05/03/2006

Utility Suppliers, Power, and You

Some programs can help you increase your cash flow despite the rate increases

 

Ronald J. Fisher, Partner, Blank Rome, LLP, Philadelphia

Buying Smart, Buying Right
With electrical rate hikes potentially imminent, facilities professionals need to re-assess their energy usage and embark upon smart power planning and purchasing.

“As these artificial caps (which have been set as transition mechanisms) roll off and it becomes a truly competitive market, the utilities will begin to buy and sell electricity at a truly competitive rate,” says Ronald J. Fisher, a partner at Philadelphia law firm Blank Rome LLP, who works closely with utility companies in his practice. “You’re going to see more people looking at alternatives such as energy conservation and alternative suppliers.”

Fisher says that facilities professionals and their energy consultants need to do these things when buying electricity:

1) Know your supplier.
How long has the supplier been in the electricity market? Is it a vertically integrated participant or a financial one? What is its credit profile? Does it have the financial wherewithal to participate in the market at the level proposed?

2) Know what you’re buying.
Often, energy contracts and price quotes include various charges and services bundled into the cost. Know what’s included so you can adequately compare proposals.

3) Know how much you have to pay.
Price is the key term. You likely will have the option of paying a fixed rate or an indexed rate. Fixed-rate price, stated in cost per megawatt hour, will generally fix rates within a band of forecast quantities; know what your price is outside that band. Indexed rate is the market price plus or minus a premium or discount.

4) Know when you have to pay.
Make sure that payment terms properly accord with your accounts payable procedures. Standard supply contract forms generally require you to pay invoices within 10 to 15 days, Fisher notes. If you don’t, your supplier can charge a late fee or terminate your contract. Let your supplier know if their payment terms are not acceptable before signing your contract.

5) Know where you take delivery.
Your electrical supplier is responsible only for delivering electricity to your local utility’s distribution system. You are responsible for arranging with and paying the local utility to transport the power from that delivery point to your building. Local utilities need prior notice before being able to accommodate a change to an alternative supplier.

“Competition now permits commercial consumers to shop not only for the best price, but also for the best terms and conditions,” Fisher says. “The increasing number of market participants engaged in supplying electric energy results in the availability of a wide variety of terms and conditions. By focusing on them, in addition to the all-important price terms, savvy building owners and managers can enhance the value of their electricity supply arrangements.”

The comfort zone set by the rate-freeze safety nets put into place during the retail electricity market deregulation in the 1990s could start to become a little uncomfortable for businesses - and buildings - across the United States.

During deregulation, nearly half of U.S. states set rate caps on electrical prices to give competition a chance to flourish and to prevent market disruptions. They lowered rates and then froze them for a few years, or found other methods to keep prices low and stable.

That’s about to change: According to a Feb. 28, 2006, report in The Wall Street Journal, rate freezes have expired in several states, including New Jersey, New York, and Ohio. The remaining caps are set to expire within the next year in roughly a half-dozen large states, including Illinois, Michigan, and Texas.

Experts predict big rate increases on the horizon. In Delaware, for example, customers of Pepco Holdings Inc.’s Delmarva Power unit are facing increases of 59 to 117 percent. Connecticut customers have seen a 22-percent increase, while customers of Texas’ biggest utility, TXU Corp., have had increases as high as 80 percent.

Some states are scrambling to extend the rate freezes. After Ohio’s cap expired in 2005, lawmakers there voted to extend the freeze until 2008. At press time, the Illinois legislature was still debating whether or not to institute a 3-year rate freeze on ComEd’s plans. Under the proposed bill, the freeze would remain in place until 2009.

Other states are examining ways to phase increases over a multi-year period to lessen the shock. Extension or not, changes to electrical rates remain imminent, providing the U.S. facilities industry with the potential to be slammed with new, higher utility expenses.

“The best thing you can do is to understand the factors that impact your supplier and align your own interests with your supplier,” notes Reena Russell, chief officer of market and product development at CosumerPowerline, a New York City-based strategic energy asset management firm.

Melting rate caps might also mean a bigger selection of suppliers, which could give businesses more choices in terms of suppliers, rates, and incentives. “Rate caps can suppress people from shipping, but also suppress suppliers from coming into the market,” notes Philadelphia attorney Ronald J. Fisher, a partner at Blank Rome LLP. Fisher, who works extensively with utility companies in his practice, says suppliers have viewed rate caps as an economic obstacle. Some have stayed out of markets affected by post-deregulation rate freezes. “As the transition mechanism winds down, more suppliers will be attracted to the marketplace,” he explains. “They can come in and compete, and ought to be doing so at a time when more people will be shopping.”

The changes are also ushering in a host of new programs that will affect commercial and industrial consumers’ bills. Depending on the state in which you operate, such phrases as “installed capacity,” “voluntary load-reduction programs,” and “demand-response programs” could become a part of your everyday energy management lingo and affect your relationship with energy suppliers.

And, some - but not all - of these programs can help you increase your cash flow, despite the rate increases - bartering payment for reduced load usage at peak load times, for example. “End-users can have control over their energy expenses,” says Richard Berger, vice president of marketing at ConsumerPowerline. “We’re trying to develop programs that allow them to bring new cash flows to the table, giving them a stronger seat at the management table. Energy was previously viewed as a cost center. Today, you need to view your energy manager as someone who generates new revenues in these deregulated markets.”

Demand Reduction
One of the most prevalent ways to work with utility suppliers in order to turn energy usage - or, in this case, reduction - into revenue is through demand-reduction (or demand-response) programs. Demand-response programs are put into place to prevent blackout states during times of energy-reserve shortages.

Many state demand-response programs provide financial incentives for electricity users to voluntarily reduce consumption and/or operate on-site generation during grid crisis periods. Others encourage commercial users to reduce loads in emergency situations, but offer no incentives other than betterment of the electrical system during crisis periods.

Reducing loads could mean raising the thermostat during air-conditioning usage (or lowering it during heating usage) at assigned times during a power crisis. It could mean dimming lights or turning off appliances (like coffee pots) that remain on all day. Some changes in load usage could be almost imperceptible to building occupants. “You can realize savings that change very little about building operations or [have little] impact [on] tenants,” Russell says.

In many states, the impendent system operator (ISO) - federally regulated non-profit corporations established to facilitate energy restructuring and oversee state electric transmission systems and wholesale energy markets - manages the demand-reduction programs.

The U.S. Department of Energy’s Federal Energy Management Program offers a comprehensive, graphical listing of energy management programs by state (see link below).

A Good Example
New York is one state with active incentive-based demand-response initiatives. The New York ISO’s various demand-response programs give system operators resources that can be deployed in the event of energy shortages to maintain the reliability of the system. Such programs require the participation of commercial and industrial energy users.

The first program, the Emergency Demand Response Program (EDRP), provides financial incentives for electricity users to voluntarily reduce their consumption and/or operate on-site generation during periods of electricity-reserve shortage. NYISO provides a 2-hour notice of curtailment events, as well as day-ahead advisories.

Participants in EDRP receive payments based on their energy reduction: They receive the locational-based marginal price (LBMP) or, at the high end, $500/MWh for their curtailments. This is balanced by the fact that it’s a voluntary program without penalties for non-response, notes David J. Lawrence, manager of Auxiliary Market Products for the NYISO.

According to Lawrence, the EDRP has about 950 participants statewide. “The number of customers has been steadily growing over the years,” Lawrence says. “I suspect we’ll see more this year.”

Individual customers can participate in EDRP if their load reduction is at least 100 kilowatts, or through an authorized “curtailment service provider,” such as a utility, energy service company, or curtailment customer aggregator.

A second demand-reduction program in New York is the Installed Capacity/Special Case Resources (ICAP/SCR) program. The program provides financial incentives for electricity consumers with usage larger than 100 kilowatts to reduce their electricity use or operate on-site generation during periods of electricity-reserve shortages.

“Resources are obligated to curtail when called upon to do so (with 2 or more hours’ notice) provided that they were notified the day ahead of the possibility of such a call,” Lawrence says. “In return, SCRs are paid the locational clearing price for ICAP.” Participants in this program face non-compliance penalties if they do not curtail their committed amount when called by the NYISO.

Another New York program, the Day-Ahead Demand Response Program (DADRP) allows energy users to bid their load reductions, or “negawatts,” into the day-ahead energy market, just as the generators do. Electricity customers can submit load-reduction bids on a day-ahead basis by indicating the load-reduction amount price (between $50 and $1,000 per reduction amount) and the time period.

Offers accepted by the NYISO are paid on the greater of the bid price or the day-ahead LBMP. If a customer fails to curtail its load, it will pay the higher of the day-ahead price or the real-time price for the amount of incomplete scheduled load reduction. The program allows flexible load to effectively increase the amount of supply in the market and moderate prices, according to the ISO.

In New York City, ConsumerPowerline has actively amassed capacity curtailment commitments from significant energy users in the metropolitan region in response to a demand-response capacity auction that closed on March 31, 2006.

The firm aggregates curtailable electrical capacity and then bids this power into the twice-annual Reliability Demand Response Market. ConsumerPowerline pays large end-users that commit to participate, and has paid out more than $15 million over the last 4 years. The most recent bid, known as the “summer strip,” is run by the NYISO. ConsumerPowerline reports its represented load will be more than 50-percent larger than its 2005 summer strip representation. The ConsumerPowerline portfolio represents more than 4 percent of the city’s entire electricity load.

The agency’s “virtual power plants” (which protect businesses from power outages) are comprised of dozens of hospitals, hotels, high-profile commercial buildings, apartment complexes, and other residential, industrial, and commercial properties in New York City. “These consumers have partnered with us to commit to curtail their power usage in the event of a crisis that can potentially threaten supply,” Gordon notes. “This commitment helps support the reliability of the electrical power grid in the region. Those who commit get a bonus: They take better control over their energy expenses, turning cost centers into recurring revenue generators.”

Voluntary Load Reduction
Some load-reduction initiatives, however, are voluntary and do not offer cash incentives in the same manner as formal demand-reduction programs. The California ISO offers such a program in addition to the state’s structured demand-response initiatives implemented through the utilities.

The ISO’s Voluntary Load-Reduction Program (VLRP) provides an additional level of demand reduction on the state’s electric system. This “purely voluntary” program relies upon participants to reduce energy consumption by an amount of their choosing when the California ISO declares a power emergency. This program strives to prevent further escalation of an emergency to higher levels requiring “more severe actions,” according to the ISO. Severe actions include involuntary brownouts and rolling blackouts.

When the California ISO determines that available resources are insufficient to maintain adequate “operating reserves,” it declares a “stage-one emergency.” Large energy users (including large buildings) that sign up for the VLRP get advance notice of potential power shortages, explains Marilyn Wright, a legislative analyst in California ISO’s governmental affairs department. “In return, they agree to voluntarily reduce their demand by an agreed-upon number of kilowatts or megawatts,” Wright says.

Communication is Key
Running a successful conservation program also involves keeping lines of communication open with your building occupants: “If you’re going to be involved in a conservation program, you need to be proactive about communicating that back to your tenants,” notes Greg Fishman, California ISO public information officer. “Explain to them that, while you are not compensated, it is a good thing to do to keep the grid stable. You also need to ask them how their businesses would be impacted during load reductions. You need to know that your tenants can experience fluctuations or reduced lighting and not have it impact their businesses.”

The latest round of changes means one thing: End-users need to become smarter, more-efficient energy consumers. “You don’t want to have a passive strategy where you get billed each month,” Russell says. “You need to understand the transmission and distribution charges on your bill. Look at the interval data and see how your load is changing. The more you understand, the better you can predict your energy costs.”

Click here for the Energy-Efficiency Funds and Demand-Response Programs Chart

 

Robin Suttell (rsuttell@cox.net), based in Cleveland, is contributing editor at Buildings magazine.

 


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Visit our website today to learn about the design flexibility of a Morton building and the endless possibilities of partnering with our designBUILD team.


Wood construction is both cost and energy efficient. Check out Morton Buildings and our designBUILD team online today to discover all the benefits of post-frame construction.


When choosing a metal-clad building for your next construction project, consider Morton Buildings, Inc., and their designBUILD team, we’ll make your dream a reality.

Bluebeam® Revu® simplifies digital facilities document management from design review to leveraging as-builts, maintenance manuals and O&Ms submittals.

Yaskawa drives offer quality performance for air handlers and cooling towers on the roof to secondary chilled water pumps in the basement

We Can Help You Reduce Energy by 30%

Our mission is to help our customers manage their buildings' energy costs, improve reliability, and enhance performance while having a positive impact on the environment.
CLICK HERE to find out how.


 
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