Energy management: Generating a strategy for savings.
Energy conservation has been the battle cry of operations executives and facilities managers for the past several years; buoyed by the promise that a competitive electricity market would bring dramatic reductions in the size of their energy hills. As deregulation of the electricity market continues to wind its way through the states, many retailers are beginning to take a more active role in their energy management operations and seeking new ways to drive costs down.
As of November 1999, every state in the United States, as well as the District of Columbia had become involved in the deregulation process--with 21 states having already enacted restructuring legislation, three states having issued comprehensive regulatory orders and 27 states having ongoing legislative investigations under way or commissioned such an investigation. However, true competition is being hindered by factors such as stranded costs, the fact that deregulation currently affects only the generation portion of a user's entire energy bill, which does not necessarily translate into huge savings for, energy users, and that given the opportunity to choose, many users have elected not to do so.
In California for example, which was one of the first states to open the doors to competition, many companies are choosing not to choose a new provider, and those that have changed users are seeing closer to 10% savings, as opposed to the often-projected 30%. According 'to an article in Power Value magazine, deregulation of the electric utility in California and Massachusetts is thus far failing to produce the desired results because very few customers are choosing to switch providers.
"Holistically, everybody is interested in energy management to save money," says Richard Costello, manager of energy consulting services, Siemens Building and Technologies, Canton, Mass. "And everyone thinks that with deregulation they are going to save money because their electric rates are going to go down. The reason they think that is because in some states they are going down--even if the supermarket does nothing--but none of them are saving the 30% they were led to believe they would save over the last three years by the media and other groups."
Costello notes that the supermarket chains that are saving 30% on their energy bills, when broken down, find that typically 29% is due to the energy conservation measures they installed and 1% is due to the savings from deregulation. "The combined numbers really falsify everything, but the CEOs see these numbers and they force their energy managers to do something because Safeway saves 30% in California," he says. "It's a big misconception. But people don't want to hear that. They think there is a savings due to deregulation. And the only real savings to be had are the ones that are actually crafted by the local utilities in response to the local regulatory authorities."
Costello points to the Massachusetts model, which mandated that all energy users must save 10% when the state began deregulation in 1998. "What the [lawmakers] basically did was made competition impossible to happen in the state, so no one really buys power from anyone else-- maybe only 1% of consumers," he says. "Because they think they are getting a 10% savings. But if you look at the energy bill, you may be paying only 2.8 cents per kWh, but it really costs 4.5 cents. They are just deferring the costs out 10 years out from now. It's the same in California and in most other states that have gone through the restructuring process."
While noting that the majority of states that have opened to competition have not developed a system that promotes competition, Costello says that a handful of states have developed successful programs. Pointing to Pennsylvania as an example, he says, "In Pennsylvania, if you do nothing, you lose money. But if you pick a supplier you can save 3% to 5%. In Pennsylvania, they didn't guarantee everybody 10% savings, they might have said, 'Everybody gets 3% [savings] and, if you are lucky, you may get 10%.' They made the standard offer a lot closer to reality so there are a lot more games to be played in Pennsylvania and people could actually go out and competitively buy and save something."
While supermarkets may not see 30% savings on their energy bills when their state opens the market to competition, experts agree that retailers should educate themselves on the contract negotiation process so they can better understand their options in the new environment. "In the previously unregulated world, customers could count on their state utility regulators to keep the pricing process reasonable," says John Athas, manager of retail business strategy, Select Energy Inc., Berlin, Conn. "Today, it is up to the customer to negotiate power supply contracts, which requires knowing something about how providers price their energy."
Costello says that to prepare for competition, retailers should assemble a procurement strategy team and develop a strategy that includes conducting a companywide analysis of energy use, developing load-profile data to identify aggregation opportunities and creating a request for proposal (REP). "The procurement process involves creating an energy team comprised of associates from purchasing, energy management, facilities management and financial departments," he says. "Then, this group should familiarize the service providers with the company's operation; write an RFP for the fuels being procured; issue an RFP to the selected energy service providers; review their responses; request an in-depth presentation from the selected provider; and begin contract negotiations with the selected energy service provider."
Costello recommends that retailers interview approximately 10 energy service providers (ESP). "Electricity is the only commodity that is manufactured, transmitted, distributed and consumed all within the same second," he says. "Hence, the time value of electricity represents a major component of its costs. So while one might think you need only ask a few reliable ESPs for prices then pick the lowest one, in doing so other opportunities to reduce costs further--such as load shedding, interruptability, conservation, fuel switching, real-time pricing and negotiating more favorable contract terms and conditions, may be missed."
Speaking at the Food Marketing Institute's Energy & Technical Services Conference held in September, Kathy Loftus, energy and regulatory affairs manager, Shaw's Supermarkets, East Bridgewater, Mass., outlined Shaw's journey from prederegulation through post-competition. To prepare for deregulation, Loftus said, Shaw's joined numerous coalitions and organized meetings with state grocers associations, legislators and other groups. The company then hired an independent procurement specialist to help with the REP process. "When the bids came in, not one could beat the standard offer for a short-term contract for supply only," she said. "Many wanted all-or-nothing package deals that would last five to seven years." After waiting nearly a year for the issue of stranded costs to shake out, Shaw's then reviewed its top four bids and selected a provider.
In explaining the process, Loftus stressed the importance of keeping current on the contract negotiation process and on finding other ways to reduce costs. She points to such energy-saving techniques as aggregating bills, retrofitting lighting, using variable-speed drives for compressors/condensers with inverter duty motors and using high-efficiency HVAC systems. "Continue to work with suppliers and regulatory agencies to mitigate billing problems and work with utilities and customer groups to prevent ridiculous stand-by rates for self- and cogenerators," she said. "It's still imperative to watch energy consumption. A kWh saved may not mean 10 cents saved anymore, but it still has a direct impact on profitability."
Indeed, in addition to negotiating contracts, retailers should keep abreast of new technologies in the market. "Reducing energy by 30% or more is realistic, particularly for larger companies, although such a reduction may require more than finding the lowest price commodity," says Athas, who notes that companies can realize substantial savings by taking a multifaceted approach to energy management. "Each energy program must be tailored to individual energy customers, and should include a combination of electricity commodity savings, a thorough evaluation of current energy usage and an aggressive energy management program."
In an effort to reduce energy costs, Fred Meyer Inc., Portland, Ore., completed a major retrofit of several retail locations as well as a distribution center. The stores feature T-8 fluorescent lamps and electronic ballasts, which cut lighting energy use by about 35%, according to a customer profile developed by Portland General Electric, which worked with the retailer on the retrofit. The company also installed outside air economizers on the HVAC systems at several store locations, arranged compressors on racks according to the output temperature, resulting in better temperature control and fresher food, and added a computerized refrigeration control system and thermosiphon oil cooling retrofit.
"The use of new technology is at the heart of many energy management programs, as competition in the electricity marketplace is driving utilities and new energy service providers to customize services and introduce new products to meet customer needs," says Steve Kiesner, president, Edison Electric Institute, Washington, D.C. "In response to customer demands for a greater variety of service options and lower rates, energy service providers are seeking ways to integrate electricity with other services, offering new products designed to lower energy usage and experimenting with such services as real-time pricing (see sidebar, "Real-time pricing: A path to savings").
Steven Tilk, customer account manager, Southern California Edison, who served as the account manager for a recent upgrade at Ralphs' stores in Southern California, notes that refrigeration and air conditioning are key areas that retailers should focus on when looking to reduce energy costs.
"Refrigeration and air conditioning equipment account for about 65% of the energy used in a store," he says. "By installing variable-speed drives, energy-efficient compressors and energy management control systems, a store's overall energy consumption can be reduced, thereby saving on the bottom line."
In addition to implementing energy-efficient systems, trade observers say, retailers should explore some of the new energy services that are becoming available as a way to better monitor and/or reduce their monthly energy bills. "As the electricity restructuring process continues to shake out, you will see more people paying attention to the energy services stuff, so we're going to see a lot more innovation in areas such as rate of financing and billing issues," Costello says. "If 'you are a supermarket chain and you have stores in multiple states with numerous meters, you don't have time to look at all those bills. The new competitive market has spawned companies that will take all your bills, feed them through energy management software that makes sure you're getting the right rate, and put it in a single bill. Something like this is a great cost-effective service that can be done better than supermarkets could ever internally do it themselves for a fraction of the cost. But this has nothing to do with the price of energy--it has to do with the field of energy, but not the procurement of energy."
As new technologies flood the market and energy service providers' offerings continue to expand, many retailers are choosing to oursource their energy management activities. "The whole issue is that, in reality, all these new entrants in the marketplace really want to sell you energy conservation stuff--like controls, secondary refrigeration, lights--those kinds of things," Costello says. "A lot of companies are coming in now and saying, 'Hey we'll take over your entire maintenance services,' so that's where you're seeing a little movement."
Shaw's Supermarkets recently awarded its Massachusetts and Rhode Island power contract to Select Energy. "Because we are already very well equipped with energy management technologies, we pursued savings on electricity supply as the next logical step," Loftus said.
Likewise, San Diego, Calif.-based Petco recently signed an agreement with Sempra Energy Solutions, a subsidiary of Sempra Energy, San Diego, last year calling for Sempra to provide energy information services and competitively priced electricity to 115 of Petco's locations in California.
"Our agreement with Sempra Energy Solutions allows us to test the waters of deregulation with our California store locations and examine future opportunities in other states as they undergo deregulation," said Ken Moss, energy manager for Petco, in a news release announcing the partnership. Through the agreement, Sempra monitors Petco's energy usage and costs and analyzes trends, the company said. In addition, the company's technicians check for billing errors, review tariff options, identify cost variances and negotiate cost reductions. The system also is being used to consolidate Petco's invoices from its various utility providers into a single summary for the retailer to review.
While noting that outsourcing is an attractive trend that is taking shape in the supermarket industry, Tilk believes it is not in a retailer's best interest to completely outsource the energy management function. "Financially, it looks enticing to purchase 'cold air' while the supermarket concentrates on selling its wares," he says. "However, in reality, energy management is a critical function that goes hand in hand with the operations and construction organizations."
Supermarkets: The next utility?
While there is no question that utilities will face competition from outside sources as the electricity market is restructured, could supermarkets be one of them?
A report, titled "Next Century's Utilities," conducted by ICL, Berkshire, England, points to this possibility in the United Kingdom. "In the longer term, forces from outside the traditional U.K. utility markets may also pose a threat," the report stated. "In particular, some of the big supermarkets along with Virgin, have been earmarked as possible new providers of a utility service."
David Loughran, vice president, utilities, North America, ICL, notes that as deregulation separates the generation, distribution and supply functions, supermarkets are in prime position to enter the electricity supply market.
"In the U.K., deregulation is now in the second stage, where residential consumers have a choice of energy provider," he says. "And what we see in the medium to longer term is that new entrants to the energy provider marketplace are likely to be people who have good brand names and a renown for customer service." Loughran points to Virgin as an example, noting that the company recently announced its intention to set up an energy company, "This is where the supermarket comes in because in this new environment people who own customer relationships are very key," he says. "And here are supermarkets-- who know how to manage brands and how to manage customer relationships--and they are suddenly able to sell a commodity in the same way as they sell food. A utility company wouldn't know a customer if it bumped into one."
Noting that there are numerous issues to be resolved, Loughran says the most likely scenario is for retailers to outsource electricity supply and bill management, but be responsible for managing the customer relationships. "Supermarkets can basically leverage their buying power and take their access to their customers and go to an electricity supplier and say, 'What price will you sell me electricity if I can provide you with x amount of customers?'" he says.
Loughran points to the possibility of using a loyalty program to offer deals on electricity. "A retailer can say to its customer, 'If you spend so much with us, we'll sell you electricity for cheaper,'" he says. "It's kind of like the Price Club model.
"It's really about deciding how you want to go about broadening your product offerings and how you can build brand loyalty into it by using additional product offerings," Loughran says. "If you get points by shopping at Safeway that you can then put toward your electricity bill, that's going to provide you with a lock in to make sure you keep shopping at Safeway."
Real-time pricing: A path to savings
As retailers look for ways to save on their energy costs, real-time pricing is emerging as a way to do this. According to Richard Costello, manager of energy consulting services, Siemens Building and Technologies, Buffalo Grove, Ill., to determine whether real-time pricing is a possibility, retailers need to know which equipment can be turned off to enable the overall reduction of power for a specific time period. He offers the following suggestions:
1. Change your current defrost schedule. See if you can go without it during high-cost hours.
2. Turn off your anti-fog heaters during high-cost hours.
3. Pre-cool cases and walk-in coolers within allowable temperature limits. Then allow the temperature to rise, also within limits, during high-cost electricity usage hours.
4. Lower the percentage of outdoor air during high-cost hours. The use of demand control ventilation would also assist you in providing the correct amount of outdoor air.
5. Pre-cool the store to achieve a thermal storage effect. Changing the temperature setpoints during the high-cost hours will shift energy usage to different periods of the day.
6. Use gas-fired desiccant units to lessen the load on the HVAC systems both during and after high-cost hours.
7. Temporarily turn off ice cube machines.
8. Temporarily turn off electric hot water heaters.
9. Temporarily change the times you use electric fryers and ovens.
10. Use the box crusher or compacter during off-peak hours.
|Printer friendly Cite/link Email Feedback|
|Comment:||Energy management: Generating a strategy for savings.|
|Article Type:||Brief Article|
|Date:||Jan 1, 2000|
|Previous Article:||Markets under the microscope.|
|Next Article:||How to spot the wolf in sheep'S clothing.|