January 2007

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The Electric Utility Industry - Missing the Boat on Conservation

Utilities’ business model – dictated to them by their regulators - is tied to selling electricity, not saving and redistributing it.


  Thomas Hartman, P E
The Hartman Company

Contributing Editor

This is the fourth article in a continuing series on achieving sustainability.
Can ASHRAE Reinvent Itself?

The HVAC Industry CAN Reinvent Itself!
Moving Toward A Sustainable Building Industry

Recently, a colleague of mine was invited by his local electric utility to a community meeting to participate in a discussion on options for acquiring additional power to meet projected load growth in the utility’s service area. It was part of a community outreach program in which various options for providing projected electric load growth were presented by a panel of the utility’s technical staff. Each potential resource for added power was discussed in some depth with the audience. It was quite informative, but seemed incomplete. So at the end, my colleague asked the question “What about conservation and efficiency improvements?”

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The panel appeared to miss the point of the question. Several on the panel emphasized that the utility wants power to be used efficiently, so it’s aggressively and successfully pursuing programs aimed at energy efficiency and conservation. But, panel members explained, the focus of this event is providing power for new loads due to the area’s growing population and economy - which will require new sources.

This experience and others like it demonstrate that the electric utility industry is missing the boat on energy efficiency and conservation because over and over it fails to realize two important facts: 1) Conservation (which includes energy efficiency improvements) applied to existing buildings is a more readily available and economically viable means for meeting near term load growth than new power sources; and 2) current conservation programs everywhere are failing to obtain even a small portion of their potential capacity for savings. Failure to come to grips with these two realities is a tragic shortcoming of the industry, but understandable owing to the strange relationship the utility industry has with conservation. Utilities’ business model – dictated to them by their regulators - is tied to selling electricity, not saving and redistributing it. But saving and redistributing electricity is exactly what our industry needs to do over the next several decades. And the numbers show it’s a realistic and workable approach to eliminate the need for virtually all the fossil fuel power plants now on the planning boards.

This need to do much more with conservation was recently reinforced in an impassioned plea from a senior US Department of Energy (DOE) scientist. This scientist’s task at DOE is to develop a plan for addressing climate change issues through the end of this century. Like nearly all scientists he is very concerned about greenhouse gasses and their effect on climate. For the near term, he told a small gathering of industry representatives, the only environmentally responsible major sources of electric energy for new loads in the US are wind power, improved efficiency and conservation! These days DOE is not in the grips of radical environmentalists, so this plea for us to do more with efficiency and conservation in existing buildings should be taken most seriously.

The disconnection between what is required from an environmentally responsible perspective and current utility planning is almost beyond comprehension. More than 100 major new fossil fuel power plants are being planned in the US alone. It is becoming clear that these plants, if allowed to go forward, may constitute one of the most destructive environmental turning points in human history. And it will not have been done by greedy slash and burn developers, but by a tightly regulated industry!

Previous articles in this series have called on each of us to fearlessly entertain and adopt new thinking and actions in the course of our business activities to help achieve a more sustainable world. It’s clear this is an area in which we need radically new approaches in order to utilize up to date technologies in making energy efficiency and conservation a useful large scale electrical resource. Doing so requires major changes in both how we view, and how we capture and deliver this abundant resource.

So, what would constitute the needed change? What’s the alternative to what we are doing today? To answer these questions, start by considering the current state of energy conservation programs. A 15% rate of return would be seen as a healthy return on the type of investments utilities make for energy resources. But by typically requiring rates of return in the range of 30% to well over 50% on energy efficiency measures, building owners and other electric end users cause otherwise prudent conservation investments to be abandoned. There are two reasons for these unusually high rate-of-return requirements. First, energy conservation is not the core business of the building owners and other end users who are required to make these investments. So they understandably require a much higher rate of return in order to invest their limited financial resources in such side deals. Second, conservation projects are correctly considered by many users to be high risk investments. This is because there are thousands of energy conservation promoters in this industry with no specific training, and the fragmented approach employed in designing and constructing conservation projects means there is almost never anyone to assume responsibility for actually achieving the performance upon which the investment is based. The sad result is that as a whole, energy conservation projects are poorly conceived and fall far short of their performance capabilities.

Imagine if utilities constructed power plants the same way they exploit conservation resources. Rather than consolidating the resource, they would negotiate separately with thousands of small resource owners who would also be required to become the investors. Then, each of the resource owners would be allowed to engage their own developer to build small independent and uncoordinated plants with no assured capacity. One of the reasons this untenable situation has developed is that regulators often look to the utilities themselves for ideas about improving conservation effectiveness. But because the basic model for utility profitability is based on electric sales, utilities see conservation as a side business the same way end users do, and there is no innovative thinking about efficiently exploiting the resource. Bold new thinking and initiatives by public utility commissions and others engaged in utility oversight are required if the barriers to more effective conservation development are to be removed. To start that effort, here are some of the initiatives that have already been discussed and provide a framework that can be further developed and to put in place by regulators to utilize efficiency and conservation as a viable power resource:

  1. Evaluate Energy Efficiency and Conservation a Power Resource: Research the resource and set much more aggressive but attainable goals for the development of conservation (including energy efficiency) as a resource to serve load growth in utility service areas. Conceptualize large scale conservation strategies and evaluate them in direct comparison with power plant and power distribution construction options. If these analyses are made with appropriate new network based technologies applied, they will show clearly how great the financial benefit is to focus near term efforts on large scale efficiency and conservation efforts as opposed to building new power plants. Such analyses are most effective at the State or Provincial regulatory level, but if States/Provinces drag their feet, it may be possible to start work on this by concerned municipalities in some areas, especially where municipal utilities exist. The word needs to get out that the green movement can and should be embraced in power supply systems as well as end use.

  2. Create a Business Model for Conservation as an Energy Resource: From a utility perspective, the real stumbling block - and it is a big one - is that there is no effective business model in place for electric utilities to capture a return on investment by investing in energy efficiency and conservation. Consider that in current utility financial models, investment in transferring saved power from wasteful systems to new loads does not create any new revenue. A number of useful approaches have been suggested to remedy this limitation. It’s time to put in place one or more changes in the basic structure of electric utilities and bring them up to what is required of them for the 21st Century.

  3. Create an Effective Efficiency/Conservation Development Infrastructure: The current small, independent, uncoordinated and fragmented nature of energy efficiency and conservation development is an enormous barrier to the goal of employing it as an effective electric energy resource. The failure of current programs to scratch the surface of this potential resource has led many to believe conservation is simply not viable as a large scale solution. But nothing could be further from the truth. Effective development requires the current processes be replaced with large scale, well structured and managed approaches based on sound strategic planning for each service area. From this will result a conservation effort that provides accurate real-time information of the power resources being applied and available, and the certainty that such power resources will be available when needed. Such a program is much more straightforward to assemble than most believe. The difficult part is effectively engaging the regulatory agencies and disassembling programs and strategies now in place. This will certainly be disruptive and costly to those involved with good faith efforts, but it is absolutely necessary to be successful.

The above initiatives will not be easily developed and implemented but with determination we can work together to make sure they are.  And if we are successful it will make all the difference in our becoming an environmentally responsible society in terms of electrical supplies at this critical time. The call is out to those involved in public policy and electric utility regulation. We need you to help lead your organizations in investigating and developing new approaches to utilizing conservation resources on the supply side. The rest of us in related industries need to support such efforts. It’s a huge challenge but one the utility industry – and those depending on it - must take. With the help of concerned individuals in the utility and building industries, we can get on the boat for environmentally responsible power in the decades ahead.


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