Burnin Down the House

29 03 2011

Some things in life you have to fully commit yourself to or they will end in colossal failure, or immeasurably small success.  When I was a kid I played Evel Knievel by setting up ramps of 2×12 planks and concrete blocks.  I jumped my bike across maybe a five foot “canyon”.  Note, this was before mountain bikes.  Gary Fischer may have been developing his mountain bike in his garage but there was nothing available on the market.  I used a purple girl’s bike, single speed, no shock absorbers, no foot clips, and certainly no helmet.  Why the girl’s bike?  The consequences of failure on a boy’s bike were brutal.  Hitting the ramp at half speed would end in disaster.  I’m sure similar consequences exist for crazy stuff like ski jumping, doing flips on/with anything.  Even when you have an easy play in sports, you have to let it fly or you’re bound to choke.  There are many things you can’t half do.

Fifteen years ago utility deregulation was the rage.  Deregulation has been a boon to consumers in many industries including airlines, and telecommunications.  It’s been brutal to product and service providers that weren’t prepared for the “free market”.  Plenty of airlines went bust and are gone; Eastern, TWA, PanAm, and Braniff to name a few.  It did allow innovative companies like Southwest to enter the market and develop new niches and business models.

Electric utility deregulation had varied results, mostly in different shades of failure.  The darkest shade of failure, pitch black, was probably California where, you guessed it, they hit the ramp at half speed and crashed and burned badly.  They deregulated wholesale prices but capped retail prices to end users.  The fools who approved this are clueless with respect to how markets work.  You have to have price response to the point of use or the system will collapse.  Healthcare anyone?  Consumers kept buying relatively cheap power, while companies like NRG Energy and Enron held all the aces and could charge what they wanted to the utilities.  Result: bankruptcy across the board for the utilities, an Austrian immigrant body builder took over as the Governator in a recall election.

Deregulation didn’t work for electricity for a number of reasons in my opinion.

  • First, the system was built over many decades on a monopolistic, captive consumer, model.  The cost to enter the market as a provider is huge, at maybe a billion dollars for a 500 MW plant.  Smaller plants would be more costly per unit output. …not exactly like starting a coffee joint.
  • It’s instantaneous production and sale, which means producers can charge the same price – so who would build peaking plants, when base load plants can charge the same as plants that are used much less often?
  • The entire economy was built on consistently low-cost power and therefore the “strike price” (say uncle) would be much higher because power is THAT important to doing business.
  • Finally, generators can’t just pick up and move to where demand is highest.  If generators could package their kWh in six packs, cases, or in bulk quantities to distribute to retailers, grocery stores, drug stores, convenience stores, and Amazon.com for consumers to take home and use as needed, deregulation of electricity would work.

Like all these half baked efforts from child stuntmen to electricity deregulation, end users can’t half do an energy efficiency project and expect decent results.  You can’t replace an HVAC system and put in crap for controls or not commission the system and expect results.  You can’t put in a completely different but proven refrigeration system, skip design review by the EE consultant, skip VFDs, skip heat recovery, and skip functional testing of the system and expect more than barely perceptible impacts.  End users may spend 20% extra to implement a new concept but skip the 1-2% needed to make sure it really works and another couple percent on enhancements to capture much of the savings.

This presents a major untapped opportunity with EE programs.  The above refrigeration case was for new construction.  Based on experience in several new construction programs providing services, evaluating programs, and doing retro-commissioning after the fact, I conclude new construction programs generate very little return on program dollar.  The “savings” are relative to essentially an arbitrary baseline.  But what is the market doing all by itself?  Actual attributable savings are relative to what the market, not a consensus reference point developed for something else (energy codes, which aren’t enforced anyway).

We will be doing a new construction market baseline study as part of a major utility program evaluation this summer.  I’ve been in this business long enough to bet a lot of money that most “savings” associated with new construction programs are happening anyway in absence of any program.

So what should programs be doing?  Burn down the house and start over.  Erase 70 years of one bad idea piled on another and start from scratch with a clean slate.  Rather than nibbling around the edges with some stupid occupancy sensors, daylighting sensors, extra insulation, and an efficient chiller (all of which are good but very limited ideas), develop means to completely raze and rebuild (pun intended) building and system designs.

Look, A&E firms are reticent to incorporate changes that make a difference.  Once an A&E team has been selected, they will want to charge exorbitant prices to make significant changes.  To some degree, I don’t blame them.  They charge double in part because of fear of the unknown and in part because they don’t want to do it.  It’s also due to the cheap and crappy market that consumers have been demanding for decades.  They don’t get paid enough to change and programs can’t afford meaningful change either.

Buildings need to be built with systems that are much simpler, low cost, and inherently difficult to dork up.  I have little to no doubt that we can develop a refrigeration and HVAC systems for grocery stores that will reduce energy consumption by about 40% compared to today’s status quo, for both gas and electricity.  The systems would be simpler, with fewer compressors, fewer condensers, fewer fans, less piping and less refrigerant loss.  It would be rugged and difficult to screw up.  If stores were built with this design en masse they would cost no more than the crap that goes in them now.  How?  Because of the simplicity.  Think of it this way.  Look at the power transmission systems built in the 1960s and earlier.  The towers are built as trusses with a bazillion small pieces of iron all bolted or riveted together with a bazillion times 100 fasteners.  What are they made of now?  One giant hunk of steel containing probably no more steel than the old ones.  They are cheaper to build, transport, install, and maintain, and they are probably stronger than the over-designed kludges of the past.  I’m saying something very similar can be done with building design.  

And you can’t develop the concept, hand it over to a contractor and not look at it again until the non-performing results start to come in.  It has to be shepherded through the design/development and commissioned.  THIS is what new construction programs ought to be doing.  But it takes a customer that wants to hit the ramp at full speed, and quit nibbling a little here and a little there with some LED lights and super duper low-e windows and a white roof.

Soon, we will be releasing a white paper that discusses the evolution, or I should say devolution of building design over the past 100 years, and what I am promoting going forward.  Get ready for that.


In an update on A Frivolous Novelty, the all-electric Nissan Leafs are flying off lots at the brisk pace of about 70 per month.  No need to check the decimal point.  That is correct.  About two or three per day, worldwide.  The average Nissan dealer probably sells two Altimas per day, by noon.  Save yours today!

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