The Balance of Power

For educational institutions, regulated electric utilities are a mixed blessing. On the plus side, rates are uniform and predictable. On the other hand, a sudden rate hike can strain a tight operating budget-and little or nothing can be done about it.

Ask school officials in Southeastern Wisconsin, where for a decade power prices had held steady or declined. In early 1998, the local electric utility received approval for a 12 percent rate boost. With school budgets already locked in for the year, business managers scrambled to find offsetting savings, since they could not shop for lower-priced electricity.

Deregulation offers the appealing prospect of freedom to choose suppliers and shop for lower prices. However, it is not a panacea. As utilities experiment with deregulation in state-sponsored pilot projects, school officials are learning that bargains come at a price. For instance, early talk about deregulation promised 10 to 30 percent savings on electricity. In reality, savings have been far smaller and not always easy to achieve. Even price shopping becomes complex as suppliers mix other services with their energy offerings.

On top of that, the free market entails risk as the removal of flat utility tariffs unmasks price volatility. The risk was evident in mid-June 1998 when, during a heat wave, tight supplies forced Midwestern utilities to pay more than $7,000 per megawatt hour on the spot market-versus the typical $30 to $50. Such extremes may be rare, but price swings are part of any deregulated market.

Although deregulation presents a steep learning curve, education institutions can reap rewards by investing in the knowledge, training, technology and advice staff need to become savvy players.

Meeting the challenge Deregulation offers challenges most facility managers have never faced before when buying power. These include:

-Managing volatility. Once deregulated, electricity will be more volatile than other commodities because it cannot be stored. But price volatility brings opportunities, as well as risks. For example, price instability can be hedged by using futures, options and other derivatives. A school also may choose to contract with a supplier for a firm supply at a fixed price over a specified term-but will pay for the privilege of having the supplier assume the risk. On the other hand, there are opportunities to use volatility to an advantage.

For example, backup power supplies or other dispatchable on-site generation should be able to run at a profit any time the market price of electricity exceeds generating costs. Similar rewards will go with the ability to shed loads during times of tight supplies and high prices.

-Tracking laws and regulations. As states experiment with new programs to foster competition, the rules of the electricity market will change sharply and often. Here, the market favors "first movers." One popular experimental program is conjunctive metering and billing, in which large institutions can treat multiple buildings or campuses as a single user. The natural diversity in loads between facilities tends to flatten the total load profile, improve the total power factor and create substantial savings. However, experimental programs like these usually are limited in scope. They become subscribed quickly, and those who hesitate are locked out.

-Evaluating suppliers. There has been a proliferation of power suppliers-from companies with billions of dollars in infrastructure to brokers and marketers with no physical assets; from companies selling only electricity to energy-management firms also offering gas, oil, steam and a host of value-added services. Schools will need to evaluate not only suppliers' prices and services, but also their balance sheets, their price-risk management tools, their reliability, their records of compliance with contracts and many other factors.

-Negotiating contracts. The choice of a supplier leads naturally to negotiating the most favorable price, terms and conditions consistent with reliability standards. The range of contract provisions is wide. Facility managers need to understand provisions like term discounts and real-time pricing, index contracts and fixed contracts, caps and collars-and know which choices best fit a specific situation.

-Training staff. Deregulation affects all staff who are involved in buying power or have substantial control over consumption. All such personnel need to understand the institution's energy strategy, how deregulation affects it, and how the things they do every day affect the organization's position. Whether handled internally or outsourced, training adds another important function to the facility manager's job.

The power of information Deregulation is in its early stages, and it is not possible to predict all the choices a fully competitive market may bring. But you can take steps now to prepare yourself. To fully understand a school's energy position, it is important to accumulate complete data on usage patterns. This includes:

-Comprehensive, real-time load-profile data by site and by meter.

-Knowledge of which loads can be shifted or shed.

-Complete and timely information on all available rates, tariffs and contracts.

The ideal is to have at least a full year's energy-consumption history recorded at 15-minute intervals, plus daily, weekly, monthly and annual load curves. Understanding how power usage relates to cost can help to effectively work on consumption patterns and drive average unit costs down.

In gathering and using information, there are three basic steps to follow: metering, monitoring and management.

-Metering. This process starts with getting data that matches the information the utility uses to prepare the monthly bill. The quickest and cheapest route is to ask the utility for the information. If utility data is unavailable or inadequate-often the case-consider installing a metering system.

Metering should tell precisely where energy is being consumed. Meters should be added at points where large amounts of power are distributed. If a facility has multiple buildings, all fed by a common power source, the next step is to install meters to monitor the individual buildings. Within large buildings, whether or not they are parts of a campus, meters should be installed at major points of energy consumption. Central chiller plants and major electrical feeders are good places to start.

The market offers a bewildering choice of metering equipment and software with a wide range of functionality and price points. Choose carefully. Power suppliers may demand certain equipment standards and calibration standards before accepting your metering data in discussions on service and pricing.

-Monitoring. Once meters have been installed, monitor them consistently. By doing so, power usage data can be compared with facility operating characteristics, such as occupancy schedules and weather conditions.

-Management. Metering and monitoring are your keys to making sound energy-management decisions in a deregulated market offering new pricing schemes. For example, an energy supplier may offer rates that fluctuate frequently during the day, even as often as hourly. The supplier tells what the rates will be at what time; a good manager takes actions that produce the greatest savings.

If the staff is agile enough to shift loads or curtail consumption with relatively short notice, costs may be reduced significantly. Technology to accomplish this already exists. For instance, some facility-management systems have advanced control logic that can adjust load profiles automatically upon receipt of pricing information.

Looking for help When dealing with a competitive power market, it is helpful to understand that by controlling a large amount of consumption, a school manages an energy position with high value to suppliers. That position can be converted into value for an institution through competitive procurement, financial innovation, energy-system management and energy efficiency.

A third party already well-versed in the workings of the market can help to leverage a school's position. By securing professional assistance, investments in time, training and technology can be avoided, and a manager can instead focus resources on the business of education.

The key quality of a third party is objectivity. That quality most likely can be found in an advisor who is fuel-neutral and commodity-independent and is rewarded specifically for performance in meeting energy objectives.

The ideal advisor manages the intersection between supply and demand, strategically applying energy information technologies such as metering, monitoring and control. Such an advisor is positioned to advocate for a school's interest on both sides of the meter:

-Employing information and technology to reduce consumption.

-Sitting on the school side of the negotiating table to help procure energy at the most favorable prices.

While electricity deregulation is all but inevitable, and while most power users look forward to potential savings and more choices of suppliers, many remain unprepared for the free market.

In one survey of corporate executives, only 11 percent of respondents said they were "very knowledgeable" about deregulation. Just six percent said they wer e "fully prepared" to manage energy in a free market. Only 30 percent had attended a conference, briefing or workshop on deregulation in the past year. There is no reason to believe these figures would be higher in a survey of education administrators.

The hesitancy may simply reflect a "wait-and-see" attitude. Nonetheless, research conducted by Johnson Controls, Milwaukee, suggests that many people responsible for their organizations' energy look toward the free market with trepidation. Some are concerned about losing contact with the local utility that has supplied them for years and knows their facilities well. Most understand the need to know their electricity usage patterns in much finer detail than before, yet they are unfamiliar with the technology that makes such knowledge possible.

On the more human side, facility managers worry that their superiors will expect cost savings on electricity that are not realistic.

Most important, facility managers understand that the deregulated world entails risk. While they may gain some easy savings from their first choices in a competitive market, they know that energy management is forever-that constant improvement is the goal and that decisions they make today about price and reliability may have long-term consequences.

Even now, facility managers are facing decisions on pre-deregulation rate discounts offered by their utilities. Those who decline forego immediate savings. Yet those who accept risk being "out of the money" if the deregulated market brings even more attractive price options.

Not surprisingly, facility managers perceive deregulation as an added strain on time and resources. Yet, few expect staff increases to help them deal with the new responsibilities.

TAGS: Energy HVAC
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