Choose Solutions, Not Facts

19 04 2011

State and federal budgets are headed for the cliff to varying degrees with few exceptions.  Here in Wisconsin, we’ve had the Battle Royale fight to the death cage match with the repubs on one side and the unions on the other while the dems were hiding out in a witness protection plan.

Meanwhile at the federal level, we are on a dangerous trajectory unseen in my lifetime.  People have whined about the deficit and debt since my adolescence – the Miracle on Ice days against the Soviet Union.  I kept saying, “It’s not a problem.  It’s not a problem.”  Why?  Because the debt as a percentage of our economy was reasonable, and flat but very few people consider this metric – the one that matters most.  They just clobber each other over the head and call each other names and we have Jay Leno fodder like “pay-go”.

However, this all changed since the meltdown Lehman Brothers in the fall of 2008.  The debt as a percentage of our economy really IS becoming a major concern.  We are staring at $1.6 trillion deficits for as far as the eye can see.  Personally, I think the word trillion should be banned because it sounds inconsequential.  How about $1.6 million million, or $1,600 billion?

Do we cut spending, take away grandma’s pharmaceuticals, sell her home, and set her and her senile dog up in a tent under the bridge, or do we fleece “the rich”.  See, I’ve always believed when politicians talk about “the rich” they mean households with incomes of two freshly college-educated people, say an engineer and a nurse or a school teacher and pharmacist.

As a rational person, I did a little Saturday morning research and some pretty simple math to prove my point.  The chart below containing data from the IRS paints a pretty clear and grim picture for those expecting a free ride from “the rich”.  What it shows is total incomes and numbers of returns (households) by income bracket.  The average income of those in the top 1% is $1.2 million and the next 4% the average drops sharply to $220,000.  My analysis goes like this: suppose we just took everything these people made above $100k, $250k, and so on.  Taking everything in excess of $100k from the top 10% of earners is “only” $2.4 trillion – $800 billion more than the deficit.  I.e., if the government confiscated all household income above $100k, we would have an $800 billion surplus.  But almost no one in this country considers $100k to be wealthy.

So let’s move to $250k, which apparently according to the President is the line between the rich and not rich because he’s said ten thousand times he’s not touching the piggy bank of anyone making less than $250k.  Well guess what; if we take everything in excess of $250k, it doesn’t even balance the budget.  Everything!  Of course if we tried this, no one would make more than $250k.  If we took 90%, there would be very little income over $250k and so on.  Lastly, if we take everything in excess of $1 million, you know, stick it to the rich, it has practically a negligible impact on the deficit.  Hello Pesky!  And remember, this is EVERYTHING above $1 million.

I conclude with facts that raising taxes on “the rich” is akin to fixing the weather-stripping on a large commercial building that is hemorrhaging energy waste.

And so it goes for energy savings.  One has to ask themselves, what can I expect for savings to pay for a renovation I want?  Start by considering you can’t save more than the building or a piece of equipment is using.  Sound pretty ridiculously simple?  Some end users could learn from this.

If you are on a buildings and grounds committee, you should know a few basic rules of thumb.  I will use schools as an example here.  New construction costs around $150 per square foot.  The cost of lighting and HVAC for the building is probably 20-30% of that cost with HVAC costing $20-$35 per square foot.  People should consider their own energy costs per square foot, but it’s most likely going to be in the $1-$2 per square foot per year.

So put some numbers together to get a SWAG (scientific wild ass guess) of what your return on investment may be for an HVAC system replacement.  At Michaels we call such a limit of savings or return on investment a bracket or a bracket calculation.  For example, if you are paying $1.50 per square foot per year and a new HVAC system costs $30 per square foot, your best possible return is a 20 year payback – that is if you save ALL the energy being consumed now.  It is safe to say that actual payback is twice that long.  Ditto for adding a variable speed drive to a pump.  One of our engineers may consider a variable speed drive for a pump and I may pull out my calculator and within thirty seconds conclude it’s never going to fly.  The motor uses $750 electricity at most, and installing a drive is going to be at least $2,000.  After screwing around with more detailed data and analysis, it will be a 12 year payback and that’s going nowhere.

Imagine being hired to analyze options for an HVAC replacement, considering several alternative systems.  Wouldn’t you know it! The payback was infinite because the new system would cost more to operate in energy than the 90 year old steam system that provides no ventilation and no air conditioning.  The board is shocked at the price tag and doesn’t want to pay for the study!  They were “misled”.  Wha?  I would call it an introduction to the real world, circa 2011.

This is like going to the optometrist because the patient can’t see very well, thinking they need a $100 pair of glasses.  The doctor does his series of tests and he diagnoses cataracts.  The exam costs $150 and the cataract surgery costs $7,000.  Otherwise, the eyes are fine.  The patient is enraged and refuses to pay for the exam.  The patient still wants the eyeglasses – prescribed by said optometrist!  This is a perfect allegory to a real story.

You may be able to choose among solutions, but you cannot rewrite history, pick your own reality, or defy the arithmetic.

Tidbits

Checking in after my rant No Brazil Syndrome, how many radiation-related deaths have occurred as a result of Fukushima’s damage sustained in March 11’s massive earthquake?  Zero.  Meanwhile, in the same period, probably more than 3,000 Americans have died in car crashes and deaths from the tsunami in Japan alone exceed 13,000.

Like most other things, you (you) have infinitely more control over your well being than that thing poses.  Stay out of the sun or wear strong sunscreen, don’t smoke, keep your BMI within better than recommended limits, skip the red meat, wear your seatbelt/helmet, exercise, don’t break the speed limit, check your cholesterol and blood pressure, get your colonoscopies…

written by Jeffrey L. Ihnen, P.E., LEED AP

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Planet of the Alpha Ape – EE Killer

29 06 2010

I know next to nothing, no, make that nothing about anthropology.  However, on several occasions I have read that throughout the animal kingdom, every social group, pack, pod, litter, colony, team, board of supervisors, has an alpha that leads the bunch.

This holds true for humans although the outward authority of the alpha differs a lot from one group to another.  Take for example a board of directors for a non-profit, a school board, and for-profit enterprises.  The alpha may simply guide discussions at meetings, keep things on track and moving along and assist the group in coming to a consensus or at least a voting majority.  This works well and is beneficial to the team.  People are allowed to voice their opinions, listen to others, persuade and/or be persuaded and the group as a whole makes decisions that a true majority is in favor of.

Then there is the alpha ape.  The alpha ape is an ignorant, chest thumping, loud mouth who is going to save the rest of the loutish boors on the board from their own stupidity.

On one occasion, we were in the early stages of design for a major building project for a college facility.  The college’s mission or vision statement (or something like that) explained that they were essentially committed to be an isolated ecosystem.  The only mass that enters and exits the system is people.  They grow their own food, recycle their waste, generate all the tiny bit of energy they use, and have no runoff.  Of course this is facetious, but the statement indicated they have the greenest campus in the world.

So there we were – on a teleconference with their board, the architect, and some other stakeholders when the subject of LEED is put on the table.  The alpha ape takes over for the client’s board essentially saying, “No way.  Costs a fortune.  I know all about it. It’s a waste of money and we’re not going follow the 10,000 other morons who do this LEED crap.  We can follow the LEED stuff without messing with those drones.”  We on the other end of the phone were rolling our eyes and shaking our heads so loudly we had to put the phone on mute.  If these people did this project and didn’t “waste their time and money” with LEED, they would regret it big time.  It would literally be an embarrassment for a long time, we thought.  They would look like fools with that mission statement and how would their donors respond?  And wouldn’t you know it, a couple months later we got a call from the college president.  They wanted to know how much LEED would cost, anyway.  I wonder how alpha ape got out of that with his ego intact.  Months later the project gets LEED Gold and this puts the president is in a state of euphoric nirvana as a result.

In a more recent case, we presented a school district with a project that would cut their energy costs by one third with a payback of barely over a year.  In another case, we presented a financial institution with the opportunity to cut its energy costs by more than half with a 1.6 year payback[1].  In the former case the administrator exerted his brilliance and authority by killing the project.   Meanwhile, he wanted to do a lighting project that had a payback of about 10 years but it didn’t work out financially – the monthly savings would not be greater than the monthly payments.  But he wasn’t about to look frail by lumping that in with our project that has a 1.5 year payback and would save 30% of total consumption.  Brilliant!  How do these people think?  I wonder how they fit their ego through the door in the morning.

What are the traits/proclivities of the alpha ape?

  • Cannot believe how much smarter he is relative to everyone else in the room.
  • Revels at the challenge of shooting down the most obviously beneficial projects, just to demonstrate his power and influence.
  • Sucks every bit of intellectual capital he can get from a consultant for free, and then feels a strong sense of accomplishment for paying nothing and wasting thousands of dollars of consultant’s time and expenses.
  • Drives an expensive car.
  • Is less charitable than Joe Biden.
  • Won’t engage in any competition such as video games, golf or pinochle where he knows he may lose.
  • Screams at his 10 year old for booting a ground ball in little league.
  • Gets into fights with parents on the opposing team.
  • Budges in line at the airport.
  • Is rude and obnoxious with wait staff and leaves $2 tips.
  • Won’t give Wiffle balls back to neighbor kids who are able to clear his 15 foot backyard fence.
  • Dogs growl and bark wildly in his presence – like the Terminator.

How does one overthrow an alpha?  In the world of the predator, say a pack of lions, a challenger will fight the alpha perhaps to its death, and then kill the loser alpha’s cubs.  An energy efficiency or LEED project in most cases does not rise to this level of importance.  But seriously, if you can make an alpha ape look like the fool that he is, and this is typically not difficult – it just takes some gastro rectitude, he can fade like a day-old poppy.


[1] You may be thinking: “30%, sure.  50% sure.”  We haven’t come up short on actual savings versus predicted savings yet.

written by Jeffrey L. Ihnen, P.E., LEED AP





Decoupling, Stupid

16 06 2010

One way the utility business works like the rest of the economy is that it sells its products/commodities at a price that is higher than the cost of production, on average.  The more utilities sell, the greater their gross profit.  This is at odds with utilities’ incentive to save energy with energy efficiency programs.  As a result, some utility executives are opposed to energy efficiency programs.  That is a short-sighted view but that’s a story for a different day.

As a result of this dichotomy, a pricing mechanism known as decoupling has been developed.  This NREL paper gives a pretty good overview.   It says simply that “Decoupling is a rate adjustment mechanism that breaks the link between the amount of energy a utility sells and the revenue it collects to recover the fixed costs of providing service to customers.”  There are a number of specific ways to do this, some of which are described in the NREL paper, but the bottom line is utilities are less reliant on sales for their well being.

This may seem like an ingenious idea, but I see a lot of significant, if not major hang-ups.  One of the benefits is reported to be price and revenue stability.  But here’s the problem as I see it: revenue stability equals profit volatility.  Take the lousy economy we’ve had the last couple years.  Utility sales are way down but the utility keeps collecting bills that are closer to the long term averages, which means prices increase (if I know math, and I think I do).  They are selling less but there is this decoupled “fixed” cost pasted to customers’ bills.  Good for them.  What about the customers?  They are cutting back on everything due to wage pressures, layoffs, production cutbacks, and lower profits.  So what do they get in return?  A higher energy costs per unit purchased, just what they don’t need.

The opposite is also true.  Say we get a really hot summer.  Now the utility has to sell, and generate or purchase a lot more energy.  In this case, a lot might be 10% more, but that has a huge effect on price.

I just watched a demand response webinar.  Demand response incentivizes customers to cut back during peak periods when energy costs are very high because everything but homeowner’s Honda generators are putting power on the grid.  One way to deliver demand response is to pass the cost of putting the last kilowatt of power on the grid.  I don’t know where the last kW comes from for sure, but it’s way expensive and for good reason.  As full capacity is reached, power generators (companies) either charge the arm of your first born or we get brown outs.  So when the utility passes this cost to the customer the cost is huge, like 5-10 times normal cost.  Peak power is very expensive.

Back to the hot weather.  Now the utility has to sell all this really expensive electricity with less ability to recover (1) the extra high price of electricity and (2) the larger volume of energy delivered.  I suppose if you have real-time pricing described above, this will be mitigated.  But many states including MN and WI have decoupling pricing mechanisms in place, but practically no demand response or real time pricing.  The decoupling in MN and WI is news to me, but if NREL says so, it must be true.

So it seems to me that decoupling presents at least as many and as big of problems as it solves.  Did Washington come up with this?

When I interview with job candidates I usually explain the utility market and why energy efficiency programs are implemented –to keep costs down by delaying or avoiding the construction of power plants, poles and wires.  Again, it seems to me decoupling is at odds with this because the intent is to protect revenue, not prices.  If you protect revenue the “societal” benefits would seem to be lower to me.

In general, not just talking about utilities, decoupling supply and demand is a horrible idea.  Despite all the political bomb throwing regarding healthcare, the number one cause of soaring healthcare costs, which continues to go unaddressed, is the decoupling of premiums and services rendered.  For decades the system worked like this: pay a flat rate and consume all you want.  It doesn’t take a genius to predict what will happen.  In California, they kinda sorta deregulated the electricity market last decade.  They decoupled generation from delivery, deregulated wholesale prices for the utilities but capped consumer prices.  Result: utility bankruptcies and the Governator in a recall election.

I am not saying decoupling is going to result in any sort of disaster like these examples, but messing with Econ 101 supply and demand is almost never a good idea.  If we want to protect revenue, why not just build it into the rate case.  Societal benefits may take the same hit, but at least customers pay for what they consume, “real time”.

If we want to control consumption and keep prices in check, we need all the market effects of supply, demand, and pricing that we can get.  A complete free for all would go too far for a bunch of reasons I’ll save for another day, but we need more pricing response, like demand response described above, not less.

written by Jeffrey L. Ihnen, P.E., LEED AP





IPO Return, Treasury Risk

13 04 2010

If there’s one thing that most people painfully realized over the past couple years, it’s that there is risk in putting your money in anything in hopes of earning a return on investment.  Riding a company into bankruptcy is an obvious one.  I’ve done that several times by investing in fast-growing start-ups, initial public offerings (IPO) and stock options.  Invest $3,000 for 100 shares of common stock and a few years later the company emerges from bankruptcy (isn’t that a cute phrase – it sounds like a daffodil blooming in spring but it’s more like rummaging for your charred silverware after your house burned to the ground) … anyway that investment may “emerge” at 10 shares worth $6 apiece, or if they liquidate you get a check for 36 cents.

If you avoid Bernie Madoff funds, you can greatly reduce your risk by buying mutual funds, which more or less track the entire stock market.  Corporate bonds might be next.  In the case of bankruptcy, provided the government doesn’t take over the company, you are first in line to get your money back.  Next might be U.S. government bonds but I wouldn’t go near them now as their value moves in the opposite direction of interest rates.  Just take a look where interest rates are now compared to historic numbers and do the math.  You CAN lose a lot of money in bonds.  Then there are money market funds that invest in super safe short term treasuries, but right now you earn about nickel a month per $1,000 invested.  Finally, there’s cash in the bank, which earns even less or zero but at least the first $100,000 is insured by the feds (the minimum was increased to something but I don’t care).

Commercial and industrial facility owners can invest in energy efficiency.  Lighting would be the bonds of energy efficiency, with the exception that you’re virtually guaranteed a return on investment as long as you can do 5th grade math to ensure you aren’t being ripped off.  Beyond that, the vast majority of energy efficiency projects carry the full gamut of risk from guaranteed savings (which isn’t free) and just buying a new piece of expensive equipment or system that may not save you a dime or could even increase your energy costs.

The big money is in custom measures and the risk varies depending who is identifying the opportunities and who, if anyone, is calculating savings.  If you browse our website you will find we identify measures and quantify savings all the time.  For many large projects we take a two phase approach to the analysis.  Phase 1 is to identify opportunities and guesstimate cost and savings to within plus or minus 40%, which means a project guesstimated to have a 2 year payback may actually have a payback from less than a year to more than 4.5 years, with the most likely being 2 years.

Phase 2 is a detailed analysis, sometimes with quotes from contractors, and energy analysis based on specific equipment performance characteristics, construction documents, and metered data.  After Phase 2, the guesstimates are sharpened to within plus or minus 10%, perhaps.  Now that 2 year payback would range from 1.6 years to 2.4 years, with the most likely being 2 years.

So energy analysis can take your project from a completely unknown return on investment to something that is close to guaranteed, and if you want, that can be added too.  The cost of hiring a firm that knows what they’re doing, delivering both quantity and accuracy of cost and savings estimates, is considered by end-users to be anything from reasonable to outrageously expensive.  Owners with smaller facilities and especially government ones tend to be at the latter portion of that range.  Large industrials may be closer to the front.

But the kicker is, utilities that run efficiency programs often pay for a good share or all of the energy analysis, sometimes even both phases of analysis described above.  But yet, end users may baulk.  We recently completed phase 2 analyses that largely demonstrated our phase 1 estimates were pretty good and some representatives of customers were scoffing that phase 2 was a waste of money.  Well look at the “uncertainty analysis” above and tell me, would you use “free money” from the utility to shore up your investment certainty before you invest a dime to implement anything, OR NOT?

As my colleague says, “It’s a no BRAINER!  Gee willikers!”

As an investment, an energy efficiency project may pay for itself four or five times or even more over its lifetime.  Peter Lynch who ran the Fidelity Magellan fund during the 80s would call doubling your investment a one bagger; tripling, a two bagger and so on.  This makes energy efficiency a likely two bagger and in many cases a four bagger.  It’s a home run with the risk of a money market fund.

Why doesn’t everyone get on this ride?  There are many reasons; some good ones and some utterly stupid ones.

written by Jeffrey L. Ihnen, P.E., LEED AP





Need Not Miracles

23 02 2010

Thousands, make that millions of people, including some smart people and congress people, when talking solutions for our energy efficiency low-carbon future are continuously babbling about “technology” that will save us all.  Bill Gates says we need Miracles.  Whadahyou talking about man?  The White House announces $130 million for a new building energy efficiency effort – “a multi-agency initiative to spur regional economic growth while making buildings more energy efficient.”  It will be “an Energy Innovation Hub focused on developing new technologies to improve the design of energy-efficient building systems”.  Get ready for cold fusion to reemerge.

Let me tell you somethin’, we don’t need to throw bazillions of dollars into developing these new magic elixirs – not now anyway.  We need the public and organizations to take action with the “miracles” that are already on the shelf at your local home improvement center or mechanical and electrical contractors’ warehouse.  You saw last week’s rant on people at Boulder lead to the energy efficiency trough but refusing to drink.  This is the problem.  Why develop a bunch of other junk that people won’t buy?

I’ve been in the energy efficiency market for 14 years and there has really been very little progress in energy efficient products or technologies for commercial buildings during this period.  Why?  In large part because there are physical and scientific barriers.  Boilers and furnaces were available in the 90% plus efficiency then as they are now.  Electric motors run in the mid 90% efficiency range.  There is this theoretical barrier of 100% efficiency that Mr. Gates may think is just a nuisance.  Maybe it’s just that nobody has thought about it hard enough.  Chillers, lighting, variable frequency drives, compact fluorescent lighting, energy recovery – there have been no major breakthroughs with this stuff in 14 years.  Prices for some things have come down a lot and quality has improved.  The thing is, these technologies have become very cost effective as prices have dropped and energy costs risen.  Just use them already!

Other innovative system designs such as displacement ventilation and chilled beam cooling systems have been refined but I don’t think they were born in the past 14 years.  But even an “efficient” system can waste energy like congress can.  See previous posts “Dermal Beauty, Ugly to the Bone”, “The More You Spend, The More You Save”, and “LEED and the Not Happenin’ Energy Savings”.

Rather than developing miracles that many think are just sitting there waiting to be discovered, let’s use cost-effective technologies we have right now.  Compact fluorescent bulbs use 70% less electricity than incandescent, but they still only take up 30% of unit sales with the rest being incandescent in the screw-in category.  And this is in CA where programs have been running forever.  Beyond that, you would be amazed at how many variable frequency drives are spinning away at or near 60 Hz (that’s full speed) because of some bonehead control setpoint; heating and cooling systems fighting one another like a car traveling down the road with the brakes applied; many pieces of large “efficient” equipment like huge air compressors online blowing off compressed air (wasting it) or otherwise running at full capacity when only a tiny fraction is needed; it’s dogs and cats living together – mass hysteria!

McKinsey  determined that the U.S. can cost effectively reduce energy consumption by 23% compared to BAU (business as usual – I like that one).  To become zero carbon, the first thing that needs to happen is minimize consumption through energy efficiency with existing technologies, system design, and controls optimization.  Once this happens, money that used to fly out the window to pay energy bills piles up so fast that renewable sources can be purchased, even though it may not be cost effective.  I’ve been through the exercise using a college campus as an example.  The perverse thing is that the more money an entity is wasting on energy, the easier it is to become carbon neutral.  How can this be?  There is a huge cash flow going to pay energy bills.  Much of that can first be cost effectively captured through energy savings.  Since more waste is eliminated, more cash piles up and renewable sources can be purchased sooner as the last leg to carbon neutral.  Of course you don’t want to be wasting energy in the first place, but if you are….

Why isn’t this happening?  There are enough barriers and discussion to fill a rack of encyclopedias but I’ve had enough for this week.

written by Jeffrey L. Ihnen, P.E., LEED AP