An Investment with a Yield

For those spending more than $60,000 annually on power, efficiency upgrades look like a wise strategy

By Ty Vierling

ENERGY-efficiency improvement projects often can result in considerable cost savings, yet tight capital improvement budgets and the prospect of additional “green” mandates mean many facilities managers are delaying investments that would significantly reduce energy consumption.

Yet implementing energy-efficiency upgrades sooner rather than later can make very good business sense for entities that spend more than $60,000 a year on energy bills. Electricity rates in Kentucky have risen 43 percent in the past five years and some experts predict that emerging regulatory requirements will cause rates to double over the next decade.

Meanwhile, investments in energy efficiency upgrades have provided an average of 18 percent savings over the last decade. Compare that with Treasury Bills, which have yielded between 0 percent and 5 percent in recent years, and with the average annual return on the S∓P 500, which hovers at less than 1 percent over the last decade.

Rising utility costs shorten payback periods. As long as utility costs continue to rise, the pay-back period for energy-efficiency upgrades will continue to contract. By using guaranteed savings contracts – “performance contracts” – along with practical financing solutions, the cost of implementing upgrades now can be covered using future energy savings rather than today’s diminished or non-existent capital budgets.

The EPA’s Energy Star website offers several case studies illustrating successful use of performance contracts. A popular, effective scenario is one where an energy services provider (ESP) performs an energy audit of your facilities, recommends an improvement plan and then guarantees the resulting energy savings, so that the costs of new energy-efficient equipment will be paid either partially or entirely as monthly operating costs out of savings from future energy bills. The contract may also include financing through the ESP, which may also provide construction management and long-term maintenance services.

Public entities may combine an ESP performance contract with a lower interest rate, tax-exempt lease purchase agreement as a financing option, when the projected savings will be greater than the cost of the useful life of the upgraded equipment and installation. Harshaw Trane used performance contracting to make upgrades at Fort Knox that saved the base more than $10 million in energy costs per year and eliminated a lengthy list of deferred maintenance needs, with most of the changes requiring no up-front capital expenditures. In some cases, energy savings may even be large enough to generate a positive cash flow that can be used for other projects; in any case, repayment terms can be negotiated to eliminate any increase in operating costs. Do the math
The first step is to do the math. Components of the analysis include:

• Total cost of the upgrade project, including the audit, engineering/design, equipment, installation, finance options and costs, long-term maintenance service fees and employee education needed to achieve maximum energy savings. Opportunity costs of delaying upgrades, including lost energy savings.
• Anticipated payback period in terms of energy savings.These are complex factors that must take into account the variety of modern technologies available and choosing a qualified ESP is critical.

Contracting with a qualified ESP The Energy Services Coalition (ESC), a national nonprofit network of energy experts, offers several tips on choosing a qualified ESP, and also offers a sample Request for Proposal (RFP) for identifying potential providers. Most important, the ESC says, is to find an ESP that understands your facilities, and that means getting the provider on site to walk through your buildings. You’ll also need to share data regarding your total annual energy expenditures, peak energy usage times, any quirks in energy demand, total facility square footage (as well as how buildings are laid out), any special air quality requirements, and any concerns or complaints about the facility. Providing information about the energy management expertise of your facility staff will help the ESP determine how much to budget for training and long-term maintenance.

A qualified ESP operating under a performance contract will guarantee the energy savings needed to finance the project under the agreed-up terms, or pay you the difference between the guaranteed savings and the savings actually achieved. You’ll want to set up a schedule for going over results and making any necessary maintenance and employee training adjustments. Even buildings that incorporate the latest energy-efficient technologies will fall short if not operated properly. Energy-efficiency improvements can bring long-term savings by reducing utility bills, as well future outlays for routine maintenance and emergency repairs, while also improving occupant comfort and productivity.

Where Kentucky Electric Power Comes From

Generation percentages are for 2004

91% – Coal-fired power plants*

American Electric Power 

• Big Sandy (Lawrence) – 1,097 MW

Cinergy 

• East Bend (Boone) – 669 MW

East Kentucky Power 

• Cooper (Pulaski) – 321 MW
• Dale (Clark) – 207 MW
• Spurlock (Mason) – 1,087 MW

Henderson Municipal Power & Light 

• Henderson 1 (Henderson – 44 MW

Kentucky Utilities 

• Brown (Mercer) – 740 MW
• Ghent ( Carroll) – 2,226 MW
• Green River (Muhlenberg) – 188 MW
• Pineville (Bell) – 38 MW
• Tyrone (Woodford) – 75 MW

Louisville Gas & Electric 

• Cane Run (Jefferson) – 645 MW
• Mill Creek (Jefferson) – 1,717 MW
• Trimble (Trimble) – 566 MW
• Owensboro Municipal Utilities
• Elmer Smith (Daviess) – 445 MW

TVA 

• Paradise (Muhlenberg) – 2,558 MW
• Shawnee (McCracken) – 1,750 MW

Western Kentucky Energy 

• Coleman (Hancock) – 521 MW
• Green (Webster) – 586 MW
• Henderson 2 (Henderson) – 405 MW
• Reid (Webster) – 96 MW
• Wilson (Ohio) – 440 MW

* An additional 3.6% of Kentucky power comes from petroleum coke burned in coal-fired plants.

3.1% – Hydroelectric power plants

East Kentucky Power 

• Laurel (Laurel) – 70MW

Kentucky Utilities 

• Dix Dam (Garrard) – na
• Lock 7 (Mercer) – na

Louisville Gas & Electric 

• Falls of the Ohio (Jefferson) – 80 MW

TVA 

• Kentucky Lake Dam (Marshall) – 197 MW

U.S. Army Corps of Engineers 

• Lake Barkley Dam (Lyon) – 130 MW
• Wolf Creek Dam (Russell) – 270 MW

1.9% – Natural gas/fuel oil power plants

(for peak power demand)

Henderson Municipal Power & Light 

• Henderson 1 (Henderson) – 2 MW

Kentucky Utilities 

• Brown (Mercer) – 967 MW
• Haefling (Fayette) – 63 MW
• Tyrone (Woodford) – 62 MW

Louisville Gas & Electric 

• Cane Run (Jefferson) – 16 MW
• Paddy’s Run (Jefferson) – 227 MW
• Waterside (Jefferson) – 45 MW
• Zorn (Jefferson) – 18 MW

City of Paris 

• Paris (Bourbon) – 12 MW

Western Kentucky Energy 

• Reid (Webster) – 99 MW

Source: Office of Energy Policy, Division of Fossil Fuels & Utility Services