Volatile energy prices and a rapidly changing regulatory environment are pushing organizations to rethink energy management strategies as the search for cost savings and operational benefits intensifies, writes Janet Lin.
The global energy value chain is changing. Long gone are the days when power provision and energy management focused on a one-way flow of electricity from large-scale central power plants out towards users, and when only an inflexible energy-provision model applied. Today, these traditional frameworks and shifting from a tactical, inertia-based decision-making process to a strategic approach for businesses and public bodies, one that brings both cost savings and operational benefits.
Motives for shifting to a strategic approach
So what’s causing this shift? At Verdantix, we surveyed 210 corporate energy decision-makers to find out. The factors pushing and pulling organizations to rewrite (or, in some cases, start writing) their energy management strategies are many in number and global in scope. Price is a key driver, particularly in today’s operating environment. Higher energy prices in both the EU and the US have pushed up the energy costs as a percentage of operating expenditure. The cost of fuel is particularly relevant in energy-intensive manufacturing sectors, and concerns over price are exacerbated by risks in the energy supply chain. Oil and natural gas production methods are getting more expensive; governments may be less able, or less willing, to fund new generating capacity; and the prospect of an unexpected nationalisation of assets also deters investors.
Higher prices are one key instrument behind change. Traditionally, power provision stemmed from large plants accompanied by extensive transmission grids. Over the past decade, the gap in the price tag between large power plants and smaller-scale, decentralized power plants has shrunk. Renewable energy plants have the added benefit of generating returns the moment the first unit is operational.
Regulations are also pushing public and private entities to act. Those with operations in Australia, California, the EU and South Korea already have to respond to legal requirements regarding greenhouse gas emissions, energy efficiency, carbon taxes and product life cycle assessments. In the EU, industry must pay a price for its own GHG emissions and, secondly, face increasing electricity prices as utilities pass their own carbon emissions costs down the value chain. No wonder firms such as Deutsche Telekom told the Carbon Disclosure Project that it plans to invest €487,000 ($620,000) in wind, solar and fuel cell technologies at its Hannover Messe base station to meet its goal of achieving a 100% independent power supply.
Other factors contribute, including growing demand for energy that outstrips current provision, particularly in emerging markets such as Brazil, China and India, and a rethink of the direction of energy flows. More deployments of smart meters and energy management software is also reshaping how stakeholders manage their requirements for energy management.
Responses to the new context
So how are firms and public bodies responding in the face of this change? At Verdantix, we spoke to 210 corporate energy decision-makers in 21 industries based in 11 countries to find out. One trend that emerged across all decision-makers, regardless of their location or industry, is that this shift from tactical to strategic energy management is a long one.
Both the corporate and public sector have a wide range of propositions to help formulate their energy management strategies. Utilities, previously unwilling to offer anything other than reliable electricity provision, now serve up solutions: for instance E.ON’s Sustainable Energy unit aims to help UK customers reduce consumption. Engineering service providers have innovated in the face of growing demand for sustainable energy engineering: Balfour Beatty and CH2M Hill have both launched new services. Energy software applications have emerged from firms such as Johnson Controls and SAP, while tech giants such as IBM have applied their IT expertise to data centres, buildings and the electricity grid. Financial services have responded too, offering businesses access to funding for energy efficiency programmes.
So now it is the turn of businesses and public entities to act by integrating energy systems. At Verdantix, we identified nine common types of energy systems (see Figure 1), three of which are prime candidates for on-site power.
Single-site decentralized energy generation systems are one of these candidates, and these feature both energy consuming and energy generating domains (see Figure 2). At the University of Texas, a 137 MW on-site CHP plant meets all the power requirements of 200 buildings spread across a 1.5 million m2 area. Another example is telecommunications firm Verizon’s 25,000 m2 central communications centre and data facility in New York, which relies on a 1.4 MW phosphoric acid fuel cell system installed by UTC Power.
UK retailer Tesco is also turning to on-site power generation, with CHP systems. Excess electricity is exported to the grid. Home furnishings retailer IKEA installed 1800 m2 of solar panels at its Brooklyn and New York sites, to generate 200 kW on site.
Urban zones are also ideal targets for on-site energy production and consumption. The Songdo International Business District (IBD) in South Korea is one example. Begun in 2000, this part-private, part-public development aims to become one of the greenest cities in the world. Songdo IBD is heated and powered by a gas-fired cogeneration plant and a 254 MW tidal power plant. There are also plans for solar panels and wind turbines on site.
Finally, public energy systems also tap into on-site energy generation production as part of their energy management strategies. Limited to a single location, such as a university, hospital or public administration buildings, this example sees city or municipal governments taking direct control of their energy procurement and consumption. In its 2011 report to the Carbon Disclosure Project Cities Programme, the City of Sydney announced plans to tap into solar PV, trigeneration and LED street lighting to cut carbon emissions in a $30 million project.
Microgrids are another energy management strategy that is gaining ground. As part of its Strategic Sustainability Performance Plan, the US Department of Defense has embarked on a $30 million microgrid demonstration project at three military bases, with a target completion date of 2014. Reducing grid dependency is already evident among the US government: in 2011 the Department of Energy teamed up with Chevron Energy Solutions on a microgrid at the Santa Rita jail in California. This combination of solar PV panels, wind turbines, a 1 MW fuel cell cogeneration plant and a 2 MW energy storage system can fully power the centre in the case of grid outages.
These are not just isolated examples of businesses and corporate users turning to on-site energy production solutions as part of a wider strategy. Many are already investing in these solutions. Our survey of energy leaders found that firms are moving beyond the pilot stage, and turning to on-site power production as a key part of their integrated energy management strategies. In the next 12 months, 30% of organizations interviewed plan to invest in on-site solar electricity generation, with an additional 9% piloting on-site solar power. Nearly a quarter are doing the same with on-site CHP power across their business, with an additional 10% piloting this source of energy provision.
The impact of the new context for suppliers
What does this mean for suppliers? As energy management migrates from a tactical response to a strategic approach, market opportunities are widespread. Through design, implementation and operation, our research indicates that no single firm currently has the capabilities to participate in every stage of the process – it is too complicated, on too great a scale (innovative firms are thinking global when it comes to energy management strategies now), and requires expertise beyond the capabilities of a single firm’s business model.
There are multiple actors in the new energy ecosystem. Strategic developers piece together a long-term energy strategy, as Gale International is doing in Songdo’s International Business District in South Korea. They offer advice on industry-specific energy risks and opportunities, access to finance and organizational design to help meet objectives. Master planners turn these objectives into an operational plan, while energy system programme managers co-ordinate end-to-end delivery. It is these programme managers that work most closely with equipment suppliers both for the implementation of new equipment, and for the retrofit of existing facilities. IT integrators back up an energy system’s data management capability, while engineering integrators design, implement and integrate electrical and mechanical equipment. These engineers are crucial in the implementation of on-site electricity generation solutions. Software captures energy consumption, generation and workflow data, while network monitors collect this data and analyse the information to enhance energy efficiency further – trigger points can lead to energy efficiency actions. Examples include Honeywell’s plans to offer a fully automated demand response system for Scottish and Southern Energy’s customers in Bracknell, UK. Finally, optimizers manage the entire energy system.
Multiple market actors factor up to create multiple opportunities – and on-site power generation is just one piece in the complex puzzle that is the new energy ecosystem. How should on-site energy equipment providers tap into this market opportunity? Picking the right engineering system integrators is crucial, targeting industries that are not only first-movers in this new energy ecosystem, but are also a good fit with existing clients and experience. Using current projects as examples of success adds proof of value, as will offering demonstrable returns on investment that will make sceptical CFOs smile. And given the global scope of strategic energy management systems, equipment suppliers should look to fill gaps in their geographic reach or specific skills through partnerships and/or acquisitions.
As the global energy value chain continues its dramatic transformation, market opport-unities are as numerous as they are certain, as both public and private enterprises aim to mitigate the risks associated with energy supply. Firms are already turning to on-site energy generation solutions as part of a wider energy management strategy. And as our research shows, large-scale energy systems integration is the only viable response to challenges in the energy value chain.
Janet Lin is a senior analyst at Verdantix. www.verdantix.com