own generation were still operating. Dade’s Water and Sewer Authority had to have back-up generation equal to its electric load for water/waste treatment and pumping due to the unreliability of the electric utility. As an aside, in 1980 when I began to do full accounting of Dade’s energy use and costs, the Authority annual electricity costs were about half of the County’s $60 million bill. The Authority was a forerunner in using methane from waste water treatment to help fuel its electric generation. Ultimately, the Authority agreed to allow the utility to start the Authority’s stand-by generators when the

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utility needed additional capacity to serve other customers. Dade had to fight to gain a rate that reflected the value of that service to the utility. The strength of electric utility political and regulatory power is one of the most powerful in the world. In the last three decades, since the passage of PURPA in 1978, utilities have effectively sought to impede the development of DG in the U.S. Many more laws and rules can be cited by experts in the field. Contact the U.S. Combined Heat and Power Association, American Council for an Energy Efficient Economy, The National Association of Energy Service Companies, the International District Energy Association, The Association of Energy Engineers, and any number of other organizations representing companies and consumers involved in power efficiency to hear them reinforce the barriers listed above as well as other barriers.

12.2.2

EPA CHP Partnership

In the three decades since PURPA was enacted, some legal and regulatory changes have been accomplished to reduce some of the barriers described above. The U.S. Environmental Protection Agency (EPA) has not only changed its standard of review of emissions for power plant approval to recognize the environmental benefits of gaining the most energy use for every unit of energy consumed, but the EPA has formed a partnership with the Combined Heat and Power Association to publicize the potential energy, environmental, and economic benefits of using combined heat and power (CHP) to meet a greater portion of our nation’s energy demand. The CHP Partnership reported that, “Through 2007, the CHP Partnership has helped install more than 335 CHP projects, representing 4,450 megawatts of capacity. The emissions reductions are equivalent to: removing the annual emissions of more than two million automobiles or planting more than 2.4 million acres of forest.” (EPA 2008).

12.2.3

2005 Energy Policy Act

In 2005, PURPA was amended by a new national Energy Policy Act calling for States to institute Renewable Portfolio Standards (RPS). According to the Combined Heat and Power Partnership’s CHP Fact Sheet, “An RPS requires electric utilities and other retail electric providers to supply a specified minimum amount of customer load with electricity from eligible renewable energy sources.” The Partnership reported, “As of August 2007, RPS requirement or goals have been established in 29 states plus the District of Columbia.” (EPA 2008). Unfortunately, only ten of these states include CHP or waste heat recovery as an eligible resource. Why not include resource efficiency? Why deny or discourage the economic and environmental opportunities it offers? The U.S. Combined Heat and Power Association (USCHPA), “works to raise awareness of CHP technologies and systems, to eliminate regulatory and

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institutional barriers, and to develop CHP markets and technologies.” USCHPA state that “generating heat and power at the site where it is used … · · · · · ·

Helps defer expensive new transmission and distribution projects Reduces utility land-use impacts Improves reliability and power quality Offers ancillary benefits to the grid Diminishes vulnerability to grid disruptions Provides a strong basis for competitive energy markets” (What Is the USCHPA? 2001)

From an economic feasibility perspective, USCHPA cites as CHP economic benefits: “lower capital and life-cycle costs, fuel diversity to mitigate risk, and reliability, comfort and convenience to end-users” (What Is the USCHPA? 2001). There are exceptions to every statement about utilities not investing in efficiency. Con Edison Steam Operations, New York was honored by the International District Energy Association (IDEA) in June, 2007 with the System of the Year Award. IDEA recognized that, “Con Edison’s steam operations unit supplies steam for space heating, domestic hot water production, and air conditioning to approximately 1,800 customers and more than 100,000 commercial and residential buildings in most of Manhattan.” Most of the steam comes from cogeneration technology. It exceeds 75% efficiency and 99.995% reliability. (International District Energy Association 2007). The 2005 Energy Policy Act provided tax incentives for consumers to make investments in energy saving end use technologies, but only encouraged States to enact real time pricing of electricity. The greater portion of federal incentives promoted nuclear and clean-coal technologies, not efficient generation technologies.

12.2.4

Standard Interconnection Agreements and Procedures for Small Generators

In 2006, the Federal Energy Regulatory Commission (FERC) mandated that electric utilities offer a simple process for interconnecting small generators (20 MW or less) to the nation’s electric grid. Because each electric utility could set its own criteria for interconnection to the grid, developers of DG were subjected to significant time and cost barriers as a means to discourage competition. The FERC ruling aided small DG in overcoming these barriers.

12.2.5

The Energy Independence and Security Act of 2007

The International District Energy Association (IDEA) was pleased to announce that the 2007 Energy Independence and Security Act “authorized $250 billion in grants

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and $500 billion in direct loans for each of fiscal years 2009 through 2013 to institutional entities for implementing energy efficiency projects and sustainable energy infrastructure such as renewable combined heat and power and district energy systems. Further, the Act provides for a number of programs supporting comprehensive waste heat recovery, combined heat and power schemes, and numerous other approaches to unlock the vast potential of thermal energy recovery.” (International District Energy Association 2007). While the law can authorize grants and loans, the U.S. government is experiencing a serious budget deficits, why not use existing energy budgets to pay for infrastructure? Loans and grants may demonstrate the spirit of the law - why increase the deficit further when financing capability already exists? The economic opportunities evidenced in energy efficiency investments also include significant tax revenues to State and federal governments from wages, profits, and land leases. Most experts involved in DG believe that the most important incentive to promote DG is to remove the policy and regulatory barriers that discourage competition.

12.3

What Will Be the Cost of Electricity?

In the May/June 2008 edition of Distributed Energy – The Journal For Onsite Power Solutions, John Trotti, Editor, decried the inefficiency of centralized power generation and the problem with the federal government relying on electric utilities to recommend energy efficiency solutions which are in conflict with the very nature of investing in large, central power stations and more grid. Trotti commented on what he called an infrastructure meltdown victimized by continuing to rely on centralization of electric energy (Trotti 2008). He stated, “I’ve heard estimates for the repair, replacement, and upgrade of our primary infrastructure between now and mid-century of $15 trillion to $30 trillion … The areas of command and control, once in the hands of predominantly local interests, gravitated inexorably to higher and more remote levels of centralization, a situation ill-suited to the demands and changes taking place in our society.” (Trotti 2008). Trotti asks that we quit acting like wimps and take control of our energy future (Trotti 2008). Support for Trotti’s statements regarding the inefficiency of centralized power generation and the need for huge energy infrastructure upgrades has already been presented. No one disclaims the need for the U.S. to upgrade its electric energy systems nor the figures for energy inefficiency associated with electric utility central plants. We know the efficiency which can be achieved by investing in energy generation located close to the customer. Further reinforcement of Trotti is reflected in Department of Energy (DOE) and energy expert studies and reports in recent years.

12.3 What Will Be the Cost of Electricity?

12.3.1

153

National Energy Policy Initiative Expert Group Report

An Expert Group Report resulting from a National Energy Policy Initiative conducted in 2001–20021 included electricity services as one of four areas where the opportunity and need for change in national energy policy was needed (NEP Initiative – Expert Report 2003/2004). The experts listed in Fig. 12.1 – Experts endorsing this report – above reported, “Electricity production, distribution and consumption decisions are often driven by incentives and constraints that do not serve the broader public interest. The driving factors include highly centralized generation, costly grids, poorly regulated monopolies and command-and-control environmental regulation, as well as ill-advised reforms. Historically, technology choices favored large plants and central generation, and public policy goals led to a regulatory model supporting monopoly protection of power generation and distribution. While this approach helped to electrify America, it is now burdening society with low fuel conversion efficiency, costly investments in transmission and distribution infrastructure, high transmission and distribution losses, and disincentives to technological innovation.” “More recent regulatory changes have not always helped align private and public interests. Current environmental rules allow electricity producers to benefit by extending the lives of dirty and inefficient power plants. New Source Review regulations have contributed to the stagnation of electric generation efficiency-which has not improved in the United States over the past 40 years. Some regulated utilities still earn a higher return by building new power stations than by investing in more cost-effective efficiency improvements. In some cases, deregulation aimed at promoting competition has allowed existing regulated owners to block competing power generation in order to avoid loss of revenue from their monopoly-owned wires.” (NEP Initiative – Expert Report 2003/2004, 10). The experts recommended, “Policy making in the electricity sector should be guided by the following strategies: · Restructure the current regulated monopoly system with appropriate rules to encourage competition while maintaining universal service, reliability, environmental and climate protection, transparency, and public involvement. · Encourage adoption of new technologies and innovations while maintaining environmental protection. · Eliminate barriers to the commercialization of emerging generation, distribution, and end-use technologies that reduce environmental impacts, increase technological efficiency and lower costs.”(NEP Initiative – Expert Report 2003/2004, 11–12). 1

NEP Initiative is a non-governmental, non-partisan, foundation-funded project designed to support the development of a stakeholder-based national energy policy. The project is independent of any trade, industry or advocacy group and was administered by two non-profit organizations, Rocky Mountain Institute and the Consensus Building Institute. A final report with the findings was disseminated to all members of Congress, energy constituency leaders, and the press.

Thomas R Casten Founding Chairman and CEO, Private Power, LLC

John D Edwards Professor of Geology, University of Colorado Formerly Chief Geologist, Shell Oil Company Victor Gilinsky Independent Consultant, Energy Issues

Formerly Commissioner of the Nuclear Regulatory Commission and a former head of the RAND Corporation Physical Science Department Amory B Lovins CEO (Research), Rocky Mountain Institute

Peter A Bradford

Visiting Lecturer in Energy Policy at the Yale School of Forestry and Environmental Studies, Yale University

President, Bradford Brook Associates Formerly Chair of the New York Public Service Commission and the Maine Public Utilities Commission, and Commissioner of the U.S. Nuclear Regulatory Commission Stephen J DeCanio Professor of Economics, University of California, Santa Barbara Formerly Senior Staff Economist at the President’s Council of Economic Advisers John H Gibbons President, Resource Strategies

Formerly Assistant to the President for Science and Technology, Director of the Office of Science and Technology Policy, and Director of the U.S. Congressional Office of Technology Assessment Henry Kelly President, Federation of American Scientists

Fig. 12.1 National Energy Policy (NEP) initiative: experts endorsing this report J Michael Davis

Rose McKinney-James President and CEO, Energy Works Consulting

Formerly Principal Deputy Assistant Secretary, U.S. Department of Energy Daniel M Kammen Professor of Energy and Society in the Energy and Resources Group (ERG), Professor of Public Policy in the Goldman School of Public Policy, Professor of Nuclear Engineering, Director, Renewable and Appropriate Energy Laboratory (RAEL), University of California, Berkeley

Reid Detchon Consultant, United Nations Foundation

Formerly Assistant Secretary, U.S. Department of Energy

CEO, Avista Labs

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John A Riggs Executive Director of the Program on Energy, the Environment, and the Economy, The Aspen Institute Formerly Staff Director, U.S. House Energy and Power Subcommittee, and Principal Deputy Assistant Secretary for Policy, U.S. Department of Energy James L Sweeney Professor of Management Science and Engineering, Senior Fellow, Institute for Energy Policy Research Senior Fellow, Hoover Institution on War, Revolution and Peace, Stanford University

William A Nitze President, Gemstar Group

Formerly Undersecretary of Commerce for International Trade Bill White President and CEO, WEDGE Group, Inc Formerly Deputy Secretary and Chief Operation Officer, U.S. Department of Energy

Formerly Vice President, El Paso Natural Gas Company

C E (Sandy) Thomas President, H2Gen Innovations, Inc

Bruce Smart Retired Chairman and CEO, Continental Group

Formerly Deputy Assistant Secretary of State for Environment

Formerly Commissioner of the Nevada Public Service Commission

Formerly member, U.S. Department of Energy, Energy Research Advisory Board

Gary D Simon Senior Vice President, Northeast Utilities System

Formerly Assistant Director for Technology, Office of Science and Technology, and Senior Associate, Congressional Office of Technology Assessment C Michael Ming Managing Member, K Stewart Energy Group, LLC

12.3 What Will Be the Cost of Electricity? 155

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The Potential Benefits of Distributed Generation (DG) and Rate-Related Issues That May Impede Its Expansion

In June, 2007, a study was conducted by the U.S. Department of Energy (DOE) to report The Potential Benefits of Distributed Generation and Rate-Related Issues That May Impeded Its Expansion2 (U.S. Department of Energy June 2007). While the study lists thirty benefits of distributed energy (a.k.a. generation or DG), it also references over 200 DG potential benefits detailed by Amory Lovins et al. in 2002. In summary, the study calculated the following DG benefits: 1. DG offers utilities and customers direct cost savings to meet peak demand loads, improve electric systems’ power quality and reliability, and serve as a financial risk management tool. 2. DG can defer building new electric generation, transmission, and distribution. 3. DG can help utilities lower emissions that threaten the environment. 4. DG can help reduce the threat of grid failure due to terrorist attacks and weather problems. 5. DG can reduce the land-use needed to build central electric plants, and transmission and distribution lines. What is not cited in the study is that DG can dramatically improve the efficiency of U.S. electric generation and reduce pollution. Please read Small is Profitable – Part II for the full detail. Since U.S. leaders have known about the benefits of cogeneration and use of renewable fuels to generate power for end-users for decades, why, in the 2005 Energy Policy Act, is the U.S. Government asking for a study to document yet again the potential benefits of distributed generation? More than a quarter century has passed since PURPA was enacted. While the 2005 study identified about 12 million distributed generation (DG) units in the U.S., most were customer emergency power units used to provide back-up power when the grid goes down. The rest of the DG comprised energy efficient, consumer-owned, CHP plants that provide electricity and thermal energy – mostly built by large industry, hospitals, universities, and other enterprises. According to the study, electric utilities have only incorporated a small fraction of customer generated power into the electric system. The second half of the study title, Rate-Related Issues That May Impede Its (DG) Expansion lists a number of issues that help us get closer to the answer. The study has numerous statements that reflect the impediments faced by customers who choose to invest in production efficiency and renewable fuels. Possibly the most significant is, “Regulation by the States of electric rates, Federal, State and local environmental siting and permitting, and grid interconnection policies and practices can have significant impacts on the financial attractiveness of DG projects.” (U.S. Department of Energy June 2007). Does this sound familiar? These same impediments have been around since the passage of PURPA. 2

This study was mandated by the U.S. under Section 1817 of the Energy Policy Act of 2005.

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Eight rulemaking impediments to DG are listed by the DOE study. To highlight, utilities argued that: · Lost sales revenues would increase costs to ratepayers. · High standby charges were needed by the utility to support DG when maintenance or emergency shut-downs occurred. · DG should pay exit fees when they implement DG due to non-use of existing utility supply system investments. · The value of DG electric capacity to the utility was low. · Extreme interconnection fees and requirements were needed to protect the utility system. No wonder Trotti asks that we quit acting like wimps and take control of our energy future. U.S. energy policy has not committed to an integrated, efficient, energy supply system which includes electricity, heat, and cooling production and distribution.

12.3.3

US Clean Heat and Energy Association (USCHPA)

February, 2006, The U.S. Clean Heat and Energy Association (USCHPA) issued a policy alert regarding New Federal Energy Regulatory Commission (FERC) Policies in Response to EPAct (2005 Energy Policies Act) Amendments to PURPA, “… there was an anti-cogeneration backlash from electric utilities arguing that they were forced to enter arrangements against their interest. Now the implementation of the amendments to PURPA in EPAct, supposedly adopting a compromise between competitive and utility interests, has the potential to fundamentally change the regulatory structure under which much CHP (Combined Heat and Power, Clean Heat and Power, a.k.a. distributed generation) has been installed.” Further evidence of the continued struggle from USCHPA to gain public policy support for DG comes from an excerpt of a February 2007 letter written by John Jimison, USCHPA Executive Director and General Counsel to U.S. DOE Secretary, Samuel Bodman commenting on an August draft of DOE’s 2006 Strategic Plan, “DOE must pay special attention to addressing the non-market barriers that hinder deployment of distributed generation technologies, such as the reluctance or resistance by monopoly utility companies to the deployment and use of third-party distributed generation on their system, and should include as part of its strategy programs and efforts to assist in overcoming those barriers.” (USCHPA – United States Clean Heat & Power Association 2007)

12.4

The Electric Utilities

What investments is the electric utility sector planning? In 2007, the Electric Power Research Institute (EPRI) published The Power to Reduce CO2 Emissions – The Full Portfolio. Key strategies included:

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· “Deployment of smart distribution grids and communications infrastructures to enable widespread end-use efficiency technology deployment, distributed generation, and plug-in hybrid electric vehicles. · Deployment of transmission grids and associated energy storage infrastructures with the capacity and reliability to operate with 20–30% intermittent renewables in specific regions of the United States. · Deployment of advanced light water reactors enabled by continued safe and economic operation of the existing nuclear fleet. · Deployment of commercial-scale coal-based generation units operating with 90% CO2 capture and with the associated infrastructures to transport and sequester the captured CO2.” (Electric Power Research Institute (EPRI) 2007, 3–1) I applaud the development of distribution-enabled technologies defined by the report as, “deployment of smart distribution grids and communication infrastructures to drive broader commercialization of end-use energy efficiency, distributed energy resources, and plug-in hybrid electric vehicles.” (Electric Power Research Institute (EPRI) 2007). It’s important to elaborate on the attributes of developing a Smart Distribution System: 1. “They have or will have high levels of distributed intelligence (embedded computers) built into their basic operating structure, allowing them to become “smart resources” that are interactive with their digital environment. 2. They incorporate standardized communication protocols, affording high levels of interoperability with other devices through AMI (advanced meter infrastructure).3 3. They are designed to be integrated with a smart electricity infrastructure at multiple levels – the distribution level, the energy management systems (EMS) level, and grid operation and planning.” (Electric Power Research Institute (EPRI) 2007, 3–3). The EPRI report indicates that by 2022, electric utilities will have integrated energy management –thus enabling full electrical systems integration with customer EMS, distributed management systems, and customer end-use systems. The average annual investment for research and deployment is projected to be $320 million per year through 2030. While electric utilities are actively working to implement an information age application to the electric energy systems, they are seeking to spend nearly four times more money each year ($1,120 million/year) to complete research, development, and demonstration to meet future nuclear and coal deployment. While they view energy efficiency and distributed energy resources as the most cost-effective, near-term option for CO2 reduction, electric utilities seek only to invest in renewable generation, not cogeneration. Distributed energy resources are predicted to be only 6.7% of future U.S. total energy generation (Electric Power Research Institute (EPRI) 2007, A-4). 3 Advanced meter infrastructure has the capability for real-time data acquisition and dynamic energy management, real time pricing signals and emergency demand signals, built into manufactured operating systems standards, integrated with end-use optimization.

12.5 Answer – Opportunity Assessment and Opassess

12.5

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Answer – Opportunity Assessment and Opassess

Why would electric utilities only plan for DG to be a small fraction of U.S. total generation especially when States Standards require 10–20% electric generation from renewables? Electric utilities admit that DG: · · · ·

Reduces CO2 emissions. Can be deployed faster and at a lower cost than building central power stations. Better matches demand with supply. Mitigates the need for new generation and transmission facilities.

The answer to why have another study to determine the benefits of distributed generation can be found in the second part of the DOE study – Rated-Related Issues That May Impede Its (Distribution Generation) Expansion. The study found that, “due to the complexity of evaluating the financial attractiveness of DG, lack of experience in implementing DG, and the perceived financial risks, a standard business model has not emerged from which utilities can realize the profits associated with DG.” The error in the study is in the statement, “Many of the potential benefits of DG are most readily available to consumers since the incentives for customer-owned DG are often far greater than those for utility-owned DG.” (U.S. Department of Energy June 2007, iii). I don’t agree. The economic opportunities for partnering with customers to earn profits from value added by making investments in DG are found throughout this book. If there were no profits to be had, why would so many organizations representing companies who have fought legal and regulatory constraints to be able to earn returns from value added? Variations of the Opportunity Assessment methodology and Opassess software tool have been used by independent power developers to implement DG for nearly three decades. It is rare to proceed on DG project development without a preliminary assessment that shows an internal rate of return of less than 25%. These planning methodology and risk management tools used to develop complex energy supply and distribution projects are standard industry practices. OA and Opassess are founded on a standard business model of energy supply systems investment. While electric utilities are clearly committed to upgrading and integrating their supply systems with customer systems, they are not yet committed to throw off the paradigm of earning money from guaranteed returns on investments. They are incented through the utility rates that reward ownership of large central plants and distribution systems. Many utilities have affiliate companies that promote DG investments that conflict with their sister company’s desire to build large plants. U.S. energy policy has everyone sitting on the fence between monopoly and competition and still battling the rules of the game. Who will win the struggle between monopoly interests and competition in the electric energy marketplace? Take away regulatory barriers and promote integration and coordinated planning and management of the energy systems investments founded on efficiency and everyone will benefit.

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In June, 2008, Fiona Harvey, environment correspondent for the Financial Times reported the results of study conducted in the United Kingdom assessing the potential of developing industrial DG plants. The study determined that the DG potential was “the equivalent to building 10 nuclear power stations, and enough electricity to power two-thirds of the country’s households. Using the waste heat by pumping it to local buildings would also mean the U.K. would need to import only half as much gas as it does now. Businesses installing or extending combined heat and power units could also save a billion pounds a year on their energy bills and could profit by selling excess electricity and recycling their waste heat.” (Harvey 2008) The U.K. study only looked at large industry. I believe that the opportunity in the U.S. and world-wide is even greater. Use of the OA methodology combines investments in end-use efficiency and reliability with supply-side investment. By first assessing the investment impact of updating and improving the efficiency of end-use buildings and equipment, production equipment can be sized, selected and operated to follow the end-use requirements. This integrated investment results in highly efficient energy production and distribution systems. Finally, optimization of each unit of energy consumed through CHP coupled with the best primary fuel options – all contribute to levels of efficiency and reductions in energy costs that can change our electric and heat generation systems and save billions of dollars a year in resource efficiencies to consumers. I challenge, electric utilities to use the OA and Opassess approach to compare the development, investment, and life cycle costs associated with investing in advanced light water reactors, new coal plants with CO2 capture, and new grids with CHP and renewable generation either separately or as a combined investment. Don’t forget to include all government subsidies, emissions and waste disposal, and decommissioning costs. Adoption of an integrated energy systems investment approach that includes selection of primary fuels, production, distribution, and end-use efficiency using a standard planning methodology and web-based, real-time planning software gives investors the ability to: · · · · · · · · ·

·

Establish business goals Set growth and escalation projections Incorporate tax benefits Establish a baseline budget that includes base year energy consumption, loads, and costs as well as equipment specifications, operating efficiencies, and O&M costs Determine environmental emissions and decommissioning costs Conduct a long term projection of budget requirements based on a status quo situation Identify end-use energy efficiency measures (EEMs) including costs and savings Adjust the baseline of energy use that results from EEMs Select and evaluate alternative, energy efficient production systems technology investments, alternative primary fuels options, and related O&M, emissions, and decommissioning costs to one another and to the baseline Select and evaluate the full costs of alternative investment implementation strategies, ownership, financing, engineering, procurement, construction, and risk management

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· Evaluate the sensitivities of investment risks and options to mitigate those risks · Communicate and report changes in investment plan assumptions to all stakeholders over the life of the investment · Manage risks in a dynamic marketplace · Calculate and report real time savings Using a standard life cycle cost business model, contained and visualized through a financial pro forma, allows electric utilities to move into utility/customer DG investments and further enhances technology interface, systems measurement, communication, inoperability, dynamic management, asset control, and real time reporting – all necessary factors to insure a reliable, efficient, and clean energy supply system. Electric utilities will make more money, and customers will reduce costs, enjoy greater reliability and productivity, and a cleaner environment. I can’t begin to list the policy and regulatory barriers that might currently exist at the federal, state, and local government levels that may impede DG expansion, but all the economic and environmental benefits of DG show that the electric utility industry must change and be required to compete. U.S. electricity generation must realize the resource efficiencies and economic benefits of its potential. The U.S. plan for supply-side energy efficiency should be an immediate initiative to upgrade all energy infrastructure using the economic incentives of competition, integrated planning, modern technologies, the internet, and increased productivity. Planners, investors, and managers of the electricity supply systems should not be in control to limit energy efficiency and renewable energy to 6.7% of the electric generation mix. I am certain that if utilities choose to support a move into DG with customers as partners that constraining rate-related and other regulatory policies will rapidly go away. Allow laws and regulations to be driven by a commitment to efficiency and the old monopoly companies will realize that their profit goals are directly linked to their customers. They will make money updating old infrastructure and reducing costs to consumers. In Turning Off the Heat, Casten describes a “recipe for national action” calling for an end to all restrictions on electric generation, distribution, and sales and doubling electric generation efficiency by adopting a fossil fuel efficiency standard (Casten 1998, 107–109). Remember, he applauded Margaret Thatcher, who led her government to deregulate its electric generation, allowing producers to sell electricity retail and consumers to choose its retailers on an hour by hour basis. The result was rapid electric deregulation, greater efficiency, lower consumer prices, reduced CO2 emission, and continued reliability. Casten reminds us that other countries have had the same experience (Casten 1998, 11 and 105).

12.6

The Value of Emissions Reductions, Waste Disposal, and Subsidies

Notice that OA and Opassess do not contain data input for energy production emissions and waste disposal costs nor do they include government subsidies. Environmental cost impacts caused by using fossil fuels and nuclear power to fuel

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electricity and heat production are as critical to the economic evaluation of energy supply investments as all other factors, maybe more. Environmental costs related to primary energy mining, transport, consumption, and disposal need to be established. Electricity rates and fuel oil prices do not yet contain these environmental impact costs. A true comparison of these costs must be considered as the world seeks to create and sustain clean, efficient, and reliable energy supply systems. Our decision-making capability to select the best energy supply investments must include the capability to compare all costs associated with energy supply investment options and to monitor investment results.

Chapter 13

Leadership

Abstract The author reveals how Thomas Friedman inadvertently details in The World is Flat how to bring about Thomas Casten’s goal of eliminating barriers to efficiency expressed in Turning Off the Heat. She explains how Friedman’s desire to see Manhattan Project between China and the US is really needed between electric energy companies and consumers. Friedman’s flatteners are used to show that part of the solution to energy supply efficiency is a commitment to collaboration and information using the advancements of information technology and the internet. Friedman excites the author to adopt a visualization of one marketplace where there is web-based integration of our electricity, heat, and cooling systems into an efficient whole and where people introduce new efficiencies and fuel options every day. The author calls upon Friedman and William Bernstein to discuss the issue of leadership and the need to develop a business framework for energy efficiency that is secure, systematic, widely available, and has the ability to rapidly communicate vital information. Bernstein in The Birth of Plenty calls the “fundamental currency of capital markets – information”. The author states, “If the world is to gain energy efficiency and realize the economic opportunity that exists, OA and Opassess or their equivalents must be identified and institutionalized into our energy systems’ heritage. The US should not only seek its own resource efficiency and economic strength but lead by example.” Keywords Advanced information technology and internet, Business framework, Commitment to collaboration and information • Economic strength • Flatteners, Fundamental currency of capital markets • Leadership, Manhattan Project

13.1

Combining Casten and Friedman

Thomas Casten in his book, Turning Off The Heat, rails against continuing “to give [U.S.] monopoly protection to inefficient power generation”. He goes on to say, “Eliminating barriers to efficiency, ending all energy subsidies, and opening energy

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markets to competition will reduce electric costs by as much as 40 percent, will increase standards of living, and will move the world toward a sustainable energy future.” (Casten 1998, 8) Casten knows the opportunity. Thomas Friedman, inadvertently, details how to bring about the change needed to realize Casten’s vision. While you were sleeping, Thomas Friedman, I took advantage of quotes from your book, The World Is Flat: A Brief History of the Twenty-First Century. To paraphrase your words, “If we fail to find a radical new approach to energy usage and conservation, we will be courting both an environment and geopolitical whirlwind.” You go on to state, “If there was ever a time for some big collaboration, it is now, and the subject is energy. I (Friedman) would love to see a grand China – United States Manhattan Project, a crash program to jointly develop clean alternative energies, bringing together China’s best scientists and its political ability to implement pilot projects, with America’s best brains, technology, and money.” (Friedman 2005, 412–413) I applaud and support Friedman’s idea, but the need for a radical new approach is closer to home – between electric utilities and their customers. What about promoting a crash project in the U.S. to use its political ability to commit to energy efficiency? Eliminate electric utility monopoly protection and implement a “Manhattan Project” to get rid of legal and regulatory obstructions that limit the U.S.’s ability to gain the greatest energy value from every energy unit consumed. Friedman recognizes that, “One of the unintended consequences of the flat world (the world offered by the internet) is that it puts different societies and cultures in much greater direct contact with one another.” (Friedman 2005, 391) Promoting electric utility and customer partnering seeks a change in different cultures. The U.S. needs to commit to energy efficiency. Inherent in the solution to energy resource efficiency is a radical new approach to earning profits from value-added. To achieve this, new relationships must be developed. Trust is built from sharing a commitment to save energy and communicate and manage risk.

13.2

Work Flow Software and Internet Application

“The internet now makes this whole world like one marketplace.” (Friedman 2005, 188–189). With Friedman’s permission, I am going to apply the solution to building highly efficient energy supply systems to his ten forces that flattened the world. Friedman provided the formula to energy efficiency. All we need to do is adopt it and apply it. The secret is to apply the concepts in globalization to energy supply efficiency. Flattener # 1 – If the Fall of the Berlin Wall in 1989 as Friedman states can, “tip the balance of power across the world toward those advocating democratic, consensual, free-market-oriented governance … allow us to think about the world … as more of a seamless whole … enhance the free movement of best practices … open the way for formation of the European Union …” (Friedman 2005, 49–52) Think what the possibilities are to eliminating the wall created by monopoly protectionism between electric utilities and consumers.

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What caused the fall of the wall? Friedman feels, “There was no single cause. But if I had to point to one factor as first among equals, it was the information revolution that began in the early – to mid-1980s. Totalitarian systems depend on a monopoly of information and force, and too much information started to slip through the Iron Curtain, …” (Friedman 2005, 52). The solution to energy supply efficiency is a commitment to collaboration and information. Flattener # 2 – When Netscape Went Public – wired the world together with open protocols and Windows 95 became the operating systems used by most. The internet-based platform made the internet accessible to everyone. People now have PC applications and standardized operating systems like Windows Word that interact with the internet. Use the internet and adopt common standards with operating functionality like Opassess to conduct energy systems efficiency. Flattener # 3 – Web-Enabled Work Flow Software – provided the technical foundation for people to collaborate. Applications can talk to applications. Departments and companies can be interoperable. Make all energy systems information: equipment maintenance/management, dispatching, financial, metering, engineering analysis, CADD, capital planning, and other related application software interoperable. As Friedman goes on to quote Joel Crawley, the head of IBM’s strategic planning unit, “We need more and more common standards … standards about how we do business together … around how supply chains are connected. All of these standards, on top of the work flow software, help enable work to be broken apart, reassembled, and made to flow, without friction, back and forth between the most efficient producers, The diversity of application that will automatically be able to interact with each other will be limited only by our imaginations.” (Friedman 2005, 79). Visualize web-based integration of our electricity, heat, and cooling systems into an efficient whole with people introducing new efficiencies and fuel options every day. “The next six flatteners,” Friedman states, “represent the new forms of collaboration which the new platform empowered.” (Friedman 2005, 81). I have taken the liberty to combine some flatteners and to apply the flatteners to integrated energy supply systems. Open-Sourcing – peer reviewed science allowing collaborative innovation – Brian Behlendorf, founder of ColabNet, “Wouldn’t it be interesting if we could take the open-source benefits of speed of innovation and high-quality software, and that feeling of partnership with all these stakeholders, and turn that into a business model for corporation to be more collaborative both within and without?” (Friedman 2005, 92). Imagine partnerships where suppliers and consumers collaborate on building advanced communication software to improve efficiency and profitability. · Outsourcing and Off-Shoring – business process implementation and improvement combined with cheaper production – Use the internet and fiber-optic cable to let the companies who know how to be nimble and efficient do the job and cover the risks.

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· Supply-Chaining – collaborating horizontally among suppliers, retailers, and customers to create value – point of sale terminals, less excess inventory in the supply chain. When all the information is fed into the demand models, energy suppliers can become more efficient on when and where to produce and ship to exactly the right place so it can flow more efficiently. · Insourcing – how to optimize the dynamics of the entire energy supply chain – Expand partners’ roles to synchronize global supply chains for companies large and small. · Informing and The Steroids (wireless technology) – knowledge and communication to optimize efficiency at your fingertips from anywhere at any time. Friedman goes on to write about a triple convergence where there is a “web-enabled playing field that allows for multiple forms of collaboration – the sharing of knowledge and work – real time, without regard to geography, distance, or, in the near future, even language.” (Friedman 2005, 176). The transformation of economic growth means changing the U.S. electric monopoly marketplace from a vertical, closed economy to an open competitive market sustained by horizontal collaboration and fueled by a commitment to energy efficiency. Finally, Friedman says, “I think the real issue is leadership.” (Friedman 2005, 333). Casten provides evidence of the results of leadership to deregulate electric monopolies, “The United Kingdom under Margaret Thatcher began to deregulate electricity generation and sale in late 1989. Six years later, carbon dioxide emissions from U.K. power generation had fallen 39 percent, nitrous oxides had fallen 51 percent, and the price of electricity to all classes of consumers had fallen 15 to 20 percent.” (Casten 1998, 11) …all this without government mandates or incentives to use non-fossil technologies, without any mandated fuel switching, without any fines or tax credits. Power entrepreneurs simply invested in efficient combined heat and power plants, automated existing plants, and improved management and operating practices. U.S. political and regulatory leaders need to let small companies use existing technologies and online, realtime tracking and tracing to compete with the big electric companies. Reestablish the rules to support resource efficiency and the economy and the environment will improve.

13.3

Fundamental Currency of Capital Markets

William J. Bernstein in his book, The Birth of Plenty: How the Prosperity of the Modern World was Created offers nuggets of intelligence that spotlight the importance of an energy supply systems methodology and software tool. Bernstein writes, “In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather it is about institutions…the framework within which human beings think, interact, and carry on business. Four institutions stand out as prerequisite for economic growth:

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· Secure property rights, not only for physical property, but also for intellectual property and one’s own person – civil liberties. · A systematic procedure for examining and interpreting the world – the scientific method. · A widely available and open source of funding for the development and production of new inventions – the capital marketplace. · The ability to rapidly communicate vital information and transport people and goods.” (Bernstein 2004). How do these four institutions apply to energy supply investments? First, the OA energy investment methodology and Opassess software tool are founded on a scientific method for planning, implementing, evaluating, and managing energy supply systems investments. The ultimate financing and ownership strategy inherent in the methodology determines the physical property rights and responsibilities. The information software assigns intellectual property requirements and provides the medium to rapidly communicate vital information. In order for business leaders, who wish to finance energy supply projects, to gain the confidence and trust of capital markets, three prerequisites must be in place. A secure property structure, scientifically applied analysis, and the ability to rapidly communicate information that is vital to management and cost control must be demonstrated in order to obtain financing. What is missing in modern energy supply investment is the ability to sustain property value. An adequate scientific framework and communication medium to analyze and realize energy and resource efficiency doesn’t exist. The myriad of assumptions that compose an energy supply investment are a collection and synthesis of observations into models and theories. The business investment plan is based on facts that are assumed to be true. But given the dynamics of the market place, these investments require constant updating, analysis, and communication. The capability to examine, manage, and communicate project value through empirical tests must be in place to win the confidence of investors. Bernstein calls the “fundamental currency of capital markets – information. The lifeblood of finance flows in the torrent of information that has been made possible by modern communication.” (Bernstein 2004). His example is the Windows computer operating system. Because the use of this operating system has become so widespread, Bernstein believes that it has gained the critical mass to be termed “a necessity of life”. If the world is to gain energy efficiency and realize the economic opportunity that exists, OA and Opassess or their equivalents must be identified and institutionalized into our energy systems heritage. Far from the theories of institutional prerequisites, are the everyday realities of individuals trying to do their jobs. Utility and building managers, maintenance, purchasing, capital planning, budget, engineering, construction management staff, dispatchers, consultants, and a host of other professionals all impact the daily costs of property ownership. To restate Bernstein – A common business plan secures the rights of each individual in a team to not only meet his defined work parameters but

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to improve productivity. Each team member provides the data for his part of the business operation. Therefore, he owns his part of the plan. His ability to improve on his job is limitless as long as he is confident that all other team members accept the same parameters that have determined the plan and have the same information and communication medium to update, evaluate, and change direction as assumptions change (Bernstein 2004). The U.S. should not only seek its own resource efficiency and economic strength, but lead by example.

Chapter 14

Commitment to Resource Efficiency

Abstract This chapter reinforces the importance of making a commitment to establish a uniform language, best practices, and software tools in order to compare, measure, and report the financial benefits of energy infrastructure investments as well as make them accessible to all stakeholders. She states the importance of being able to define the opportunity value of new, alternative investment fuels, technologies, and implementation strategies in order to make the right investment decision regarding the timing, location, and size of the investment. The ‘smart’ grid is presented as an exciting IT solution to optimize the operation of the US energy systems, but the IT approach needs to be expanded to include evaluation and management of energy systems infrastructure investments and not just operations. The author tells about the Presidential Directives that federal government facilities are facing to reduce energy use and invest in renewable fuels and uses the example of the Veteran Administration to expose the tremendous task of obtaining baseline and on-going information to try to meet the directive. Although the federal government is providing billions of dollars to support a ‘smart’ grid, customers like the VA are left without energy information technology or a framework to meet their directives and must find ways to spend their own budgets and staff time to try to move forward. The author takes apart the title of the book to best expose the policy initiatives implied and the real commitment to not just energy, but resource efficiency. Key government and business policy initiatives are recommended for change. Keywords Best practices • Commitment • Opportunity value • Presidential Directive • ‘Smart’ grid, Uniform language The U.S. and the world are going to build new energy infrastructure. Will it be efficient? Will we choose to realize the promise of using energy efficiency to pay for the infrastructure and reduce the costs of energy and emissions caused by production of electricity, heat, and cooling? The most significant area to deliver on a commitment to resource efficiency is through combined heat and power investment. The greatest energy value and the

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lowest capital cost result from the transfer of primary energy fuels into useful electricity and heat and managing the load impacts from cooling. Investment in energy efficient generation and distributions systems begins on the customers’ side of the meter and is achieved through gaining the greatest useful output of energy, load management, proper sizing of equipment to meet efficient end-use of electric, heat, and cooling energy. What needs to be forged is integration not separation of energy systems investments, operation and risk management. Let’s take apart the book title, Energy Efficiency – Real Time – Energy Infrastructure – Investment – Risk Management and think about how these words have been applied in the U.S. since the early 1970s and how they need to be applied to achieve resource efficiency and a clean environment in the twenty-first century.

14.1

Energy Efficiency

Energy efficiency means gaining the greatest energy output from every unit of energy consumed. The very nature of conversion to electric and heat energy means that to realize the economic opportunity contained in energy efficiency investment, the investor must look at combining electricity generation with the best use of thermal energy. Consumers and producers must work together to not only fully use all the energy output of primary fuels but gain the added benefits of being able to reduce the size and amount of energy infrastructure investments and pollution. The U.S. has spent decades requesting that households, businesses, and institutional consumers use less energy. Conservation – initially, turning down the thermostat and turning off the lights largely translated into being uncomfortable and potential health hazards unless these consumers had the money to purchase, install, and maintain more efficient light bulbs, appliances, heating, ventilation, air conditioning equipment, pumps, motors, controls, insulation, thermal windows, and other investments. Incentive programs run by electric utilities were intended to help their customers reduce their energy use – again putting the responsibility for energy efficiency on the end-user. Utility conservation programs have generally been paid by additional charges on customers’ bills. Where customers sought to invest in their own generation, electric utilities have worked to create barriers to independent power generation in order to maintain market control. Federal tax incentives for investments in solar and wind investments have been sporadic. And the consumer continues to be responsible for investing his own money to now be in the energy supply business. The U.S.’ commitment to resource efficiency in the production and transportation of electricity is not codified. Electricity producers, the biggest energy consumers of them all, have not faced serious resource efficiency and carbon emissions standards. Appliance efficiency standards and building codes have been in effect for decades but electricity generation standards have largely been left to businesses whose profits are based on inefficient use of energy and capital resources.

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Energy efficiency means resource efficiency – not just gaining the most energy output from every unit of energy consumed, but reducing the capital resource cost to build generation plants and distribution systems – the infrastructure itself. Why build isolated generating stations and massive grids when on-site generation will not only allow waste heat to be used but also avoid the need to invest in equipment to produce more heat energy? Energy Infrastructure Primary Fuels Supply i.e., coal, natural gas, etc.

Primary Fuels Supply Contracts

Production & Distribution Systems i.e., electrical, heating, cooling

Building End-Use Systems.

Production & Building End-Use Distribution Systems Systems.

= Lowest Cost

Fig. 14.1 Energy system

14.2

Energy Infrastructure

The whole energy system was defined in Chapter 3. Figure 3.1 – Energy system – is shown again in Fig. 14.1. Our energy infrastructure is not just electricity generation and distribution. The whole system includes primary fuels, electricity, heat, and cooling production and distribution equipment, and end-use structures and equipment. If we fail to consider the entire system and the associated public and environmental costs in our energy infrastructure investment decisions, we neglect the opportunities offered from thermodynamics and resource efficiency. Energy, capital, and human resources will not be used efficiently and will contribute to making energy more costly.

14.3 14.3.1

Investment Comparing Options

The U.S. knows that its energy supply systems are old and polluting. Trillions of dollars in long term investments are and will be made in electric, heat, and cooling systems. These investments last 20 to 50 years so what we choose will be around a long time. Making the right infrastructure and fuel supply investment choices is essential.

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When news announcements appear about investments in solar, wind, geothermal, clean coal, nuclear, and other primary fuels, how do investors determine the value of one option compared to another, or any new electric generation compared to the value of integrated electric, heat, and cooling production systems investments? How does the location and size of the new electric generation compare to other options? Should it be a new large central plant, distributed generation, district heating and cooling, or some other fuel, production, and distribution option? As new technologies evolve, how will these investment options be compared to existing technologies so that attractive transactions can be realized? A massive effort is underway in the U.S. to invest in renewable electric generation. I applaud that effort and have seen new solar technologies that create both electric and thermal energy, but building new generation and grids can mean higher costs to end-users unless there is an investment commitment to resource efficiency that drives infrastructure investment decisions.

14.3.2

Who Pays?

In the 30 years that I have been in the energy industry, I have attended untold numbers of conferences where the speakers will point out the opportunities for investments in energy efficiency that exist in the rooms where participants are sitting. After 30 years, the owners of these conference centers have not made efficiency investments. Why? Property owners (a.k.a consumers) who may have capital dollars available prefer to put their capital into the products or services that they are selling. If the facility already has lighting, air conditioning, heat, electric power, the owner may fuss over the monthly bills, but spending additional capital to replace equipment that works is too often not a priority. Even if they have the financial means most consumers have no interest in becoming their own energy supplier by producing energy on site. In order for infrastructure efficiency investments to occur, suppliers must be ready, willing, and able to partner with property owners to finance, build, operate, and maintain efficient infrastructure. Electric utilities and energy service companies have the knowledge, financial strength, and goal of being energy producers. Their interests are to invest in generation and distribution systems that meet the needs of the end-user. If the investor profits are based on gaining the more energy efficient and reliable energy output, then making sure that the end-user’s equipment is efficient and reliable is also essential. All levels of reliability and efficiency create the cost savings that will pay for debt and increase profits.

14.4

Real Time

The Encarta® World English Dictionary offers two definitions of real time – “(1) the actual time during which something happens and (2) the immediacy of data processing: the time in which a computer system processes and updates data as soon

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as it is received from some external source. The time available to receive the data, process it, and respond to the external process is dictated by time constraints imposed.” (Microsoft Corporation (Developed by Bloomsbury Publishing Plc) 2009). Tech Target’s Whatis.com web site offers a rich suite of technology glossaries. Tech Target’s Search CIO-Midmarket give this definition of real time: Real-time is an adjective pertaining to computers or processes that operate in real time. Real time describes a human rather than a machine sense of time (Tech Target: Search CIO-Midmarket 2007–2009). Tech Target’s Search Domino site defines real-time collaboration as “collaboration using the Internet and presence technology to communicate with co-workers as if they were in the same room, even if they are located on the other side of the world. Real-time collaboration involves several kinds of synchronous communication tools.” (Tech Target: Search Domino 1999–2009). In addition, Tech Target’s Search Unified Communications states, “A real-time application (RTA) is an application program that functions within a time frame that the user senses as immediate or current.” (Tech Target: Search Unified Communications 2008–2009). Real time as defined in this book encompasses these definitions. As the U.S. moves to accomplish real time capability to encapsulate the dynamics and complexity of its energy systems, actual time, internet data processing, collaboration, and response are essential. Where is the U.S. in accomplishing real time technology? One example is the ‘smart’ grid which will be discussed below.

14.5

Risk Management

Risk management is based on metrics – the ability to transform the metrics of energy infrastructure investments into reports that reflect and communicate the economics of the investment at any point in time over its life to all stakeholders who are charged to sustain and improve on the investment. What is happening in the U.S. to manage investment risks?

14.5.1

The ‘Smart’ Grid

Chapter 12 discussed the plans for electric utilities to invest in ‘smart’ distribution grids and communications infrastructures. Directed by the U.S. Department of Energy, electric grid stakeholders representing utilities, technology providers, researchers, policymakers, and consumers have worked together to define the functions of a ‘smart’ grid. A ‘smart’ grid is an exciting IT solution to optimize the operation of the entire energy system that was shown in Fig. 14.1 Energy system. According to the National Energy Technology Laboratory (NETL), “the performance features of a ‘smart’ grid include:

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Self-healing from power disturbance events Enabling active participation by consumers in demand response Operating resiliently against physical and cyber attack Providing power quality for twenty-first century needs Accommodating all generation and storage options Enabling new products, services, and markets Optimizing assets and operating efficiently” (U.S. Department of Energy: Office of Electricity Delivery and Energy Reliability n.d.)

The ‘smart’ grid initiative is an important energy policy commitment. Professionals and consumers will have the ability to see electric energy consumption and loads real time. Consumers can make electric energy use decisions based on real time price signals and reduce demand during peak times when costs increase. Electricity dispatchers can not only interface all generation options that are available on the grid but also may work with customers to reduce their loads and offer better rates. Investment in the ‘smart’ grid also expands the U.S. electric grid to be able to reach the electric generation from wind, solar, geothermal, and other renewable fuels that are being developed in the central part of the U.S. where the current electric grid is limited. Renewable energy electric generation will allow the U.S. to retire old coal-fired generation. While the ‘smart’ grid information technology approach focuses on optimizing the operation of electric energy production, distribution, and end-use, it needs to be expanded to include evaluation and risk management of energy systems infrastructure investments not just electricity operations. Understanding and maximizing the most efficient and cost effective investments in new energy supply systems also require a ‘smart’ infrastructure investment approach that includes thermal energy.

14.5.2

Alternative Energy Investments

Recently, I heard Bjorn Lomborg who wrote a book called The Skeptical Environmentalist, raise a concern that investments in electricity generation from renewable fuels should be cost effective. Lomborg’s view is to put more money into research to develop renewable generation technologies that are cheaper. While I agree that more research dollars should be spent on improving the costcompetitiveness of renewable resources, investments in electricity and thermal energy infrastructure are happening now. Investment incentives to build the ‘smart’ grid and renewable energy electric generation are already in the billions of dollars and will stimulate immediate investments. The U.S. and the world cannot wait to evaluate the value of alternative energy infrastructure investments, nor can it wait to track, manage, and report these investments to manage investment risks and reduce the total cost impact on the consumer. Blind investments in electric energy generation and expanded electric grids are likely to result in cost increases to customers and do not address the investments needed in energy systems upgrades in heating, cooling, and water on the customer’s

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side of the meter. Infrastructure investment focused solely on new investment in U.S. electric generation and distribution does not capture the tremendous efficiency, financing opportunity, energy and capital cost savings, increases in productivity and jobs, and reductions in environmental emissions that are inherent in combined heat and power investments.

14.6

Recommendations for a New Energy Information Age

Energy information technology surely must include software transparency, interoperability, and oversight. The investment equation must compare fuels, technologies, and other life cycle costs relative to business investment goals of financial returns, efficiency, and environmental health. Seven important factors are discussed below that are essential to energy infrastructure investment.

14.6.1

Adopt a Standard Tool

The most important goal for the U.S. is to adopt a standard, web-based energy infrastructure investment decision-making and risk management tool. This tool will become a communication medium for all stakeholders to evaluate and compare energy infrastructure investment options and to manage investment risks. As new, cleaner, cheaper technologies are developed, the information tools will be in place to readily assess adoption of these new technologies and provide for decision-making for the location and timing of implementation. Overarching investment architecture and standards are needed to first model existing fuel, electric, heat, and cooling production and distribution as well as end-use systems based on current business situations and goals. Second, the opportunity value of alternative investment fuels, technologies, and implementation strategies can then be evaluated as an integrated system and compared to the baseline or current business situation. OA and Opassess help to demonstrate the data and reports underpinning energy infrastructure investment decisions and associated equipment operating strategies. A commitment to evaluation standards, a uniform language, and software tools to compare, measure, and report the financial benefits of energy infrastructure investment is essential to making the right investment decisions in a timely and costeffective manner. OA and Opassess are not the only tools available. Just a survey of U.S. energy service companies like Lockheed Martin, Johnson Controls, and Suez prove that numerous proprietary software tools have been developed. Without compromising company intellectual property, these companies can benefit from working together to adopt a common web-based, investment tool that can be used almost immediately. The development time spent to collect the baseline information for energy service companies and equipment suppliers to make proposals to consumers and to close

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transactions is very time consuming. Because each company uses its own software tool, consumers have no way to determine if they are comparing proposals based on the same baseline or that the proposals include all the assumptions that will impact costs. Because of the complexity associated with energy infrastructure investment, consumers often are not willing to take risks to make investments or partner with energy service companies. A common tool reduces the timeline to close and implement investments and greatly enhances confidence and trust for suppliers and customers to work together.

14.6.2

Focus on the Full Business Solution

Business goals, status, and strategies drive investment solutions and are reflected in financial statements. The purpose of having energy infrastructure reported in a life cycle pro forma allows for isolated data that exists among different systems and functions to be communicated, integrated, measured, and reported in a standard business format. The development of OA and Opassess were founded on a standard independent power production methodology and enhanced energy engineering, performance-based investment, project financing, tax advantages, and other industry business goals. Multiple business goals like efficiency, off-balance sheet financing, reduction in carbon emissions can become mixed with lowest cost financing, levelizing energy budgets, upgrading aged, unreliable equipment, risk transfer, and other goals. The combination of goals drives the technology, implementation, ownership, and financing solutions – thus the need for a pro forma planning and risk management approach.

14.6.3

Support Stakeholder Communication

Perhaps more fundamentally pervasive is the need to create the right IT architecture to support energy investment and management that can be accessed by all stakeholders. Each stakeholder needs to see the integration and interrelationships of separate business functions, systems, facilities, and other data reflected in business pro formas. The easiest way to express what this looks like is shown in Fig. 14.2. Energy systems data, functions, and communications shown below. First, automated baseline data collection and integration into a tool like Opassess must be accomplished. Standard baseline date, shown in the baseline box, is inputted. Then, each stakeholder employed in the development and implementation of the energy infrastructure business plan, as well as service providers, should be able to acquire the data needed to perform each function and communicate the impact through the pro forma and other reports. Different users can then apply their expertise in as many ways as might be needed both now and in the future to communicate and make decisions.

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O&M

Engineering

Budget

Opassess Baseline Procurement

Policy Makers

Opassess Investment Strategy

Regulators

Fuel Suppliers

Finance

Business goals - Growth & cost escalation Budgets -Tax metrics Energy consumption & load - Cost metrics Equipment design O&M data & costs

Energy Service Co

Construction

CEO & BOT

Investors

Fig. 14.2 Energy business strategy – data, functions, and communication

Add all the many energy producers and consumers that are part of an energy supply system, include all the service providers and investors, and on and on – and the ability to integrate and share data becomes more and more complex and impossible if the business situation reflected in a pro forma is not available. This IT solution empowers stakeholders to document performance and not be lost in a world of data that may or may not be collected or useful. All of these stakeholders need to be able to access information related to their special functions and be able to communicate and cooperate in the integrated investment solution over the life of the equipment. Without this capability, individuals can and will make decisions that negatively impact the cost/benefit of the investment. For example, procurement specialists in charge of fuel supply contracts can impact equipment operators who must choose the best equipment operating practices to contain operating costs. How to design the energy industry IT solution is critical to achieving the successful implementation of energy systems efficiency.

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The Department of Defense consulted utilities, technology providers, researchers, policymakers, and consumers to advance the ‘smart’ grid. The disciplines involved in making and sustaining each energy infrastructure investment not only include the stakeholders listed above but should also include equipment manufacturers, fuel suppliers, contractors, financiers, engineers, equipment operators, procurement specialists, maintenance personnel, and many, many other stakeholders.

14.6.4

Reinforce Adoption

In the early 1980s when Dade County’s Office of Computer Services helped the Energy Office automate accounting and verification of its 2,500 electricity accounts, all the electricity bills which met the verification standards set up by the Energy Office were automatically sent to the County’s financial accounting system which created the checks to pay the utility. Upon launching the implementation of the new software system, the staff person in the County’s Finance Office still wanted to work with paper bills. I approached the Finance Director to explain that his staff person was negating the efficiency that was achieved from the software. The question that had to be raised to move forward was, “Are we in the information age or are we not?” The new software was adopted and greatly reduced the man-hours normally required to do the work manually. In addition, the software provided a centralized database where the electricity billing data detail enormously helped the Energy Office to analyze rates, evaluate efficiency investments, provide evidence in legislative and regulatory hearings, conduct engineering analysis, and a myriad of other functions. A major message needs to be considered. The message is the importance of leadership not just from policymakers but from all business and institutional leaders regardless of title. To achieve energy efficiency, these leaders need to commit to bringing their energy infrastructure into the energy information age and direct and empower their staffs to use information technology and the internet to work together and improve their performance. In turn, leadership comes back from staff that has information, direction, and the tools and knowledge to enrich the enterprise.

14.6.5

Automate Consumer Data and Translation

In the summer of 2008, I met with Kevin Maxson, the new energy manager of Veterans Administration’s hospitals and clinics in the Northwest and Pacific U.S. Maxson’s assignment is to meet a Presidential Directive to reduce his facilities’ energy use by 3% per year through 2015. In order to demonstrate compliance, each hospital and clinic’s energy use must be detailed starting from the base year of 2007. In addition to documenting energy savings, Maxson needs to evaluate hospital growth and select and measure energy investment options, costs, and savings as well

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as integrate other factors that might affect the facilities’ energy savings. Maxson is also directed to achieve a goal to obtain 10% of his energy from renewable fuels. Maxson was seeking to evaluate the use of Opassess as a software tool to help accomplish his goals. The work that Maxson and his staff would require to manually track energy use information for all facilities would be extremely time consuming and not easily available. Automating the collection of real time, baseline data into an accessible database positions the VA and its service providers to be able to use real time data to do rate analysis, chart operating costs and loads, conduct engineering analysis and design, analyze impacts of changes on financial and budget situations, evaluate investment options – a whole collection of important functions, including the measurement of energy savings. Timely data is important, but the requirements vary. Business goals may only change yearly, but cost escalation for electric, heat, and cooling energy use and equipment operation can change minute by minute. Most of the data is being tracked within the VA organization but is not easily accessible because it is maintained in separate locations by separate functional groups. The standards for data quality may also vary. These issues are hardly unique to the VA; collection and updates of data is a common problem throughout the public and private sector. Opassess is, by its very nature, a data-intensive tool that depends upon information found throughout the organization. At the meeting with Kevin, we talked about the considerable need to employ information technology to be able to achieve resource efficiency and solve the problems associated with managing the risks of energy infrastructure investments. The VA not only needed to install IT technology that would automate collection of energy and equipment operating metrics, but it was very important that Maxson have the knowledge to select an appropriate IT architectural solution to the systems integration problem at the Veterans Administration. The IT solution would affect the VA’s ability to accomplish its energy efficiency goals.

14.6.6

Promote Inter-Operable Energy Software Tools

The U.S. Department of Energy Office of Energy Efficiency and Renewable Energy, Buildings Technologies Program offers an excellent library of free software tools. Their website states, “This directory provides information on 344 building software tools for evaluating energy efficiency, renewable energy, and sustainability in buildings. The energy tools listed in this directory include databases, spreadsheets, component and systems analyses, and whole-building energy performance simulation programs. A short description is provided for each tool along with other information including expertise required, users, audience, input, output, computer platforms, programming language, strengths, weaknesses, technical contact, and availability.” (U.S. Department of Energy: Energy Efficiency and Renewable Energy n.d.) The Building Software Tools Directory offers subject headings that include: whole building analysis, codes and standards, materials/components/equipment/systems,

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and other applications. Each of the subject areas are broken down into subheadings. Just codes and materials have forty software applications available. A host of energy enterprise software applications are available from private sector businesses which not only provide the software but support services and training. The VA work begins with data gathering focusing on the baseline data needed to complete the first two steps of the OA. As the VA staff learns what data is needed and where it can be found among its hospitals and clinics, it needs to find a solution to automating timely data retrieval. Remember the experience with the Navy in San Diego. They found that the payback on investing in proper metering and measurement hardware and software was 2 years. The data-gathering and data retrieval solution should be done together. Recall the testimony of the National Association of Energy Service Companies in Chapter 10 under the heading Data Collection – A Policy Priority. NAESCO reported to the federal government that the need for data collection is essential to accomplish energy program success and should be a policy priority. Maxson and hundreds of thousands of other energy managers need help to complete baseline data collection and monitor ongoing energy consumptions patterns. Just as the public is projected to pay an average of $320 million per year through 2030 to research and deploy electrical systems ‘smart’ grid, the baseline data needed by consumers stands with their hands in empty pockets. The ‘smart’ grid is very important, but the need to help consumers collect their baseline metrics that the OA methodology outlined in Chapter 5 is more eminent and immediate. Energy infrastructure investments are being made today. Metrics, communication, risk management are problems of today.

14.6.7

Institute Energy Unit Costs Reports

The VA has a plethora of energy software tools from which to select. The question that they should be asking is which ones should they adopt? Selection criteria should be defined based on numerous standards. The VA will have some measurement infrastructure already installed which must be inventoried and a plan developed to invest in technology that will integrate communication. Then the process of data collection must be accomplished. Any number of tools and service providers are available. However, as the VA chooses to proceed, they should seek to obtain the hardware and software that will report the energy unit costs for their electric, heat, and cooling systems and the combined unit cost for all systems at any time of day. Unit costs for each commodity consist of capital, operation and maintenance, fuels, and pollution expenses. Remember the OA reports presented in Chapters 6 and 7. Integrated energy efficiency and the ability to finance infrastructure investment comes from gaining the lowest unit energy cost at any time of day to serve the needs of the end-user.

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The combination of capital, fuel, operation, and maintenance investment solutions that the VA will eventually select to gain efficiency and renewable fuels will result in helping the VA finance and pay for the investments. Integrated efficiency will reduce combined energy consumption and demand thus impacting the sizing and amount of equipment, maintenance, and other expenses. Further, integrated investment will reduce the cost and risks of financing, procurement, and construction. The energy enterprise solution must provide the information, communication, measurement, and reporting capability to manage the asset over time.

14.7

A Student Energy Core

In the Fall of 2007, I talked with Bruce Bremer, Manager of Facility Engineering, for Toyota, North America. After showing Bremer, OA and Opassess, he recognized the value of the methodology and the software tool and asked to discuss it with his facility managers. Unfortunately, the response from facility managers was that the effort required converting existing data technologies that the managers were using would be very time consuming. I assumed that this translated into costly as well. At this time, the Presidential campaigns were at full force. It occurred to me that Barack Obama’s ideas to encourage more educational emphasis on math and science and helping students to pay for higher education through volunteer service might be the solution to the huge problems of energy baseline data gathering. U.S. educators report a need to promote science and math learning. Universities have the experts to train students to conduct the massive energy data collection and entry. Applied science is often the better way to learn and to contribute to society. Why not expand the Industrial Assessment Centers (IACs) where students from 26 universities provided energy and waste assessments to small- and medium-sized manufacturers into a Student Energy Core? Certainly, the energy data technology experts already exist to select data standards for developing and integrating consumer business situations with energy data repositories for all electricity, heat and cooling commodities. University professors and professionals from the Association of Energy Engineers and other associations can train students to gather and populate each consumer’s data repository of business, energy and equipment information and to sustain an on-going, active data base from which energy efficiency can be benchmarked, updated real time, and reported. Couple this effort with setting up a revolving investment fund to pay for the energy data systems hardware and software and interface with the experts to design the energy information systems for consumers. Savings from energy budgets that result from improved operation, maintenance, and energy usage will pay for the energy information systems and revolve back into the fund to provide investment capital for other consumers. Certainly, if the ‘smart’ grid is worth $320 million per year for the next twenty plus years, capitalizing baseline data and infrastructure

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investment and asset management information and communication technology is equal in value and will provide a more immediate return on investment. It is exciting to gain an educational opportunity that improves student motivation to learn math, science, IT, and finance disciplines needed to create energy information systems. Also, the application of these disciplines to real situations can greatly improve real learning and improve technology research and development. Field work will test our technology and investment solutions and our educational requirements. Flexibility and cooperation are essential, but if Bremer and Maxson could get help to make the commitment to energy and resource efficiency, especially free help, they have the ability to move forward and achieve their business goals. The step forward will not be simple and it will need to be staged. University research facilities, textbooks, and professional papers already exist that detail the processes of business planning, energy management, financial structuring, and other disciplines. They need to be put together to offer the tools and educated workforce needed to implement energy infrastructure investment. Stanford and many other universities have already committed to cross-discipline education and recognize its rewards. Energy engineering firms have Gantt1 charts for project planning and scheduling. The process of energy information technology development has been known for many years with many companies providing these services. Perhaps another player in the move for information technology that empowers consumers to realize energy efficiency and investment risk management is the Department of Defense Advanced Research Projects Agency (DARPA), which funds researchers in industry, universities, government laboratories, and elsewhere to conduct high-risk, high-reward research and development projects that will benefits U.S. national security. Certainly the economic, energy, and environmental security of the United States merits support form DARPA.

14.8

The Larger Energy System

Figure 14.3 – The larger energy system – is a picture of how ‘smart’ infrastructure investment and grid technologies can be integrated with the VA Opassess or business pro forma. Think of the VA Opassess as one part of a much larger body. We could return to the analogy of the human body. The VA Opassess is a cell with a universe of other Opassess cells belonging to other energy consumers. Each entity producing and consuming energy for electricity, heat, cooling, and other secondary energy commodities is another cell. Each cell has its own Opassess, which can be linked and dispatch to achieve the most effective, efficient, and valuable

1 A Gantt chart is a type of bar chart that illustrates a project schedule. Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project. Terminal elements and summary elements comprise the work breakdown structure of the project.

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Central Electric Plant #1 Opassess

Central Electric Plant #2 Opassess

Consumer Producer Opassess

Customer Opassess

Wind Farm Opassess

Solar Array Opassess

Ocean Opassess

Fig. 14.3 The larger energy system

investment and use of each cell as it relates to the larger body. With this approach the complete interconnection of cells and functions is possible. Risks or poor health in one or more cells can be diagnosed and isolated to sustain the health of the larger system.

14.9

Summary

At one time, like Thomas Friedman, I thought that the energy investment world needed to have a standardized communication tool or “flattener,” like Microsoft Windows. I have struggled with what to do with the OA methodology and Excel spreadsheets initially used to demonstrate the huge investment potential of energy efficiency. I intuitively knew that the investment process needed to be web based, be able to integrate and communicate all functions real time, and have many other capabilities. While I sought a standard tool, I did not want the standard tool to be subject to the proprietary problems associated with Windows. I want to promote competition and a diversity of solutions that are open, interoperable, and extensible – to be effective instruments of rapid change.

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I leave the ultimate IT solutions to the professionals but insist that whatever evolves, the software development goals must be to achieve all the goals upon which this book is founded. The investment goal is to compare the full financial impacts of alternative fuel and technology infrastructure investment solutions for producing electricity, heat, and cooling sized to meet efficient demand. The opportunity investment in any fuel and technology solution that provides energy and reliability should be decided based on a consideration of all costs. Reaching the goals of energy efficiency, lower costs and emissions is too complex to be done in the dark using mountains of paper. Yet that is how the U.S. struggles to sustain its closed, out-of-date, inefficient energy supply systems. State-of-the-art information technology and standards are essential. Integrating the metrics and assumptions essential to evaluating and sustaining efficiency related to all energy fuel, production, transportation, and end-use infrastructure options requires a synergy only offered electronically. Complex technologies and transactions to engineer, procure, construct, finance, own, operate, maintain, and manage the dispatch of energy infrastructure is equally dependant on the best information technology available. Without information and communication, businesses and consumers cannot know the value of efficient energy infrastructure investments and cannot move forward to take advantage of the resource opportunities that exist. Beyond the complexities of traditional technologies and ways of doing business are ways to optimize systems’ design and evaluate changes using standard energy supply investment methodologies and existing information technology. A framework of business standards, information management, and open, interoperable software tools can lead to incorporation of best practices and a highly charged infrastructure investment climate. The financial returns can be substantial with very low risk. The U.S. will meet its needs to have reliable, affordable, less polluting energy and promote secure investments, employment and business strength, and a clean environment.

Chapter 15

A Framework for Working Together

Abstract Again, the barriers to acceptance of energy efficiency as a part of US energy supply policies are outlined and a solution offered that provides a framework for collaboration among competitive forces. The Electric Power Research Institute and the Electricity Innovation Institute Distributed Energy Resources Public/Private Partnership study findings are shown to describe the barriers to partnerships, finding ways for all parties to benefit, and the need for a framework to work together. Other policies such as creating a market value of carbon emissions and other pollution costs to include in investment life cycle costing and adoption of Casten’s Fossil Fuel Efficiency Standard are recommended. Goals are presented upon which to achieve a framework to facilitate competition, foster growth, and tap the power of free enterprise to deliver the most effective application of today’s solutions and to support development of the solutions of tomorrow. Achievements are listed that can be accomplished by committing efficiency and openness. Finally, an Energy Efficiency Corps is recommended to train students to conduct the massive energy data collection and entry that is needed. U.S. educators are encouraged to use application education to learn the math and sciences needed to conduct field work – a way to learn and contribute to society. The author points out the importance of having the Department of Defense Advanced Research Projects Agency involved to support research and development projects which insure our economic, energy, and environmental security. The author asks all leaders to change our culture of building inefficient energy supply systems and promoting monopoly control and commit to competitive metrics that support investment and operation of efficient infrastructure using information technology tools and standards dedicated to a new energy information age. Keywords Application education • Barriers to partnerships • Energy data collection and entry • Energy Efficiency Corps • Framework for collaboration • Market value of emissions • Research and development projects • Security

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Realization of energy and resource efficiency, reliability, security, flexibility, power quality, and emissions reductions in the U.S. and elsewhere means investing in and integrating energy production as a combination of distributed generation, central plants, and efficiency. Achievement requires that the U.S. move from a twentieth century monopoly culture where utilities electrified the country to an open market, resource efficient culture where utility and energy supply companies and customers work together to accomplish a win, win business result for all entities. U.S. economic stimulus is now focused on converting the U.S. energy system to renewable energy which includes not only trillions of dollars to promote investments in generating electricity and heat from renewable energy, but wrapped around this stimulus are also trillions of dollars to improve end-use efficiency and expand and digitalize a new ‘smart’ grid. While there is huge public support for these initiatives and tremendous activity to take advantage of the stimulus, regulated electric utilities are fearful of losing revenue needed to cover their fixed costs and shareholder returns. The U.S. is struggling with how to transform itself from the entrenched cultural and regulatory framework that electrified America to a new era based on renewable fuels, infrastructure efficiency, and a clean environment. But, how do we know that all this money will be spent wisely? How the U.S. electric and heat energy supply systems will be transformed is still unresolved. I have asked investment leaders and decision-makers, like Dan Reicher, Director of Climate Change and Energy Initiatives at Google, Inc., John Bohn, Commissioner, California Public Utilities Commission, William Massey, former FERC Commissioner, and Daniel Kammen, Founding Director, Renewable and Appropriate Energy Laboratory, University of California, “What standard investment decisionmaking and risk management tool is being used to evaluate alternative energy fuels, generation and grid, and efficiency investments so that we don’t increase costs unnecessarily to consumers?” The question was not answered, but needs to be. Our economy and environment are at risk. A further comment by Bohn indicated that he was unclear what the ‘smart’ grid is. The U.S. has committed to trillions of dollars of investment in a ‘smart’ grid which is an integral part of reaching our energy goals. Definition of the deliverables to this investment initiative must be clear to support and sustain all the best investments and practices at the least cost. The money is being spent. It is time to be very clear about what the ‘smart’ grid is and how it will be integrated with the entire energy systems transformation.

15.1

Utility Incentives

In order to incent electric utilities to invest in energy efficiency, it is essential to turn around the regulatory disincentives that utilities face in reduced earnings due to implementation of energy efficiency investments. Numerous state programs have been implemented and are still being evaluated by the American Council on

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Energy Efficiency Economy (ACEEE) (Kushler et al. 2006). For example, the federal government is linking receipt of billions of dollars of stimulus money for states to fund energy efficiency projects to a move to “decouple” electric utilities’ revenues and profits from the amount of energy that they sell. Instead of utilities earning money from selling the most power they can at the highest price allowed and customers making decisions on how much they use based on price signals, utilities would charge customers a fixed rate regardless of use. A period true-up of actual to projected sales would occur. I am uncertain how a fixed rate regardless of how much the customer consumes would encourage energy efficiency. Certainly, it would seem to bail out past, inefficient electric utility investments. Another regulatory approach is to provide utility shareholder performance incentives for achieving energy efficiency objectives. Through my experience with investment returns from integrated energy systems investments that are financed from energy efficiency, utilities are already incented to invest in energy efficiency. Profits from value-added energy infrastructure investments have been shown to be better than utilities’ current rates of return. Electric utilities can take advantage of federal tax credits applied to investment in renewable energy electric generation. Carbon emissions costs are looming. The majority of the U.S. electric generation is from coal-fired plants that are old, inefficient, and could be retired. A fair transition to a new energy era is important for both the pioneers of electrifying American in the last century and the consumers and investors of the new century.

15.2

A Framework

In 2004, the Electric Power Research Institute (EPRI) and the Electricity Innovation Institute (E2I) Distributed Energy Resources Public/Private Partnership studied ways to break down barriers to distributed generation (DG) development. The study found that the largest barrier was the adversarial positions between electric utilities and promoters of DG. The result of the study was to promote partnerships and find ways to have both parties benefit. EPRI and E2I called for creation of a framework around which all stakeholders could work together to define and quantify DG business investment relationships and to build a way to fairly measure and report the market integration of DG. EPRI’s vision is to create collaborative partnerships and to use the best resources, knowledge, and skills of each stakeholder. (EPRI Electric Power Research Institute 2001–2008). A framework is exactly the right solution. OA and Opassess offer a framework to build energy efficiency into energy supply systems. Commitment to energy and resource efficiency are good business with profit opportunities for all stakeholders. The market movement toward efficiency is increasing. We know how to be efficient. Information technology is available to empower stakeholders to carry efficiency forward.

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There are many other details that will need to be worked out over the years. The market value of carbon emissions is evolving world-wide. Public policies that limit CO 2, sulfur, and other pollutants through taxes or cap and trade result in assigning financial values from which to compare investment in generating electric, heat, and cooling. Pollution costs related to nuclear waste, power plant decommissioning costs, and other public costs related to energy generation must be defined and factored into energy infrastructure investment decisions. I highly support adoption of a Fossil Fuel Efficiency Standard as recommended by Thomas Casten to increase resource efficiency and lessen the impact of carbon and other air emissions caused by burning fossil fuels. I also support policies that would address nuclear waste disposal environmental impacts and include these costs into the equation for assessing production of electricity from nuclear fuel. Energy supply environmental costs need to be incorporated into each project investment and operating consideration. Energy infrastructure location costs need to be considered. Central plants compared to local generation need to include the costs of building and maintaining distribution equipment as well as energy losses, land requirements, and environmental impacts. Related distribution energy losses should be factored into the total costs of each energy infrastructure investment alternative. Many of the details that have yet to be worked out are indeed complicated. If scientists can map DNA, surely, they can map our man-made energy infrastructure and fit into that infrastructure the best primary fuels and technologies that meet the goals of energy and resource efficiency, a clean environment, reliability, security, flexibility, a strong economy, and cooperation. The framework taps the power of free enterprise to deliver the most effective application of today’s solutions and to support development of the solutions of tomorrow. An energy information age committed to efficiency and openness can: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Double the energy output from every unit of energy consumed Level the electrical loads of consumers Increase the use and efficiency of electric central plants Reduce the need for electric transmission systems Vastly reduce the consumption of fuels for heat energy Lower electricity consumption Improve the environment Fund utility infrastructure upgrades and expansion Give investors the ability to evaluate and compare the life cycle value of alternative energy fuels and technologies Integrate the dispatch, efficiency and value of all power and heat generation facilities, equipment, and fuels Secure investment risk, energy reliability, and exposure to supply interruptions Improve business productivity Provide local jobs and industrial production Empower people to work together to create a better energy future

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I ask all leaders to change our culture of building inefficient energy supply systems and promoting monopoly control and commit to competitive metrics that support investment and operation of efficient infrastructure using information technology tools and standards dedicated to a new energy information age. The stimulus will come from working together to invest in efficiency and creating the framework of information technology and capital funds to support energy infrastructure investments, not new appropriations.

Chapter 16

Plan of Work: The American Recovery and Reinvestment Act of 2009

Abstract Passage of The American Recovery and Reinvestment Act 2009 offers an opportunity to demonstrate a plan of work on how to apply a Manhattan project initiative to not only successfully implement the billions of dollars of seed capital that the Act allocates to energy infrastructure investment, but to accomplish the information technology and data gathering laid out in Energy Efficiency and return the seed capital provided in the Act to the Federal coffers. The author outlines the bill provisions under six headings, interprets the goals related to investments in energy production, grid, and end-use infrastructure, and offers ground rules for accomplishing the investments. In addition, she outlines a plan of work containing twenty tasks and a schedule that corresponds with the Act’s time frames. By following the work plan, projects can not only be implemented but the Federal seed money can be part of project financing and repayment – thus reducing the burden on the Federal budget. Keywords The American Recovery and Reinvestment Act 2009 • Manhattan project initiative • Bill provisions • Ground rules • Plan of work • Repayment Although Chapters 14 and 15 refer to the American Recovery and Reinvestment Act of 2009 (Wikipedia: American Recovery and Reinvestment Act of 2009), the huge amount of money provided for in the Act that is dedicated to energy investment tax credits, rebates, investments in government buildings, loan guarantees, clean-up of hazardous waste, electric grid modernization and expansion, and related energy infrastructure research, administrative, and investment costs, demands direction. Provided below is a plan of work presented in the form of a schedule and task outline to help guide productive use of the funding, insure the multiplier effect that energy efficiency investments offer to pay for substantially more investment than those envisioned in the Act, and implement on time and budget. In addition, implementation of the plan of work secures the most cost effective investment decisions, secures risks, tracks results, and allows continued ability to evaluate and adopt new technologies.

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A selected summary of the Act’s provisions related to energy infrastructure are listed below. Due to the crossover of energy efficiency investments in different parts of the final bill, I apologize in advance for any omissions or duplications. Since some provisions, like $2 billion for the Department of Energy, do not specify the use of the money, they are included but may not directly relate to infrastructure investments. In an effort to attempt to define the goals of the stimulus plan, to focus the plan of work in the areas that have the greatest funding commitment, and to schedule the sequence of tasks, the bill provisions are listed under six headings: Households ($9.85 billion) · $4.3 billion: Home energy credit to provide an expanded credit to homeowners who make their homes more energy-efficient in 2009 and 2010. Homeowners could recoup 30% of the cost up to $1,500 of numerous projects, such as installing energy-efficient windows, doors, furnaces and air conditioners. · $5 billion for weatherizing modest-income homes. · $300 million to buy energy efficient appliances. · $250 million to increase energy efficiency in low-income housing. Government Facilities ($26.5 billion) · $4.5 billion to the U.S. General Services Administration (GSA) for energy efficiency and renewable energy · 4 billion toward the establishment of an Office of Federal High-Performance Green Buildings within the GSA · $4 billion for public housing improvements and energy efficiency (Department of Housing and Urban Development (HUD) · $6.3 billion for state and local governments to make investments in energy efficiency. · $4.5 billion for state and local governments to increase energy efficiency in federal buildings · $3.2 billion toward Energy Efficiency and Conservation Block Grants Electricity Generation from Renewable Energy ($13.4 billion) · $13 billion: to extend tax credits for renewable energy production (until 2014) · $400 million for the Geothermal Technologies Program Electric Grid ($21.825 billion) · $11 billion funding for an electric ‘smart’ grid · $4.5 billion for the Office of Electricity and Energy Reliability to modernize the nation’s electrical grid and ‘smart’ grid · $6 billion for renewable energy and electric transmission technologies loan guarantees · $3.25 billion for the Western Area Power Administration for power transmission system upgrades

16.2 Some Ground Rules

195

Research, Training, and Administrative ($5 billion) · $2.5 billion for energy efficiency research · $500 million for training of green-collar workers (by the Department of Labor) · $2 billion to the United States Department of Energy Clean-up ($9.4 billion) · $6 billion for the cleanup of radioactive waste (mostly nuclear power plant sites) · $3.4 billion for carbon capture experiments (Wikipedia: American Recovery and Reinvestment Act of 2009)

16.1

Interpretation of Goals

The energy goals related to investment in energy production, grid, and end-use infrastructure are interpreted as follows: 1. To invest in energy efficiency in government facilities and residences 2. To reduce the need to build more power plants by using information technology to integrate distributed and central station generation options with end-use equipment operation on a time of use basis 3. To upgrade and modernize the grid, especially to be able to transmit power from solar and wind generation facilities 4. To promote energy generation from renewable fuels 5. To clean-up environmental emissions 6. To focus in energy efficiency and green energy as the preferred energy generation of the future 7. To use the stimulus funds to jump start investments in efficiency and renewable energy within 2–5 years.

16.2

Some Ground Rules

Energy demand and supply investment decisions and risks are directly related. The fundamental driver of how much electricity generation and transmission that is needed to reliably serve consumers is the amount of electricity consumption and load demand at any time of day. Electric supply companies should focus on using the stimulus package to make government facilities efficient so that they can accurately evaluate, select, and operate electricity production and grid investments. Energy efficiency requires integrated electric, heat, and chilled water systems planning and implementation. All electric production and grid investment options need to be compared to viable distributed generation investments located on or near customer electric, heat and cooling loads.

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Measurement and communication of energy and equipment performance metrics, unit costs, and growth factors are essential to investment decision-making, operational dispatching, and risk management. The first step in energy efficiency investment is investing in the measurement collection and software programs to baseline, calculate, report, and update all energy production and consumption use, load, and maintenance in order to identify time of day capacity requirements and unit costs for electric, heat, and cooling energy. In order to compare electric production and grid investment decisions all costs should be included in the calculation. The combined positive and negative costs of investing in electric plants, grid additions, waste disposal, decommissioning, and other life cycle costs related to energy infrastructure investments must be considered in selecting and operating new plant additions. Standardizing and automating the process, baseline data, and proposal submittal and evaluation format will improve the quality of information, provide for fair comparisons of alternatives, and reduce the time, expense, and complexity for implementing investments. Working with uniform and updated data among all stakeholders will help to quickly close deals, reduce the cost of investment planning and procurement, and accurately report results.

16.3

The Plan of Work

Given the time frame of 2 years to stimulate investments in government buildings and residences and 5 years to bring generation with renewable fuels on line, I recommend that the seed capital be used to accomplish the following schedule and tasks: One–six months 1. Commit to develop a web-based standard energy investment business planning and asset management software application – Program and complete testing and training especially using facility managers and university energy teams found in the Association of Energy Engineers, Building Operators and Managers Association, and university Industrial Assessment Centers. 2. Train and launch baseline data gathering using OA and Opassess to create the baseline data and data entry listed in steps one and two of the OA and detailed in Opassess data entry for each government facility (includes housing) (Opassess freeware data will ultimately be transferred to the investment standard application.). 3. Identify the performance requirements and estimated budgets needed to automate energy use, load, and unit cost data gathering and rate analysis for electricity, heat, and cooling energy on a time of use basis and use stimulus money to begin procurement and installation of metering/measurement hardware and software needed at each government facility – include the costs for staff maintenance/ management/reporting, assign and train staff – begin. 4. Provide a data software plan to automate transfer of facility size and use data and energy production and distribution operations, maintenance, cost, and budget data obtained from equipment management systems, CADD, work order

16.3 The Plan of Work

5.

6.

7.

8.

9.

10.

11.

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management systems, and financial management systems software into the investment plan application. Develop a regional scope of work, requirements, and budget plan for implementing a ‘smart’ grid and grid upgrades – start with regions that have major government facilities and large populations – Ensure that the ‘smart’ grid software will communicate with the energy investment standard application and production/ distribution equipment operating management and metering systems. Establish a revolving energy investment fund for each government facility – as metering and controls are implemented, the payback on investment is often less than 2 years – savings should revolve into the fund for future investment (i.e. preventive maintenance programs, low cost improvements – begin immediately). Contract with qualified engineers who know how to (a) conduct integrated energy efficiency analysis and design for proper equipment sizing and energy savings calculations, (b) complete the baseline for electric, heat, and cooling data (if needed), (c) develop the data software plan, and (d) begin the process of identifying the facility energy infrastructure investment solution information that includes primary fuels, production and distribution equipment for electricity, heat, and cooling plus grid additions, building additions and equipment, permitting, environmental, and other costs detailed in Steps 3 and 4 of OA and data entry in Opassess and expanded to include environmental cost impacts. Establish Financing Authorities for Resource Efficiency in each State and/or by federal department (i.e. DOD) to help finance pools of projects that can reduce costs, spread risks, attract investors, pool emissions credits, track and report investment results by linking to each project’s energy investment standard application with the larger pool investments (see FARECal and the National Rural Utilities Finance Corporation as examples). Establish an energy emissions clean-up task force and produce a scope of work to implement and determine the cost of cleaning up radioactive waste, carbon emissions, and other toxic by-products of energy production and distribution systems – The task force should also be charged to begin to identify the data requirements and algorithms to calculate clean-up costs for each toxic substance as a component of the energy investment application software. Conduct the research and be prepared to incorporate into the energy investment standard software the life cycle investment costs of building, operating, maintaining, and decommissioning electricity generation and associated transmission systems’ costs from nuclear and coal plants compared to solar, wind, ocean thermal, geothermal, and other central plants. Remove any barriers to electric utilities and energy service companies to partner with customers to invest and implement energy efficiency projects and earn returns on investment.

Seventh month 1. Launch the new energy investment standard software application and convert facility baseline data to the new software. 2. Launch ‘smart’ grid software applications.

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Seventh – Twelfth month 3. Complete preliminary assessments of all government facilities to identify their energy investment business plans – Plans include the fuel, equipment, O&M, waste disposal, decommissioning, financing, engineering, procurement, construction, ownership, and risk management plans – Integration with potential partners, financing alternatives, and other service providers will be required. 4. Compare efficiency investment preliminary assessments and capacity additions to existing and potential new electric generation and grid enhancement and connection costs. 5. Begin detailed engineering, implementation, and financial strategy. 6. Complete each facility’s energy investment plan providing for continued update, comparison, and reporting of the evolving investment plan into the software application. 7. Continue development of electricity production projects from renewable fuels to offset and/or replace existing coal plants and monitor grid addition costs. 8. Select the final facilities investment plans and establish the risk management strategies and costs for primary fuels, EPC, O&M, financing, and other risks. 9. Begin engineering, procurement, construction and construction financing and performance testing. As presented above, implementation of the energy efficiency investments in government facilities as well as continued grid development, electricity generation from renewable fuels, energy waste clean-up, training, research, financing, and risk management can be well advanced within 12 months. I have not assigned roles and deliverable dates, but the stakeholder roles will clearly be identified for DOE, EPA, local and state governments, energy industry professions, investors, insurance companies, and others. What is essential is that all capacity investments in efficiency, new power generation, grid enhancement, and waste disposal are based on real time, sustainable metrics to compare the life phases of investment, manage assets, and conduct all business investment functions to measure, communicate, and report results. The standard application approach is intended to build teamwork, promote decision-making, close deals, and deliver results to all stakeholders. The brief steps listed above are both complex and incomplete, but the timeframes are realistic with the strong financial stimulus provided under the Act. By the end of the second year, substantial construction should be underway. The larger investment plan of all Stimulus Act projects can demonstrate the returns on investment, capacity additions, and financial benefits from investing in energy information technology to achieve efficiency, a clean environment, and economic growth. The costs of the Stimulus Act can be financed as a part of each project and money returned to the federal government with the added benefits of job creation, increased productivity, and financial stability.

References

Anderson, R. R., & Sullivan, J. B. (1995, August). Manual on financing energy efficiency projects. World Energy Efficiency Association (WEEA). APPA (2008). http://www.appa.org. Bernstein, W. J. (2004). The birth of plenty: how the prosperity of the modern world was created. New York: McGraw-Hill. Casten, T. R. (1998). Turning off the heat: why America must double energy efficiency to save money and reduce global warming. New York: Prometheus Books. Covey, S. R. W. (1989). The seven habits of highly effective people. New York: Free Press. Deutsch, C. (2006, October 21). Sunny side up. New York Times. Electric Power Research Institute (EPRI) (2007). Power to reduce CO2 emissions – the full portfolio. http://www.epri.com. Electric Power Research Institute for the Board of Directors (2003). Electricity sector framework for the future, summary report. Palo Alto, CA: EPRI. Energy Information Administration (2007). 2007 Annual Energy Outlook (AEO 2007) Base Case. EPA (2008). Combined heat and power partnership. http://www.epa.gov/chp/. Financial Times (August 18, 2003). 1 & 3. Financing Authority for Resource Efficiency of California (“FARECal”). California municipal utilities association. http://www.cmua.org/farecal.htm. Friedman, T. (2005). The world is flat: a brief history of the twenty-first century. Farrar: Straus and Giroux. Hansen, S. J., & Weisman, J. C. (1998). Performance contracting: expanding horizons. Lilburn: The Fairmont Press. Harvey, F. (2008, June 19). Energy from industry could halve gas imports. The Financial Times. International District Energy Association (2007a). 2007 Energy Bill Signed into Law. IDEA. http://www.districtenergy.org International District Energy Association (2007b). News Release. International district energy association. http://www.districtenergy.org Johnson Controls (2008, March). New research reveals increased interest in energy efficiency, but limited action. www.johnsoncontrols.com Kushler, M., York, D., Witte, P. (2006). Aligning utility interests with energy efficiency objectives: A review of recent efforts at decoupling and performance initiatitves. American Council for an Energy-Efficient Economy. Laitner, J. A., & Ehrhardt-Martinez, K. (2008, February). Information and communication echnologies: the power of productivity. http://aceee.org/pubs/e081.htm: American Council for an Energy-Efficient Economy. Lovins, A., & Others (2002). Small is profitable – the hidden economic benefits of making electrical resources the right size. Rocky Mountain Institute.

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Microsoft Corporation (Developed by Bloomsbury Publishing Plc) (2009). Encarta world english dictionary [North American Edition]. http://uk.encarta.msn.com/dictionary_1861815156/ real_time.html NAESCO (2008). NAESCO’s Federal – 2nd Quarter 2008 Policy Priorities. http://www.naesco. org/policy/federa/2008–02.htm National Rural Utilities Cooperative Finance Corporation (2007). http://www.nrucfc.org NEP Initiative – Expert Report (2003/2004). National Energy Policy (NEP) initiative. http://www. nepinitiative.org/expertreport.html. Project Finance. Wikipedia (2008). http://en.wikipedia.org/wiki/Project_Finance. Roberts, D. (2007, August 12). Interview with Thomas Casten. Gristmill. http://gristmill.grist.org/ story/2007/8/12/105752/270 Singer, T. (2007). Comments of the NAESCO in Response to the DRAFT REQUEST FOR PROPOSALS (drfp) NUMBER DE-RP36-06GO96031 (Draft). www.naesco.org/policy/testimony/2007-0-26.htm Solmes, L. (2008). Integrated energy systems: reliability and lowest btu cost. In B. Capehart (Eds.), Encyclopedia of energy engineering and technology. Boca Raton: Taylor & Francis. Tech Target: Search CIO-Midmarket (2007–2009). Real Time. http://searchcio-midmarket.techtarget.com/sDefinition/0,,sid183_gci214344,00.html Tech Target: Search Domino (1999–2009). Real Time. http://searchdomino.techtarget.com/ sDefinition/0,,sid4_gci934876,00.html Tech Target: Search Unified Communications (2008–2009). Real time application. http://searchunifiedcommunications.techtarget.com/sDefinition/0,,sid186_gci1309755,00.html The World Bank – ESMAP Report (2006, May). Financing energy efficiency: lessons from recent experience with a focus on Brazil, China and India. New York. Trisko, E. M. (2006, January). America Needs New Power Plants! Trotti, J. (2008, May/June). Institutional thinking: back-to-back we face the past. Distributed Energy, 8. U.S. Department of Energy (1978, November). The national energy act. en.wikipedia.org/wiki/ National_Energy_Act U.S. Department of Energy (2007, June). The potential benefits of distributed generation and raterelated issues that may impeded its expansion. http://www.oe.energy.gov/epa_sec1817.htm U.S. Department of Energy: Energy Efficiency and Renewable Energy. Building technologies program: Building energy software tools directory. http://apps1.eere.energy.gov/buildings/ tools_directory. http://www.oe.energy.gov/epa_sec1817.htm U.S. Department of Energy: Office of Electricity Delivery and Energy Reliability. Smartgrid. www.oe/energy.gov/smartgrid.htm. University of New Mexico (1995). Capital Projects and Facilities Department USCHPA – United States Clean Heat & Power Association. (2007). http://www.uschpa.org/i4a/ pages/index.cfm?pageid = 1. Vaitheeswaran, V. V. (2003). Power to the people. New York: Farrar, Straus and Giroux. What Is the USCHPA? (2001). International district energy association. http://www.districtenergy.org.

List of Abbreviations

ACEEE AMI APPA BGA Btu CADD Cap Factor CFC CFC CHP CHPA CO2 COP CSU DG DOD DOE DOE2 ECM EIA EMS EPA EPC EPRI ESCo F FARECal FERC FPL FPSC GT HRSG HVAC

American Council for an Energy Efficient Economy Advanced meter infrastructure The Association of Higher Education Facilities Directors Bosek, Gibson, & Associates British thermal unit Computer-aided design Capacity factor Chlorofluorocarbon National Rural Utilities Cooperative Finance Corporation Combined heat and power Combined Heat and Power Association Carbon dioxide Coefficient of performance California State University Distributed generation Department of Defense Department of Energy Department of Energy freeware building energy analysis program Energy conservation measure Energy Information Administration Equipment management systems, also energy management systems Environmental Protection Agency Engineering, procurement, and construction The Electric Power Research Institute Energy Service Companies Fahrenheit Financing Authority for Resource Efficiency of California Federal Energy Regulatory Commission Florida Power & Light Company Florida Public Service Commission Gas turbine Heat recovery steam generator Heating, ventilation, and air conditioning 201

202

IAC IAQ ICT IDEA ISU Klbs kV kW kWh LAS Lbs/hr LHV LLC M MACRS MEDCO MFF MM MPSC M&V MW MSU NAESCO NEA NETL NOX NPC OA OEM O&M PNM Psig PUC PURPA PWC R&D RMI RPS SMSS TCS TES UCSB UI(UIowa) UMCP UNM

List of Abbreviations

Industrial Assessment Centers Indoor air quality Information and communication technologies International District Energy Association Illinois State University Thousand pounds kilovolt Kilowatt Kilowatt hours LAS & Associates Pounds per hour Low heating value Limited Liability Corporations 000 Modified Accelerated Cost Recovery System Maryland Economic Development Corporation Mission First Financial 000,000 Maryland Public Utilities Commission Measurement and verification Megawatt Michigan State University National Association of Energy Service Companies National Energy Act National Energy Technology Laboratory Nitrogen oxides Non-profit corporation Opportunity Assessment Office of Energy Management Operation and maintenance Public Service of New Mexico Pound force per square inch Public Utilities Commissions Public Utilities Regulatory Policy Act Public Works Center Research and development Rocky Mountain Institute Renewable Portfolio Standards Supplemental Maintenance & Standby Service Trigen-Cinergy Solutions Thermal energy storage University of California, Santa Barbara University of Iowa University of Maryland, College Park University of New Mexico

List of Abbreviations

US USC USCHPA VA VAV Yr

United States University of Southern California United States Combined Heat and Power Association Veterans Administration Variable air volume Year

203

Index

A Abraham, Spencer, 14 Adjusted Baseline, 63 Adoption, 15, 153, 175, 178, 188 Advanced Research Projects Agency (DARPA), 182 Aged infrastructure, 1, 13, 125 Air conditioning (AC), 27 Albuquerque, 102, 103 Alternative technologies, 37, 59, 80 American Council on Renewable Energy, 123 Annual debt service, 71 Annual savings, 57, 71, 73, 76, 77, 95 Arab oil embargo, 8 Asbestos abatement, 66, 71 Assumptions, 31, 37, 38, 41, 43, 45, 55, 59, 66, 68, 69, 71, 72, 81–83, 87, 90, 105, 109–110, 115, 116, 118, 119, 124, 125, 129–131, 161, 167, 168, 176, 184 Automated Data Retrieval, Assessment & Reports, 87 Automated time of use meters, 49 Automated utility bill accounting, 32, 116 Availability, 53, 179

B Bagasse, 114 Base year, 41, 45, 48, 51, 55, 62, 111, 160, 178 Baseline, 41, 43–48, 51, 53, 55, 57, 60, 61, 63, 65, 66, 68–72, 84, 85, 88, 109, 112, 118, 126, 128–130, 141, 160, 175, 176, 179–181, 196, 197 Basic assumptions, 37 Behlendorf, Brian, 165 Berlin Wall, 164 Bernstein, William J., 166 Best practice, 141, 164, 169, 184 Bohn, John, 168

Bosek, Gibson & Associates, xiii Bremer, Bruce, 181 Btu, 10, 11, 15, 20, 26, 40, 112, 141 Budget projection, 55 Building blocks, 40 Building efficiency measures, 63, 65, 97 Building end-use, 3 Business as usual, 55 Business investment alternatives, 45 Business investment plan, 37, 40, 99, 167 Business partner, 2, 3, 80, 98, 100, 112, 113, 116, 118 Business planning, 37, 38, 40, 41, 57, 59, 73, 90, 116, 129, 182, 196 Business proposal, 60 Business reliability, 2 Business terms, 83

C California State University (CSU), 84 Calpine, 103 Capacity, 9, 14, 28, 29, 38, 41, 53, 62, 65, 73, 78, 80, 89, 100–104, 113, 127, 142, 143, 148, 150, 157, 158, 196, 198 Capehart, Barney, xv, 13, 60 Capital asset pool programs, 142, 143 Capital costs, 10, 11, 17, 22, 24, 31, 34, 56, 67, 71, 76, 82, 89, 96, 99, 104, 110, 112, 116, 137, 170, 175 Capital upgrades, 15, 60, 61, 84, 135 Carbon dioxide, 8, 62, 166 Carter, Jimmy (President), 11 Cash flow, 68, 72, 73, 83, 85, 90, 111, 115, 136 Casten, Thomas, 5, 8, 115, 163, 188 Casten, Tom, 147 Central Plants with District Energy Systems, 10 Central power plants, 2, 9 Chilled Water Supply Systems, 53 205

206 Claudia Deutsch, 33 Cleveland, Ohio, 29 Close deals, 3, 119, 196, 198 Cogeneration, 10, 24, 147 Collaboration, 37–39, 164–166, 173 Combined cycle generation. See generation Combined Heat and Power (CHP), 4, 8, 10, 24, 26, 60, 62, 103, 127, 142, 148, 150, 152, 160, 166, 169, 175 Combined Heat and Power Association (CHPA), 127 Commitment, 4, 73, 82, 126, 134–136, 141, 161, 164–166, 169, 170, 172, 174, 175, 182, 194 Commodity price signals, 83, Communication, 1, 3, 15, 16, 37, 38, 40, 41, 59, 82, 83, 85, 90, 105, 109, 113, 116, 121, 140, 145, 158, 161, 165–168, 173, 175–178, 180–184, 196 Compare alternative assumptions, 83 Competition, 4, 16, 19, 27, 62, 145, 149, 151–153, 159, 161, 164, 183 Component parts of supply systems, 19 Compressed air, 20 Construction information, 67 Construction management, 68, 82, 111, 167 Contingency, 71, 130 Contra Costa Community College, 124 Cooling energy, 2, 8, 10, 19, 23, 26, 60, 170, 179, 196 Cooling production, 1, 3, 20, 23, 24, 34, 55, 157, 171, 172, 175 Cooperative standards and tools, 4 Coral Gables Library, 88 Cost control, 4, 7, 34, 39, 56, 57, 65, 84, 85, 87, 96, 98, 99, 112, 128, 129, 138, 167 Cost control decisions, 4 Cost effective, 57, 60, 84, 174, 193 Cost escalation, 41, 45, 56, 118, 130, 131, 179 Cost minimization, 2 Cost per unit of output, 55 Crawley, Joel, 165 Create investment returns, 2 Cultural fears, 2 Customer load, 40 Customer production and distribution systems, 13 Customer production system, 89 Customer production systems, 24 Customer supply system, 19 Customer Systems, 23–24

Index D Dade County Downtown Government Center, 39 Data entry, 47–49, 53, 54, 128, 129, 196, 197 Debt coverage, 71 Debt obligation, 68, 136, 137 Debt service, 71–73, 80, 99, 106, 143 Debt service reserve, 71 Debt term, 67, 68, 72, 83 Decentralization, 25 Decision-makers, 33, 38, 45, 69, 82, 85, 118, 124, 137, 186 Declining cost-commodity business model, 9 Decommissioning costs, 160, 188 Decouple, 187 Deferred maintenance, 14, 32, 73, 94, 95, 97, 98 Demand, 3, 8, 9, 16, 24, 27–29, 38, 45, 48, 49, 63, 65, 73, 85, 89, 90, 97, 99, 101–105, 112,116, 122, 123, 126, 135, 146, 150, 156, 159, 166, 174, 181, 184, 195 Demand-side a.k.a. end-use, 8, 122, 123 Department of Defense, 56, 59, 178, 182 Depreciation, 47, 69, 149 Depreciation benefits, 47 Deregulation, 11, 136, 153, 161 Detailed metering and mapping, 49 Dispatch, 80, 105, 182, 184, 188 Dispatching equipment, 2 Disposal, 9, 10, 23, 44, 160, 161, 188, 196, 198 Distributed Energy – The Journal For Onsite Power Solutions, 152 Distributed generation, 3–4, 10, 29, 146, 148, 149, 156–159, 172, 186, 187, 195 Distribution, 1–3, 10, 13–15, 19, 20, 22–24, 26, 29, 31, 33, 34, 38, 40, 51, 54, 60, 62, 63, 65, 66, 70, 71, 73, 84, 87, 89, 94, 95, 101, 103, 123, 128, 135, 136, 138, 141, 143, 151, 153, 156–161, 171–175, 188, 196, 197 Distribution infrastructure, 1, 153 Distribution Systems, 159 District cooling system, 29, 39, 76, 77, 104 District energy systems. See energy systems District heating systems, 25 Diversify risk, 133 DOE2, 64 Dynamic marketplace, 16, 38, 83, 90, 99, 141, 161, 161

Index E Economic growth, 4, 8, 166, 198 Economic stability, 8 Economy-of-scale, 9 Ehrhardt-Martinez, Karen, 127, 199 Electric Power Research Institute, 9, 14, 16, 146–147, 157, 158, 187, 199 Electric ratepayers, 28 Electric utilities, 8, 27, 115, 159, 161, 172, 187 Electric utility, 19 Electrical intertie, 76, 77, 90 Electricity, 1, 16, 20, 21–23, 27, 49, 50, 51, 60, 71, 80, 104, 105, 113, 146, 152, 153, 162, 170, 174, 187, 194, 199, 200 Electricity brownouts and blackouts, 25 Electricity generation and transmission systems, 13 Electricity generation systems, 78, 149 Electricity restructuring, 14, 61 Emergency generators, 10 Emissions, 3, 8–10, 12, 16, 17, 23, 24, 26, 44, 62, 114, 138, 143, 146, 147, 150, 156, 159, 160, 161, 166, 169, 170, 175, 176, 184, 186, 187, 188, 195, 197 Emissions reductions, 7 Empower people to measure, manage, and report energy investments, 2 Encyclopedia of Energy Engineering and Technology, 13, 200 Energy budget savings, 32, 39, 71, 76, 94, 95, 102, 138, 139 Energy budgets, 3, 105, 135, 176, 181 Energy commodities, 26, 45, 49, 87, 98, 182 Energy efficiency, 1, 2, 4, 9, 11, 19, 20, 26, 27, 32, 33, 39, 43, 49, 50, 56, 60, 63, 64, 76, 88, 89, 90, 95, 99, 101, 102, 104, 106, 113, 115, 118, 121, 122, 123, 124, 126–128, 133–136, 139–143, 146, 147, 152, 158, 160, 161, 164, 224, 166, 166, 169, 170, 172, 178–184, 186, 187, 193–199 Energy efficiency savings, 1 Energy experts, 4 2007 Energy Independence and Security Act, 151 Energy Information Administration, 146, 199 Energy information and management system action plan, 84 Energy information management system, 66, 71 Energy infrastructure investment project plan, 69 Energy Internet, 147 Energy investment company (the investor), 94 Energy managers, 38, 180

207 Energy monopolies, 4 2005 Energy Policy Act, 150–151, 156 Energy production systems, 3, 23, 87, 101 Energy retrofits, 94, 95 Energy service companies, 3, 4, 106, 115, 119, 121, 122, 123, 130, 143, 173, 175, 197 Energy suppliers, 1, 3, 9, 15, 16, 29, 33, 34, 80, 90, 100, 103, 104, 114, 116, 166 Energy supply companies, 2, 186 Energy supply contracts, 22 Energy supply development, 39 Energy supply system financial modeling software, 83 Energy supply systems, 1, 2, 3, 9–11, 14–17, 21, 22, 24, 26, 29, 33, 34, 38, 40, 41, 66, 80, 83, 89, 91, 93–98, 104–106, 110, 111, 113, 138, 157, 159, 161, 162, 164–167, 174, 177, 184–187, 189 Energy systems, 2, 3, 8, 10, 15, 23, 24, 28, 31, 32, 33, 41, 55, 57, 85, 93, 97, 101, 102, 105, 111, 114, 116, 128, 138, 139, 152, 158–160, 163, 165, 167, 169, 170, 173, 174, 177, 186, 187 Engineering, procurement, and construction (EPC), 67, 111 Environmental standards, 44 Environmental sustainability, 4 EPA CHP Partnership, 150 Equipment controls, 71, 83 Equipment logs, 49 Equity, 67, 98, 117, 122, 134, 136 Evaluation, 37, 59, 65, 109, 130, 131, 162, 169, 174, 175, 196 Executive Summary, 69–72, 73, 127 Existing Capacity by Energy Source, 2006, 21 Extensible, 141

F Facility, 14, 15, 19, 33, 41–49, 51, 54–57, 60–63, 66, 68, 72, 76, 83–85, 87, 88, 94, 95, 102, 112, 116, 118, 119, 128–130, 172, 181, 196–198 Facility Budget, 44–45 Facility business situation, 47 Facility technical situation, 47 Fear of the unknown, 106 Fears and barriers, 3 Federal – 2nd Quarter 2008 Policy Priorities, 126 Federal and state energy legislation, 4 Federal Energy Regulatory Commission (FERC), 151, 157

208 Financial benefits, 13, 16, 91, 95, 102, 175, 198 Financial evaluation, 69 Financial officers, 38, 137 Financial pro formas, 39, 119 Financial Times, 14, 15, 160, 199 Financial tool, 81 Financing, 3, 10, 31, 32, 41, 67, 68, 71, 73, 76, 80, 82, 83, 85, 94, 98, 99, 102–105, 110–115, 118, 121, 123, 129, 130, 133–138, 140–143, 160, 167, 175, 176, 178, 181, 197, 198, 200 Financing Authority for Resource Efficiency of California (FARECal), 142 Financing fees, 67, 105 Flattener, 164, 165, 183 Flattening the electric load, 65 Flexibility, 4, 24, 98, 102, 140, 186, 188 Florida House Energy Committee, 39 Florida Power & Light Company (FPL), 16 Florida Public Service Commission (FPSC), 87, 116 Fossil Fuel Efficiency Standard, 115, 149, 188 Fossil fuel energy resources, 1 Fossil fuels, 7–10, 23, 26, 161, 188 oil, natural gas, coal, 7, 8 Framework, 4, 128, 166, 167, 184, 186–189 Frank Brewer, UMCP’s Assistant Vice President of Facilities Management, 62 Friedman, Thomas, 4, 116, 164, 183 Fuel switching, 40, 99, 104, 166 Full load, 65, 103 Fund building upgrades, 32 Fundamental prerequisites for economic growth and financing, 4 Funding problems, 31–34

G Gaming (manipulating) the electrical grid, 25 Generation, 1, 8–11, 15, 20, 23–29, 31–33, 39, 40, 51, 53, 54, 60, 62, 63, 65, 69, 73, 78, 80, 89–91, 93, 96, 97, 99, 102–106, 110, 113, 114, 123, 126–128, 136, 138, 139, 142, 143, 146–149, 151–153, 156, 158–161, 163, 166, 170–172, 174, 186–188, 195–198 Gerontology, 95, 96, 104 Ghandour, Fadi, 116 Gigawatts, 9 Global warming, 1, 115, 199 Goal, 11–12, 61–62 Governor Parris N. Glendening, 62

Index Greatest energy value from every unit of energy consumed, 10 Greatest value, 2 Grid interconnection, xiii, 127, 149, 151, 156, 157, 183 Grids, 2, 9, 22, 153, 158, 160, 171–174 Growth & Escalation Rates, 45–46 Guidebooks, 140–141

H Hanson, Shirley J., 140 Harvey, Fiona, 160 Heat and power production, 9 Heat loads, 24 Heat/steam, 1, 2 Hetch Hetchy, 90 Highly efficient energy supply investment strategy, 2 HVAC (heating, ventilation, air conditioning), 71

I Illinois State University (ISU), 66 Impact of price changes, 83 Implementation, 11, 12, 37, 41, 44, 59, 61, 66–69, 72, 97, 100, 110, 112, 114, 119, 123, 124, 126, 128–130, 136, 140, 146, 148, 149, 157, 160, 165, 169, 175–178, 186, 193, 195, 198 Incorporating new fuels and technologies, 3 Increase productivity, 2 Independent power producers, 16, 149 Independent power projects, 149 Industrial Assessment Centers (IACs), 181 Inflation, 45, 46, 72 Information and Communication Technologies: The Power of Productivity, How ICT Sector Are Transforming the Economy While Driving Gains in Energy Productivity, 126–127 Information and communications technologies, 127 Information technology, 1, 4, 15, 16, 56, 80, 83, 90, 99, 134, 140, 145, 163, 174, 175, 178, 179, 182, 184, 189, 195, 198 Innovation Institute (E2I) Distributed Energy Resources Public/Private Partnership, 187 Insourcing, 166 Integrated, xiii, 2, 3, 10, 11, 13, 15, 19, 24, 29, 32, 34, 37, 38, 40, 55, 59, 61, 63–65, 71, 72, 73, 76, 80–85, 89, 90, 93–98, 103, 106, 115, 121, 122,

Index 125, 127, 129, 133–136, 140, 141, 157, 158, 160, 161, 165, 172, 175–177, 181, 182, 187, 195, 197 Integrated energy production systems, 7 Integrated energy supply systems, 1 Integrated heat and electric power production, 1 Integrated investment, 63 Integrating investments, 13 Internal rates of return, 100 International District Energy Association, 28, 123, 127, 150, 151 International Performance Measurement & Verification Protocol, 140 Internet-based information technology, 1 Interoperability, 85, 141, 158, 175 Investment authorities, 133 Investment backbone, 126 Investment decisions, 2, 38, 136, 171, 172, 175, 188, 193, 195, 196 Investment methodology, xiii, 2, 3, 37, 40, 167 Investment opportunity, 3, 7, 37, 59, 66, 82, 100, 103, 133 Investment plans, 2, 60, 198 Investment returns, 57, 141, 187 Investment uncertainty, 13 Investors, 1, 2, 16, 25, 38, 41, 71, 76, 80, 100, 102, 106, 118, 141, 160, 161, 167, 172, 177, 187, 188, 197, 198

J Japan, 9 Joint energy supplier and consumer economic and environmental opportunity, 2 July 2007 Cogeneration and Small Power Production Semi-Annual Report, 147

K Kammen, Daniel, 186 Kelley, Ron, 135 Kenetech Energy Services, xiii Kilowatt, 29, 48, 49, 73, 77, 148 Klepper, Martin, 122 Koenig, Herman (Dr.), 8 Knowledge management, 135

L Laitner, John A. “Skip”, 126 Land development, 68 LAS & Associates, xiii, xv, 59, 119, 125

209 Leadership, 62, 82, 106, 166, 178 Legal and regulatory constraints, 3, 159 Legal fees, 68, 71, 114 Leveraged lease, 99 Life cycle, 3, 10, 11, 37, 59, 61, 128, 129, 141, 151, 160, 161, 175, 176, 185, 188, 196, 197 Life/safety, 33 Limited Liability Corporations (LLC), 110 Line losses, 25 Living master plans, 2 Load management, 65 Lobo Energy, 102 Lomborg, Bjorn, 174 Long Term Debt, 67, 68 Lovins, Amory, 147, 156 Lowest combined capital, operating, maintenance, fuel, and environmental costs for the life of the investment, 2 Lowest cost, 2, 10, 68, 99, 116, 134, 176 Lowest energy unit costs (capital, energy, and O&M), 3, 7, 10, 11, 40, 65

M Major maintenance, 72 Managing risk, 2, 38 Manhattan Project, 164 Manual on Financing Energy Efficiency Projects, 140 Market changes, 73, 84, 98, 110, 116 Market share, 3, 4 Maryland Economic Development Corporation, 64, 114, 138 Maryland Public Service Commission (MPSC), 139 Massey, William, 186 Master lease financing, 32 Maxson, Kevin, 178 Measurement devices, 85, 135 Mercury, 8 Methane, 8, 114, 149 Metrics, 3, 126, 129, 134, 135, 137, 173, 179, 180, 184, 185, 196, 198 Metropolitan Dade County, 16 Miami Sports Arena, 39 Michigan, 7, 8 Michigan State University, (MSU), 7 Micropower, 147, 148 Mid-American, 73, Mission First Financial, now Edison Capital, xiii Mission Integrated Energy Services, xiii Multiple agencies, 67

210 N National Association of Counties, 7 National Energy Act (NEA), 11 National energy concerns, 7 National Energy Policy Initiative Expert Group Report, 153 National Rural Utilities Cooperative Finance Corporation, 142 Navy Public Works Center (PWC), 59 Neal, Jim, 7 Net energy gain, 9 Net present value, 71, 72, 77, 115 Netscape, 165 New energy information age, 4, 189 New energy supply investment era, 7 New Source Review, 153 New York City, 25 Nitrous oxide, 8 Non-renewable energy resources scarce, 7 Northeast U.S. power failure, 14 Not-for-profit entity, 71

O OA, xv, 3, 4, 40, 41, 55, 60, 63, 66, 82, 85, 89, 109, 118, 126–128, 130, 135, 140, 148, 159–161, 163, 167, 175, 176, 180, 181, 183, 187, 196, 197 Obama, Barack, 181 Obligation to serve, 19, 27, 38 Off peak, 49, 65 Off-balance sheet debt, 61 Off-balance sheet financing, 99, 110, 113–114, 133, 138, 176 Office of Computer Services, 178 Office of Energy Management, xiii, 16, 32, 87 Official Energy Statistics, 21 Olin, 96 On balance sheet, 99 On-site, 54, 55, 60, 62, 65, 71, 113, 143, 148, 171 Opassess, xiii, xv, 2, 3, 4, 37, 41, 48, 59, 82, 85, 109, 112, 115, 117–119, 127–131, 137, 140, 141, 143, 148, 159–161, 163, 165, 167, 175, 176, 179, 181, 182, 187, 196, 197 Open markets, 4 Open-Sourcing, 165 Operating and maintenance costs, 38 Operating budget savings, 32, 84, 93, 95, 117, 135, 137 Operating calculation assumptions, 72 Operating changes, 43, 45

Index Operation and maintenance, 51, 60, 66, 71, 72, 87, 99, 121, 128, 130, 180 Opportunity Assessment, xiii, xv, 2, 3, 37, 40, 41, 59, 60, 82, 89, 125, 159–161 Opportunity value, 169, 175 Opposing business interests, 16 Optimal energy costs, 40 Optimal mix of energy supply, production, and distribution systems, 2 Output results, 2 Outsource, 67 Out-sourcing, 112, 137 Outsourcing and Off-Shoring, 165 Over-coming transaction complexity, 3 Ownership, 3, 21, 27, 41, 66, 67, 68, 82, 83, 99, 118, 129, 130, 141, 159, 160, 167, 176, 198

P Paid from savings, 7, 12, 14, 15, 17, 22, 32, 33, 34, 43, 44, 46, 57, 60, 61, 70, 71, 76, 78, 80, 82, 84, 88, 95, 96, 99, 101, 105, 106, 110, 111, 112, 124, 128, 129, 134, 135, 136, 137, 138, 139, 157, 169, 172, 178, 180, 181, 193 Peak demand, 27 Performance, xiii, 2, 3, 3, 3, 53, 55, 6, 6, 72, 84, 8, 8, 89, 94, 9, 111, 112, 119, 123, 130, 131, 134, 135, 136–138, 173, 176, 177, 178, 179, 187, 196, 198 Performance Contracting: Expanding Horizons, 140 Performance guarantee, 98 Performance-based investments, 84 Permitting, 68, 71, 105, 111, 114, 127, 149, 156, 197 Piecemeal, 15, 31, 33, 85, 95, 96 Plan of Work, 193, 196 Plant output, 29 Pollutants, 8, 188 Power marketing, 73, 100, 106 Power plant business structuring, 39 Power plant capacity, 9 Power plant developer, xiii Power to Reduce CO2 Emissions – The Full Portfolio, 146, 157, 199 Presidential Directive, 178 Preventive maintenance, 56, 88, 128, 197 Primary fuels, 9, 10, 20, 21, 24, 26, 40, 48, 52, 65, 105, 113, 160, 170, 171, 172, 188, 197, 198 Private sector partners, 47, 60 Privatize, 55

Index Pro forma, 72, 83, 124, 141, 161, 176, 177, 182 Profit potential, 1 Profits, 2, 3, 11, 12, 27, 32, 73, 80, 93, 99, 100, 103, 105, 147, 148, 152, 159, 164, 170, 172, 187 Project finance, 136 Promote employment, 2 Public procurement rules, 67, 111 Public Service of Colorado, 148 Public Service of New Mexico, 102 Public Utilities Regulatory Policy Act (PURPA), 110, 148 Pyramid, 40–42, 47, 51, 59, 60, 61, 63, 83, 90, 109

R Real time, 2, 3, 15, 37, 49, 51, 59, 65, 83, 87, 94, 98, 109, 112, 116, 126, 128, 129, 135, 137, 141, 149, 161, 166, 172, 1, 174, 179, 181, 183, 198 Real time updates, 2 Rebuild America, 133, 136 Recommissioning, 71 Reconciliation, 141 Reduce emissions, 2, 148 Reduce the cost of energy, 2 Regulation, 16, 19, 153, 156 Regulatory and legal barriers, 11 Regulatory uncertainty, 14 Reicher, Dan, 186 Reliability, 3, 4, 13–15, 17, 27, 29, 63, 82, 84, 89, 90, 95, 103, 106, 110, 123, 126, 129, 131, 135, 137, 139, 149, 151, 153, 156, 158, 160, 161, 172, 174, 184, 186, 188, 194 Reliable energy services, 2 Renewable Portfolio Standards (RPS), 150 Renewable resources solar, wind, geothermal, hydro, 8, 174 Reporting, 2, 84, 98, 116, 126, 129, 134, 137, 140, 161, 181, 196, 198 Resource efficiency, 3, 4, 7, 9, 10, 12, 13, 29, 135, 142, 143, 147, 150, 164, 166–172, 179, 182, 186–188 Resource scarcity, 3, 9, 25, 27, 29 Restructuring, 14, 25 Retrofits, 72, 104 Return on investment, 3, 17, 72, 98, 106, 135, 159, 182, 197, 198 Revenue optimization, 2 Revolving investment fund, 32, 141, 181 Risk management, 12, 15, 39, 109, 138, 156, 159, 160, 170, 174–176, 180, 182, 186, 196, 198

211 Risk mitigation, 13 Risk mitigation options, 41 Risks, 2, 3, 29, 38, 41, 44, 61, 68, 80, 81, 84, 93, 98, 100, 106, 109–112, 116–118, 130, 131, 133, 134–136, 139, 141, 159, 161, 165, 173–176, 179, 181, 193, 195, 197, 198 Roberts, David, 147 Rocky Mountain Institute (RMI), 147

S San Diego, 59, 61, 81, 82, 135, 138, 180 San Francisco International Airport, 89 Savings to debt ratios, 71 Scientific method, 167 Secondary fuel, 48 Second law of thermodynamics, 8 Security, 3, 4, 14, 60, 85, 128, 138, 182, 186, 188 Self-generation, 51, 53, 90 Sensitivity, 90, 115 Sensitivity Analysis, 115 Silicon Energy (now Itron), 134 Simple payback, 57, 76, 95, 97 Sizing, 65, 96, 123, 128, 129, 170, 181, 197 Small Is Profitable – The Hidden Economic Benefits of Making Electrical Resources the Right Size, 147 ‘Smart’ grid, 174, 178, 181, 197 Social rate structuring, 145 Software, 37, 59, 83, 109, 134, 164, 179, 200 Solutions, 1, 61, 65, 68, 69, 71, 80, 83, 89, 110, 125, 129, 130, 141, 152, 176, 181–185 Sound financial management, 2 Southern Companies, 148 Special purpose non-profit corporation (NPC), 99 Spiking peak loads, 104 Stakeholders, 3, 16, 37, 89, 110, 119, 131, 135, 161, 165, 173, 175–178, 187, 196, 198 Standard industry framework, 4 Standards, 4, 114, 149, 164, 165, 170, 175, 178–181, 184, 189 Standby power, 105, 110, 145 Start-up materials, 68 Status quo projection, 60 Steam Supply Systems, 53 Steve Harkness, 62 Stimulus money, 187, 196 Stranded costs, 139 Structure of the utility industry, 9 Student Energy Core, 181

212 Substation, 22, 66, 71 Suez Energy North America, “Suez”, 138 Supplemental electricity, 60, 113 Supply-Chaining, 166 Supply-side, 3, 4, 8, 141, 146, 160, 161 Systems Benefit Charges (SBC), 142

T Tax incentives, 11, 151, 170 Tax-exempt financing, 68, 99, 138 Taylor and Francis, 13, 60 Thatcher, Margaret, 161, 166 The American Council for an Energy Efficient Economy (ACEEE), 126 The American Recovery and Reinvestment Act of 2009, 193 The Potential Benefits of Distributed Generation and Rate-Related Issues That May Impeded Its Expansion, 156, 200 second law of thermodynamics, 4 The Skeptical Environmentalist, 174 The World Bank, 139, 140, 200 The World Energy Efficiency Association, 140 Thermal dynamics, 7, 171 Thermal energy, 9, 61, 65, 66, 71, 77, 83, 104, 105, 152, 156, 170, 172, 174 Third party financing, 95 Thomas, John, 135 Time criticality, 87 Time of day costs, 28 Time of use cost signals, 126 Time of use pricing, 11 Tons and ton hours, 49 Top ware, 85 Training, 56, 88, 125, 180, 195, 196, 198 Transportation electric, heat, cooling, xiii, 8, 9, 22, 170, 184 Trigen Energy Corporation (Trigen), 25 Trigeneration, 10 Trisko, Eugene, 9 Trotti, John, 152 Trust, 37, 73, 164 Turf battles, 2 Turning Off The Heat, 115, 163 Turn-key construction, 111 21st century, 8, 174

U U.S. Army, 55 U.S. Clean Air Act, 146 U.S. Clean Heat and Power Association, 123

Index U.S. Combined Heat and Power Association (USCHPA),, 150 U.S. Department of Energy, 4, 11, 62, 64, 113, 140, 154–156, 159, 173, 174, 179 U.S. Department of Energy – Energy Efficiency and Renewable Energy, 4 U.S. Environmental Protection Agency (EPA), 127, 150 Uniform language, 169, 175 Unit costs, 11, 15, 25, 28, 40, 47, 49, 50, 55, 60, 65, 71, 72, 84, 90, 99, 112, 113, 118, 126, 141, 180–181 United Kingdom UK, 160, 166 United States (U.S.), 1, 7 University of California, Santa Barbara (UCSB), 137 University of Iowa (UIowa), 49 University of Maryland, College Park, 61–62, 138 University of New Mexico (UNM), 100 University of Southern California (USC), 94, 104 Useful energy, 1, 2, 9, 19,26, 29, 73 Useful lives, 56 Utility interties, 68 Utility managers. See facility managers Utility systems upgrades, 14, 95, 105

V Vaitheeswaran, Vijay, 4, 147 Value-added, 3, 93, 100, 106, 118, 121, 164, 187 Veterans Administration VA, 178, 179

W Waste heat, 8, 10, 23–26, 29, 32, 39, 60, 65, 72, 73, 76, 90, 96, 99, 138, 147, 150, 152, 160, 171 Water and Sewer Authority, 149 Web-based information technology, 13 Web-based risk management, 2, 38, 73 Web-based tools, 2, 38, 73 Web-Enabled Work Flow Software, 165 Weber, Dick, 142 Weisman, Jeannie C., 140 Welsh, John, 135 Wireless technology, 166 Woolard, John, 134

Y Young, Jim, 148