AutomatedBuildings.com
Article - July 99
[Home Page]

BTL Mark: Resolve interoperability issues & increase buyer confidence
BACnet Testing Laboratories

(Click Message to Learn More)

Market Directions for Energy Services
in the Deregulated Environment
Multiple Facility Networking - A Strategy for Energy Management and Value Added Services

Conservation Through Innovation Ltd.
August 19, 1998
Gerry Lands and David Wolins

"In the next 5 years, large corporations will spend more on IT as a line item expense than they spend on payroll."

enflex1.jpg (4196 bytes)
Gerald W. Lands - Mr. Lands, President and Chief Executive Officer, worked with major corporations in facilities and engineering management for 16 years.Prior to starting EnFlex Corp. (formerly CTI Ltd.) in 1993, Mr. Lands was a principal of a controls contracting corporation in California.

David Wolins has more than 15 years of consulting and sales experience in the fields of energy conservation and systems control.


Background

The sale of electrical energy in a deregulated market is now a reality in parts of the U.S. and other locations throughout the world. Deregulation is being embraced to varying degrees by the major industrialized nations of the world with the process unlikely to reverse itself. This emerging market is quite similar in many respects to the marketplace of numerous nations that are now undergoing privatization of state controlled industries. There is a general idea of how the free market for electric energy should work, but the implementation, operation, and market driving factors are not consistent in all locations. Electrical energy is a commodity, but unlike most other commodities, it has a shelf life of zero. Electrical energy is used daily by virtually all businesses and individuals in the world; it is a very transitory commodity that must be used the instant that it is created; the demand for it varies greatly; the price is determined by any number of complex and varying market factors; and the fact that the spot price of this commodity varies hourly makes the electrical energy market one that will exclude amateur players.

Energy markets will remain regional in the foreseeable future; however, a few large international corporations are entering various energy marketplaces around the world. New players will bring new market strategies and new product offerings to be presented to their target customers. Product offerings for a commodity are difficult. Electric energy can be reliable, clean, and even "green," but there aren't many market differentiating characteristics other than price and service to attract new customers. Energy and information based services will provide most of the differentiation.

The size of the electrical energy market is huge, but the margins are being driven down by competition. Wholesale and retail prices for electrical energy will always be quite competitive with the exception of a few unique and isolated situations. Thus it appears that the marketing draw for the energy service provider must be more in the service than in the energy part of the offering.

Sales Model for the Deregulated Utility Market

Energy purchasers presently have little incentive or capability to closely monitor or control their pattern of electricity consumption. Deregulation of the market will provide the incentive. Technology must provide the capability. A power generator knows exactly how much power is being fed into the grid every minute of the day. The generator, however, does not know what individual customer demand is or what the electrical demand will be at any point in the future. With historical data, the generators make a good estimates of grid requirements in order to bring additional generation capacity on line and meet projected aggregate demand. Thus at any given time, both the customer and the power marketer can determine price and availability of electrical energy, but knowledge of the supply side of the market has limited value without knowing what demand they are serving.

After deregulation, purchasers may select the company from which they will purchase electricity as well as the terms for purchasing the energy. Electricity marketers will sell "commodity" kilowatt hours at competitive prices and delivery terms. The most significant element in determining the customer's rate for electricity will be the purchaser's "peak" energy consumption at a given time, the time the peak demand occurs, and the ability of the customer to stay within contractual demand profiles. Utility rates under the present regulated system of tariffs do not necessarily relate to nor do they reward the efficient use of electrical power. After deregulation and in a free market, the market price of electricity will vary significantly depending on the demand at a given time. In the deregulated marketplace, both the customer and the service provider will be aware of the hourly price and the demand for energy and will accordingly structure energy purchasing contracts to a customer usage profile. A common, real time system with the ability to both monitor and control demand is the basis for competitive energy delivery.

Technology for the Deregulated Utility Market

The Gartner Group summarizes the increasing importance of Information Technology (IT) and the role IT will have in future business operations:

"In the next 5 years, large corporations will spend more on IT as a line item expense than they spend on payroll."

Peter Drucker reinforces the growth of IT in a recent article for Forbes:

"In the next 10 to 15 years, collecting outside information is going to be the next frontier."

As the capabilities of IT increase so will businesses increase their dependency on IT to deliver integrated solutions that touch every operation and business line of the company. Facility related information (e.g. systems control and monitoring, energy, security, etc.) is consistently an "island of information" such that there are few examples of large-scale facility information being included in the integrated business information system of a large enterprise. Facility information generally stays resident in the facility and is not available in real time on the enterprise network. The convergence of energy deregulation with the information services industry has created a need for an intelligent meter and information gateway in commercial facilities. In the case of utilities and energy service companies, their core business is related to the delivery of energy and services to a large number of diverse facilities. Will utilities continue to only sell energy and keep its customers by communicating monthly with them through a bill in the mail? Not in the future energy market.

There is an emerging market requirement for a scaleable capability to connect, monitor, integrate, and control functions in a single building, groups of buildings, or even entire cities -- a need to integrate and expertly service facility operations of an enterprise. A flexible facility information gateway connected to a network (e.g. Internet or corporate WAN) and backed by an effective enterprise information system are essential elements of the infrastructure through which facilities are monitored and information services are delivered. New technology is needed that allows electricity usage to be monitored and controlled in real time over large geographic areas for a large number of facilities. Devices that monitor and control electricity usage must be deployed with a supporting infrastructure of significant capability since the quantity of information generated will be substantial. The information from the system will require concurrent access at all levels by both the customer and the service provider and include significant database and data visualization capabilities.

The above requirement is the basis for specifying a large-scale, networked information and control system.

DADSM Illustration.gif (27435 bytes)

Facility Information and Services System

A number of products are emerging in the marketplace that address various aspects of the end-to-end solution for gathering, processing, transmitting, disseminating, and accessing facility related information. At this point in time, there is no single product solution available to the customer or service provider. The solution for information services delivery must be an open system tailored to the needs and organization of both the service provider and the customer. It will need to interface with existing ERP, accounting, and support software of both the service provider and the customer.

Although the cost of software and software customization will be a factor, the installed cost such a system will primarily be driven by the cost of the host hardware installed at each facility. Presently available hardware products are an excellent investment for a utility or service provider when analyzed in terms of early market opportunity and the total amount of information transactions that the gateway will facilitate now and in the future. The business case for installing this hardware can be analyzed in terms of the value of services provided. The price of hardware will continue to decrease with volume and advances in technology thus making future business cases even more attractive.

System Users

The users of an enterprise energy and facility information solution becomes readily apparent since the above system has advantages for both the vendor and the customer.

Distributed Commercial Electricity Purchasers. Large purchasers of electricity with numerous distributed facilities need a networked information system to essentially present their diverse group of facilities as a single aggregated entity for purchasing electricity. There are numerous examples of a large industrial customer with a single plant being able to negotiate a better rate than a large retail commercial customer (e.g. supermarkets, department stores) with numerous locations that actually uses a greater amount of power from the grid.

Energy Service Companies. Most small to medium commercial electricity purchasers do not have their own internal energy management staff so they "outsource" their energy management function to ESCOs. ESCOs perform functions ranging from the installation of energy saving measures (e.g. controls, efficient lighting), system maintenance and repair, and making programming changes on systems they control (e.g. parking lot lights, interior lights, HVAC, refrigeration, etc.). ESCOs also provide consulting services to help find additional ways businesses can minimize their electricity consumption and often finance conservation measures with shared savings programs. ESCOs need a networked system to more efficiently access and control installed energy management systems, minimize communications expense, and reduce training requirements.

Energy Marketers. In addition to using AMR for billing purposes, energy marketers need a real time system for energy information since they must constantly be aware of the changing supply and demand situation to profitably deliver on energy contracts. Many energy marketers will also want to deliver additional services as does the ESCO to increase their customer base and their profitability. A flexible information point-of-presence at the customer facility will enable the energy marketer to capitalize on emerging service opportunities.

Utilities. With the advent of deregulation, utilities have begun to align themselves with the following choices in the marketplace: (1) be a generation company, (2) continue to be a regulated transmission and distribution (T&D) company delivering electrical power for energy marketers (3) actively market energy and related services, or (4) do all or some of these through separate companies. Many large utilities are in the process of dividing into regulated T&D companies and nonregulated marketing companies. Accordingly, utilities are forming their own ESCOs to compete with (or in some cases, partner with) established ESCOs. The utility ESCO/energy marketer needs a monitoring and control system for the same reasons other ESCOs and energy marketers need an information connection. A comprehensive, networked system will also allow the utility ESCO to better share information with its large number of customers and business partners.

Energy Co-ops. Energy co-ops will begin to appear in the deregulated marketplace. These will essentially be similar in concept to farm and health plan co-ops in that they will consist of groups of commercial businesses that join together to increase their commodity purchasing power. For example, all of the independent retailers in a geographic area or members of a national association such as independent hotels or restaurants may form a purchasing co-op through their association or member organization.

Municipalities. Cities, state agencies, school districts, municipal utilities, and other public entities are other examples of enterprises with geographically diverse facilities that will consolidate purchasing power and present itself as a single customer to the energy marketer. The military and other federal entities have already begun this process. We are also seeing large property management groups, multi-family housing developments, and even small commercial associations present a single consolidated market presence to the energy marketer/provider. It will require some exceptional application development and use of technology to fully serve these markets.

Most of the above system users will have little or no capability or desire to build or maintain the infrastructure needed for an end-to-end information solution. The marketplace has begun to see the emergence of support service providers who market selected services to their customers in the list above. These service providers will provide installation services, network services, maintenance, help desks, billing services, and marketing services to the energy company so that the customer ultimately sees a comprehensive set of products and services offered.

Market Opportunities for Bundling Services with Electricity

The facility information gateway serves related product markets which can take advantage of a common, cost effective information gateway in a commercial facility:

There are countless other potential services that could be provided to a party by owning the information gateway to a facility. The common element to all these services is that they require timely bi-directional transmission of information. Once there is a cost justification for installing the connection to a facility for any information service (or combination of services), the incremental cost of providing additional information services to that facility is greatly reduced, allowing additional services to be provided at very attractive profit margins. Moreover, the owner of the connection/gateway will be able to broker the connection to other service providers for delivering information services to the business at the facility. Utilities already have name recognition and a relationship with each purchaser of electricity in their service area. By strategic partnering and effective marketing, they are in an excellent position to expand their business beyond commodity retailing in a soon-to-be very competitive environment. Providing their commercial and industrial customers with additional services and technology for an end-to-end solution will improve the chances of keeping their customers after deregulation as well as increase profitability. The ability to serve the large quantity of commercial customers will determine ultimate market success for competing companies.

Summary

The deregulated energy market will thus be characterized by the following:

Energy and energy services delivery will take on the characteristics of a web page wherein one sees the involvement of a large number of companies to produce a single image in front of the customer. A good exercise to appreciate some of the complexities of large-scale business development in the energy marketplace is to critically examine a typical web page to understand all of the businesses involved in its delivery. Consider, if you will, the PC vendor and the manufacturers and marketers of all of the various hardware components involved, the creators and vendors of the browser software, the LAN and WAN provider(s), the Internet service provider, the telco or Internet backbone provider, the creator and host of the web page, the advertisers paying for the web page, the system administrator, etc. etc. One sees a complex economic and technological model that will be a component in itself of the economic model for energy and services delivery.

Companies competing in the energy services market will need the resources, vision, and marketing expertise to connect to the customer and to effectively deliver, directly or indirectly, energy and a range of related, value added services. Those companies that see the energy market as being information dependent and who have the business infrastructure to provide a competitive, comprehensive, flexible, end-to-end solution for its customers will be the dominant players in the market.


Gerald W. Lands - Mr. Lands, President and Chief Executive Officer, worked with major corporations in facilities and engineering management for 16 years. Prior to starting EnFlex Corp. (formerly CTI Ltd.) in 1993, Mr. Lands was a principal of a controls contracting corporation in California. Also during this time, he started and operated an advanced refrigeration systems manufacturing company that developed new controls for refrigeration systems and supplied systems to leading retailers. Mr. Lands' company designed and constructed the variable speed chiller used in PG&E's premier ACT˛ pilot project. During this time, Mr. Lands won several state and national awards for innovative and efficient systems design. Concurrently, Lt Col Lands, was commander of one the Air Force Reserve's largest and most capable engineer squadrons before his retirement in 1995. He has a BSEE degree with graduate studies in systems management. He is a member of IEEE and other professional organizations.

David Wolins - Mr. Wolins has more than 15 years of consulting and sales experience in the fields of energy conservation and systems control. He has managed energy audits, technical analyses programs, and has developed energy conservation recommendations for numerous city, county, state, and private sector clients. Mr. Wolins has broad experience with efficient building design and computer building simulation tools. He has managed such high profile jobs as the Pacific Gas and Electric Company’s ACT2 technology demonstration project which included an energy efficiency retrofit of their corporate research building. Mr. Wolins specializes in the application of computerized control systems and has been involved in the development of energy management hardware and network gateway systems as a principle at CTI and Energroup Technologies. Mr. Wolins has a BS in mechanical engineering and is Vice President of Business Development at CTI.



[Click Banner To Learn More]

[Home Page]  [The Automator]  [About]  [Subscribe ]  [Contact Us]

Events

Want Ads

Our Sponsors

Resources