Shifting Energy Access for your Business

Energy is changing. Natural gas prices are low, electric cars are becoming more popular and LED light bulbs consume drastically less energy for the same amount of light. There are many new energy management tools and technologies available today that were not available five years ago, making it difficult to choose the right solution. To make matters worse, every business is different, every need is unique and every building provides its own challenges. How should you be shifting energy access for your business? With some forethought and planning any business can overcome those challenges and create the right energy resource plan. This plan begins with two very simple questions: what am I buying, and which energy product do I care about?

When we plug a laptop, cell phone, refrigerator or any electronic device into the wall, what are we buying?

This seemingly simple question has a very complex answer. Certainly we are buying electrons as electricity powers our world, from light bulbs to elevators. But is electricity and electrons the only product we buy when we plug ourselves into the wall? We are also demanding access to those electrons 24/7/365. The light bulb needs to turn on when I need light and the elevator needs to take me to the floor that I want to go to. Clearly access to energy is also important. Furthermore, I don’t just demand universal access to energy – I also demand that those electrons be delivered to me at 60 Hz and 110 V. If I did not receive my electricity with those constraints neither my toaster nor laptop would work. Obviously, we are purchasing more than just the electrons. We are also purchasing a reliable and stable infrastructure that is capable of providing on-demand access.

When we plug ourselves into the wall, are we buying electrons or are we buying access to electrons? To put it in another way, is access more important than electricity or is electricity more important than access?

This answer is simple. Yes – sometimes I value electrons more than I value access and other times I value access more than electrons. Let’s think about that. If I want to take a hot shower, I care about hot water. I don’t really care whether the water was heated an hour ago or 5 minutes ago. If the water could sit in a well-insulated tank for an hour, I can still take my shower. On the other hand, if I want to eat toast right now, I need access to electricity right now. Thus the value of electricity and the value of access to electricity are dependent on the situation. If I need a service right now, I care about access. If I don’t care when energy was consumed, I care about energy. The two are related based on when I need access.

What we need to remember is that our access to electricity is changing. I can now access electrons generated by solar panels on my roof. I only need 9W of access with an LED light bulb to instead of 60W to enjoy the same amount of brightness for a room. This changing access is realigning the way we purchase energy today.

Think about your business. There are some operations of your business that are critical – the stove and oven for a restaurant, the surgery room for a hospital, air conditioning for a gym. There are other operations that are non-critical. After understanding the business needs of your energy resource, a business can become more informed in how to best shift their changing access.

— Jimmy Jia

via Shifting Energy Access for your Business.

Money Management

The Seven Steps to Utility Money Management (part 1)

 

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The electric grid was built over one hundred years ago to provide economic advances. It accomplished that goal with flying colors. The first centralized power plant, built at Niagara Falls in the 1890’s, charged customers the equivalent of $320 per kWh when adjusted to 2013 dollars. Today, the average USA electric rate is $0.12 per kWh, a drop in the bucket. Access to cheap energy is no longer the luxury it was a hundred years ago. It is now a necessity.

Our world would halt without energy. We buy energy every time we plug into the electric grid. It provides the comforts in our homes – entertainment systems, laptops, lights and heat. It drives the economy with factories, data centers and warehouses. It gets us to work via elevators and escalators.

Energy and money are tied

Energy and the economy are intimately tied. We spend money to consume energy via utility bills. We consume energy to run our businesses and get paid from clients. Without energy, we would not have our economy. Without our economic power, we could not afford to buy energy.

Energy is invisible. We cannot touch it, see it or feel it. We have no intuition on how to quantify energy. Sure, it is measured in the kilowatt-hour (kWh). But what is a kWh? Many solutions try to monitor the resource, attempting to make the resource tangible. Even with these solutions, executive would be hard-pressed to describe what 1,000,000 kWh means to their business. Energy is a necessary, but abstract, commodity.

Money is tangible. We keep track of expenses and work to increase revenue. We are driven to maximize the bottom-line. Businesses use many century-old tools to manage money. They use profit & loss statements for quarterly snapshots, balance sheets to view current status and cash flow statements to make projections. Their uses are governed by generally accepted accounting practices (GAAP) or other accounting methodologies. As a result, every businessperson could describe in detail what $100,000 means to their business.

It turns out that in the Pacific Northwest, 1,000,000 kWh costs $100,000 to buy. Investing $100,000 is functionally equivalent to investing 1,000,000 kWh to run your business.

via The seven steps to utility money management.

Jimmy Jia

Money Management 2

The Seven Steps to Utility Money Management (part 2)

 

Is $30,000 cheap?

The system we built over the last one hundred years has dropped the cost of energy to virtually nothing. Yet the ease of consumption has only increased our total consumption. Not all of that consumption produces economic value. The EPA estimates that 30% of the energy consumed by the commercial sector is wasted. In the Pacific Northwest, the average electricity rate is half the national average. So if a business spends $100,000 per year in electricity, they are wasting approximately $30,000 per year.

Every business owner can think of many ways to invest an additional $30,000. But saving energy is actually the wrong approach. It is energy one doesn’t need to consume in the first place. It’s impossible to ‘save’ what one doesn’t need. It’s like buying more flour than one needs to make bread. A baker doesn’t save money by the simple act of buying the right amount of flour.

When we apply this framework to energy, we need to ask the question “can I function normally and consume less energy?” For instance, does one’s company function normally after replacing all incandescent bulbs with LEDs? Does an automated HVAC control system, affect productivity? Would weatherizing windows affect your business practices? In each case, the company will function as normal. Yet each energy savings measure could substantially reduce the electric bill. From an energy perspective, one saved energy. From a financial perspective, one reduced waste.

The common approach: Energy management to save money

The common approach to energy management is to purchase more energy efficient equipment. This takes up-front capital. Solution providers quantify the return-on-investment (ROI) of upgrades to make the project attractive. Some projects can have ROIs and paybacks of a few months to a few years. These are great income statement arguments.

A frequent challenge is overcoming this first-cost barrier of financing a retrofit. Many new financial innovations have focused on lowering that first-cost barrier. Solutions such as energy performance service contracts, on-bill financing, and property assessed clean energy (PACE) financing can eliminate the installation costs in lieu of payments out of future savings. These are great on-balance sheet and/or off-balance sheet approaches.

A needed tool: Money management to reduce energy

Given that money and energy are tied, it is possible to reduce energy through disciplined management of money. Consuming electricity is equivalent to the utility cash flow; it can be used as a tangible proxy for energy consumed. Through utility money management, a company can use a full suite of accounting tools to manage energy. The operational utility costs are monitored via the profit & loss statements. Capital costs affect the balance sheet. Month-to-month consumption can be monitored via the cash flow statement.

A company can then apply well-understood and accepted financial practices to utility cash flow in order to manage energy. A holistically managed cash flow can lower overall operating costs. It includes both operational and capital expenses that support the bottom line.

A cash-flow based energy management solution fills a needed gap that connects waste with investments. Waste negatively affects a company’s cash flow all the time. Retrofits and improvements have a long term positive effect but may need an upfront expenditure. In the ideal world, a company would shift their wasted expenditures into investments. However, business-as-usual does not accomplish this task. Through disciplined control of cash flow, one can apply financial tools to identify and reduce waste.

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Seven principles for fiscal discipline in utility money management

The goal is to use money management to help control for energy consumption. A strategically managed budget is able to help you manage the cost as well as grow your business. Below are the seven principles when designing a utility money management program.

1) It must be have a plan that focuses on your business goals.

Companies purchase equipment to generate revenue. Equipment also consumes energy, an ongoing fixed cost. These expenses need to reinforce business goals. A plan gives companies a clear roadmap of how continuous improvement in the business can lead to reduced utility costs.

2) The plan must be multi-year long

Some energy needs are short-term, such as higher heating bills in the winter and higher air conditioning bills in the summer. Other energy needs are long term, such as retrofitting LEDs or HVAC systems. Multi-year plans are more effective because they are able to mitigate both short-term risks while achieving long-term goals.

3) It must be responsive and flexible to change

As the saying goes, no plan survives contact with reality. We know that business plans will change over time. As needs evolve, the money management system also needs to be flexible to change. Although the goal usually stays the same, the pathway to get there needs to be continuously updated.

4) It must be interdepartmental and organization-wide

Energy and utilities are consumed by every department in an organization. The plan must incorporate all stakeholders, from finance to operations to marketing and communications. The plan and strategies must be comprehensive and capture all costs associated with utilities.

5) It must be a separate line item in your budget

The most important metrics for success are financial. Having a separate line item in your budget and cash flow statements makes it transparent to manage these metrics. Regular financial reporting helps departments have a common language to communicate their progress towards goals.

6) It must incorporate all costs – both operational and capital.

Utility costs are more than just one’s bills. Maintenance costs, capital set-aside funds and planning/engineering costs should be included as well. Managing all costs in a holistic manner helps minimize the total budget while giving flexibility to respond to emergencies.

7) It must have a single-point of responsibility within the organization

Execution is most effective when there is a single-point of responsibility. The plan needs to identify the individual or team that will be responsible for setting goals and monitoring the metrics. The team needs to made energy investment decisions, communicate with the organization, and report to a company’s financial directors.

The Utility Money Management Solution

Here at Distributed Energy Management, we have taken these seven principles to heart. We have created an automated solution that helps commercial clients maintain a disciplined and robust money management program for their utilities. At its core is a financial platform housed at Kitsap Bank that manages the cash flow related to utilities. This consolidates bills, energy services, etc. that a building already consumes. It adds to that a capital set-aside that helps anticipate future needs and cushion unexpected emergencies. All transactions are automated in order to reduce error and improve accuracy. In essence you are become proactive managers instead of retroactive consumers – we put you in control.

Through our program, we help clients reduce waste. The difference: saving money is opportunistic and reactive. Reducing waste is proactive and strategic. We help businesses determine what they should expect to spend on their normal business activities. We work with clients to tailor their energy expenses to their strategic goals. We implement a fiscally responsible program that reduces waste. We increase transparency between CFOs, accounting, operations and other departments to make decisions that benefit the entire organization. In essence, we are a partner that makes a client’s team more productive.

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Benefiting from utility money management

A company should see some immediate benefits after implementing a utility money management program. Responsibilities that are traditionally diffused throughout an organization are now centralized with clear metrics and transparent activity. This consolidation of activity enables control over future decisions. Companies are now able to take advantage of several additional benefits.

Leveraging outside funds – One immediate advantage is being able to leverage utility incentives to maximize one’s own money. Many utilities will pay up to 70% of qualified energy efficiency projects. Financial entities have special interest rates for qualified ‘green’ loans. Companies that already have a capital set-aside fund find it easier to attract lenders and incentive programs.

Reducing errors through automation – Many tasks surrounding utility management is transactional in nature – whether it is paying of bills or filling out efficiency loan forms. Automation of these tasks saves time and the reporting easier. More importantly, automation reduces human errors. In one case, a company estimated that it took over 8-hours to gather a year’s worth of utility bills. Because of this barrier, the client never had visibility into their actual costs. A manager can be focused on setting strategy and goals instead of spending their time on data gathering and entry.

Improved relationships and communication – Clear financial metrics gives visibility and coordination for entire organizations to make decisions. For some that own their own buildings, these metrics allows different departments to set priorities. For organizations that have tenant / manager / owner leasing relationships, this improves relationships and gives clarity to expectations amongst the stakeholders. In all situations, information transparency helps to improve relationships.

Focus staff time on core business needs – Well-run companies want their staff focused on their core businesses. Support roles, such as interfacing with utilities, equipment vendors and a myriad of players in the energy field, becomes an added cost and distraction. By centralizing all non-core activities, one reduces overhead costs. One company found that consolidating non-core activities freed up scarce hours of their busy managerial staff.

Enable future growth – A robust utility money management program helps companies plan for future growth. Companies find it easy to incorporate additional energy expenditures of expansions and increased revenue. In one case, a company was preparing for a major retrofit in two years. They had no plan for how to do the retrofit – just that they needed one. After implementing a utility money management program, they began to systematically plan for all of their needed improvements and found a way to tie in both incremental changes and major renovations into a cohesive strategy.

Achieving fiscal discipline

At the end of the day, there are only two metrics of importance – top line revenue growth or bottom line profitability. A robust utility management system helps companies manage both. It helps achieve top line revenue growth by freeing up staff to perform core business tasks instead of utility support functions. It helps achieve bottom line profitability by reducing costs and freeing up valuable resources. Some companies have been able to achieve both.

One client, a restaurant owner, created a utility money management program to help manage his cash flow. With the transparency Total Utility Budgeting provides, the owner is now motivated to manage energy as a valued resource and has information to better run his business. The result: within twelve months the client achieved a 31% reduction in electricity bills while growing revenues near 30% at the same time. As the owner said, “Good business decisions are ones that reduce costs and increase sales in the long run. As long as I am trying to improve my business, there will always be opportunities to reduce energy costs.”

In conclusion, a fiscally disciplined approach to utility money management can achieve cost savings and energy savings. Energy can be made tangible by centralizing all utility costs and functions under a budgetary line item. It can be achieved organization-wide and must be focused on a company’s business goals. It can increase productivity of staff by removing unnecessary work. A well designed program can both achieve cost savings and productivity improvements.

< < read part 1

via The Seven Steps to Utility Money Management Part 2 – Distributed Energy Management.

Strategic Capital Budgeting – Distributed Energy Management

A strategic capital budget is more than just a pot of money to buy large, expensive equipment.  It is a plan that was designed to meet your current day operational needs as well as support future growth of your business. A strategic capital budget for efficiency is just that – a plan for how to save capital today to better improve your business tomorrow. Indeed, there are many improvements that will save you money and many that you could pursue. However, it is not always possible to do every one. Which areas of your business will have the highest impact on energy reductions? Which ones will have the highest impact on your bottom line?

Sadly, today there is very little visibility into how efficiency can improve your business case. Frequently business owners have a mindset that energy is not something they have control over, or they just pay the utility bill without thinking about it. Retrofit programs and upgrades abound, but they are each very expensive and can take a lot of time to learn, to understand the nuances, and to finance. There has been very little transparency to help business owners make those tradeoff decisions between capital improvements.

At DEM, we understand these challenges and we put your business needs first. We start by first understanding your business goals. We then investigate your energy needs. From there, we help match the energy goals that give you the best returns. We put you on a savings plan that allows you to reach that goal in a timeframe that makes the most sense. We realize that every customer is different and we are ready to work within your constraints.

In addition to bringing clarity to the budgeting decision, we work with you in drafting a plan to reach your goals. We help you set aside funds early on a monthly basis. We then apply your savings to executing efficiency investments that reduce your operating costs. We are able to capture the utility cost reductions back within your capital budget, allowing you to grow faster.

This gives the business owner much more visibility into the workings of energy management. Our clients are able to make prioritized decisions based on their energy needs and have a savings plan to reach those goals. It is one turnkey solution to identify, manage, execute and finance all aspects of efficiency.

via Strategic Capital Budgeting – Distributed Energy Management.

electricity rates

Does higher electricity rates result in larger bills?

Obama’s announcement of carbon pollution regulation certainly caused a stir. Environmentalists hail the plan as a big deal for climate change.  Critics blasted it will drive up electricity rates. Both are important points. However, a business person needs to know how this will affect their bottom line.  In essence, does a higher electricity rate result in a larger bill?

The answer is no.

We would expect that states with the lower rates pay less in bills.  But according to data from the Energy Information Administration, that is not the case.  From the graph, we can see that a Washington state homeowner pays the same amount as a California homeowner. This is in spite of electricity rates in California being nearly double the rates in Washington.  In fact, residents of Alabama pay nearly twice more per month to run their homes, despite electricity rates being 30% lower than in California!

States with higher rates also invest in energy efficiency.  If anything, higher rates motivates homeowners buy insulation, seal windows, replace hot water heaters, etc.  This can increase the demand for construction jobs – a positive for the economy.

In summary: yes, the climate action plan will affect climate change.  It will most likely increase electricity rates.  But no, it may not result in a larger bill.

For more info: www.whitehouse.gov/sites/default/files/image/president27sclimateactionplan.pdf

via Does higher electricity rates result in larger bills?.

Jimmy Jia

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