Nicht Tee Kugel, Dos

8 03 2011

This week I am testing an additional medium for the The Energy Rant; the cartoon.  Click here to try it out.  Send email comments with your thoughts regarding this mechanism to me at jli@michaelsenergy.com.

Major barriers to EE for large commercial and industrial end users include;

  • Lack of time
  • Lack of expertise
  • Lack of capital
  • Risk aversion

If you don’t think end users are short on availability, just ask them.  Most end users don’t have time to commit to energy efficiency projects and most of the rest think they don’t have time.  The ones who really don’t have time get seven paid holidays and two-three weeks vacation while the latter group gets eleven paid holidays and six weeks vacation, if you know what I mean.

Most commercial building owner/occupants think of lighting retrofit, adding roof insulation and replacing windows or maybe replacing a boiler they think is 60% efficient.  Lighting may be ok but the rest of this stuff is almost always going to have a negligible impact on energy consumption.  Efficiency to most industrial end users means, just keep it rolling – widgets per shift, less maintenance.  Many times increasing widgets per shift and reducing maintenance is accompanied by energy efficiency, especially when EE is the primary reason to do project.  However, there are bails of cash on fire in many places that are invisible to folks who focus solely on keeping things going.  In other cases, we’ve seen industrial end users think they’re going to meet their 10% reduction goals by turning lights off.  Pssst.  Your lights only consume 4% of your energy bills.

Not enough money.  I’ve investigated commercial real estate from both an owner’s and leaser’s perspective.  The owner makes the tenant pay the utility bills in many/most cases, so there is little incentive for the owner to do anything.  The tenant’s perspective is “I have a three-year lease, this isn’t my building, and I don’t even know if I’ll be here after three years.”  For industrial end-users, capital is very precious and can take force majeure to get.

Then there is a real risk that savings won’t transpire as indicated.  Lighting is about the only measure customer’s can count on with high probability.  This is unfortunate because it doesn’t need to be that way.  It’s just that there are a lot of schlocks who make assumptions like an old boiler is 60% efficient.  As my boss says, if a boiler is really 60% efficient, turn and run as fast as you can because it may be about to blow.  We’ve seen schlock estimates indicating over one therm per square foot savings by adding insulation.  You might achieve these savings if one of the walls on your facility was missing prior to implementation.

Now we arrive at the subject of this week’s rant: efficiency bid programs.  We see a lot of efficiency bid programs, some of which are delivered by clients of ours.  They are typically an alternative to conventional custom efficiency incentive programs provided side by side.  They work like this: develop a project with cost and savings estimates and submit a proposal to the utility for an incentive.  The incentive is always greater than the standard custom efficiency incentive or why bother with the development and bid?  The program is purportedly competitive – i.e., a “free market” for incentives to maximize bang for the program buck.  If it’s competitive, somebody must lose.  This isn’t tee ball.

I cannot see how these programs don’t get slaughtered in a net to gross analysis.  Net savings are actual savings attributable to the program.  Gross savings are actual savings, period.  What’s the difference?  Net includes the effects of the program.  Did the program influence the customer’s decision to move forward with an EE project?

Let’s get back to the barriers now.  Time.  It takes just as much time for a customer and a contractor and/or consultant to develop the project for bid as it does to develop the project for a standard incentive.  And it takes more time to shepherd the thing trough the bid process.  Efficiency bid takes MORE time.  Which leads me to…

Risk.  As mentioned, there is risk the project won’t generate savings because the energy analyst is a schlock.  But for efficiency bid, there is risk, presumably, that there won’t even be an incentive after thousands of dollars are spent developing the project.  Remember, if this program is competitive, somebody loses.  Who is going to spend gobs of time not knowing whether they will get an incentive?  If the standard custom efficiency incentive is the consolation prize and it’s enough for a “go”, then why would the program waste money on a premium efficiency-bid incentive?

True story, last week we considered pursuing one of these bids for an industrial customer for which we had done a study.  We decided against it because (1) we only had a month to get it submitted and in that month you need to get the customer on board and a month is a nanosecond for a capital intensive corporation to allocate (2) extremely scarce capital, and therefore, (3) it was too big a risk for even us, the consultant, to get the whole thing pulled together in a month, at the mercy of the corporate bean counters.  There is far too little upside for our risk of getting something we have almost no control over to happen.

Somebody has to lose if this is competitive.  Most likely only the biggest customers are going to pursue these projects.  A major customer spends a bunch of time to put a bid together and then is told, sorry, you lose.  Now the utility is faced with a colossal PR disaster with a major customer that will raise Cain all the way to PSC’s office.  OR, the customer takes the standard custom incentive as a consolation prize, in which case the whole bid thing was a ruse to get extra program money – a free rider.

These efficiency bid programs probably look great on the surface but if one really understands market barriers and how large end-users allocate and budget capital, it seems like a big free rider program to me.  They take more time, not less.  They add risk rather than decrease risk.  They potentially provide more capital assistance, but at what I see is a disproportional addition of risk.

Tidbits

  • Ameren Missouri says they will pare back EE programs because they are costing shareholders return on investment.   Wow – although I consider it unfortunate, it’s understandable and refreshing to some degree to get straight talk from a utility that actually believes this.  I think a good portion of utilities really think this way but lead on as though they are saving the universe.   Do what it takes to look good to the regulators but with minimal real impact.  Come to think of it, these utilities may be like The Firm.  Once a partner in the EE programs and made aware of the scam, you’re stuck unless you want your car to accidently explode when you leave for home.  BTW, programs can be developed for utilities to make money on EE.  Just call 608.785.1900.
  • Don’t look now, the Chevy Volt has even less than the advertised 40 mile battery range – like about 40% less during cold weather as batteries don’t work well in cold weather.   Not only that, as mentioned in “A Frivolous Novelty” it takes about 5 kW to heat the cabin of the vehicle.  I “mistakenly” thought this was a big deal.  Not really.  At about 0.5 mile/kWh, the battery juice is consumed in less than a half hour.  That’s 50 kWh for 25 miles of driving but only 2.5 kWh for heating.  Who is going to pay $40,000 to be limited to 25 miles between charging?  Raise your hand.  Not all at once, it may make the planet wobble.
  • In one last bit of refreshing honesty, this guy provides a good assessment of plusses and minuses of the ban on the standard incandescent lamp:   Good assessment – far above average for that matter.

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