Cost Recovery for Energy Efficiency Programs – An Ignorant Idea
If you haven’t seen Michaels’ recent self-indulgent video, you might want to do that now. It is many hours of video shooting reduced to a fine sauce, just under four minutes. My interview, for example, lasted maybe 45 minutes and maybe 30 seconds of it are included in the video. One line I’m pleased to have been captured and included was the statement that there is a limitless supply (and immense variety) of learning available in our industry. One thing I know little about is the guts of the utility business and cost recovery for energy efficiency programs. So why not write about that and see if I can avoid being a fool.
This post is brought to you by the report The Old Model Isn’t Working: Creating the Energy Utility for the 21st Century, by the American Council for an Energy Efficient Economy (ACEEE).
Since there are always new readers, I’ll say it for the 300th time, investor owned utilities are regulated monopolies. As ACEEE points out, just imagine how ridiculous it would be to have duplicative competitive delivery of power to your house. It wouldn’t work for a bunch of reasons but space is limited so I’m not going to explain any of that.
Rates are comprised of investor return on the rate base plus operating expenses. Consider the rate base to be long-term hard assets – power plants, transmission and distribution (T&D), and the opulent headquarters buildings downtown, complete with restaurants, Starbucks, and spas. The cost of owning this stuff is stock dividends, bond dividends/yields, and bank interest. Operating costs obviously include fuel, and I would guess trucks. And despite what they say, employees are an expense and not an asset [1], [2].
Take the cost of all that stuff, including profit for investor/banker, and divide by energy sales to arrive at the allowed cost of energy. Here I go out on a limb. Profits are very sensitive to economic activity. Since utilities are monopolies with not-quite-guaranteed profit, their profit margins are low. Sales growth is tiny, if anything. Return on investment for investors is primarily the dividend yield, which is protected like Fort Knox. The first thing I’m thinking is yields are 3-4% for major utilities in the US. It would seem[3] very foolish to buy US bonds at a yield of 1.5% against this kind of return.
Energy efficiency programs are obviously at odds with the utility business model. It would be like Carl’s Jr. running ads: “Feeling a little chubby today? Get a clue: 67,000 calories in one of these babies.” I’m not sure why they erode the appeal with that slice of tomato.
The programs cost the utility money to run (reduced earnings), erode sales (reduced earnings), and provide no ROI on the dollars spent (no earnings). Cost recovery for energy efficiency programs gets all the hype. I’m going to run out on a limb again at the risk of revealing my ignorance of this subject.
What does DSM stand for? Demand side management. (I’m firmly on the ground hugging the tree trunk still; not out on a limb yet) By what measure are goals set for energy efficiency programs? Energy, NOT demand. Now I’m on the branch ready to go out on a limb.
What if we incentivized utilities for energy savings by allowing them to hike demand charges while decreasing energy prices somewhat?
To get higher return on assets for investors, one way to do it is use the stuff more. It’s obvious. There are lots of megawatts of generating capacity that get used a couple hours, a day, or few days a year. Charging more for demand will increase investor ROI and incentivize customers to squish their annual peak demand lower, but get more full load hours from the rate base.
Unfair for large power users? Not really. It is like lowering and flattening tax rates while removing deductions. Taxpayers would squeal that their health insurance, mortgage, property tax, kid, this that and the other expenses will no longer be written off, and they will pay more taxes. NO! Cut the rates so by the end of the year, the same dollars are paid. Ditto for tariffs. Increase demand charges, cut energy charges, and pay the same by the end of the year.
Let’s see. Return comes from the assets. The operating costs are a pass through. Well, let’s heap some of the pass through cost onto return on assets for investors. But this will not make utilities whole for their operating expenses. Good! Therefore, they will have an incentive to reduce their operating expenses/losses – a huge one of which is fuel, coal, natural gas, all producing CO2. This would reward energy efficiency, pressure end users to reduce peak and run flatter, and get more operating hours and revenue from utility assets.
What is the problem here? I don’t get it.
[1] It all boils down to this – you always need to be a step smarter than the software developer who is continuously developing software to replace you with a server in a data center in Singapore. Never forget.
[2] If this offends you, take it up with the regulators.
[3] Just pointing out, not advising.
Demand Side Market Transformation
Last week I was reading a couple regulatory dockets; one by a citizen and another by an intervener. They made some good points, including a situation of being locked out of the market[1] in one’s own state, to which I replied, “Welcome to the party.” Both dockets had a ring of “market transformation”.
Our friends at the American Council for an Energy Efficient Economy (ACEEE) define market transformation as, “The strategic process of intervening in a market to create lasting change in market behavior by removing identified barriers or exploiting opportunities to accelerate the adoption of all cost-effective energy efficiency as a matter of standard practice.” I think I am correct in saying that behavior in this sentence includes consumers choosing CFLs over incandescent as one example, and in a broad sense, consumer choices.
Some market transformation, per my definition, has been very successful, including the CFL example mentioned previously. ENERGY STAR® appliances, including refrigerators, have been another one, to the point that some programs are dropping refrigerators from their portfolios. Another odd one is ground source heat pumps. In certain spheres, ground source heat pumps have taken on a cult-like following, and to say ground source heat pumps don’t make the meter spin backwards in every application is blasphemy[2]. After beatings from “trade allies” for a heat pump study Michaels completed a few years back, I found last winter that MidAmerican Energy is dropping them from their energy efficiency plan going forward due to lack of cost effectiveness. Touché.
Aside from equipment choice, market transformation to its advocates includes training the masses to be energy experts – contractors, controls companies, architect and engineering (design) firms, and so on. This sort of market transformation is never going to happen. Why? It is easy to teach people to care for their lawn. It isn’t easy or cheap to teach people how to successfully replace four knee joints per day. Have you ever seen a knee surgery performed? To an ignoramus it looks easy – like carpentry, cobbling, and seamster rolled into one.
Barrier number one, therefore, is time and money. It reminds me of a manufacturer one time that wanted us to show them in a day or two how to be do-it-yourselfer energy efficiency experts. That would be like satiating a couple thousand ravenous souls with two croissants and a few mackerel. That is, give “us” the equivalent of an engineering degree and 10-20 years’ experience in a couple days. If only it could be reproduced and stored on a micro SD chip placed under the tongue, dissolved into the bloodstream, and stored permanently in the brain.
Barrier number two: Few capable of sawing lumber and wielding a hammer and chisel are interested in becoming an orthopedic surgeon. Nor does the orthopedic surgeon really want to become a neurosurgeon or dermatologist. The core building blocks of the MD profession, as they are with engineering, are similar. Energy efficiency, particularly for large commercial and industrial systems and process optimization, requires highly trained and experienced talent. Even converting a commissioning agent to retrocommissioning (RCx) agent is no small feat because they are substantially different services. In the former, the professional is ensuring the systems are built and operating as intended, while the latter only cares about the design intent for purposes of understanding how it is supposed to work. Any RCx agent worth paying is going to go far beyond the design intent to capture savings in addition to recognizing design flaws or mistakes that result in waste – and how to fix it.
Like consumer choice, markets can be transformed and are transformed on the demand side of the equation. While buyers obviously don’t understand the details of RCx, or they would do it themselves, they love the benefits and the word spreads to propagate the service/program – transforming the market.
Lastly, when it comes to market transformation, supply cannot be dictated. The market, like every other, gravitates to the best products and services. A layperson example of this is farming. Many today would like the family farm of the 1950s – the ones that include 25 head of swine, a dozen dairy cows, a few beef cattle, seven egg-laying chickens, a collie, and three cats to take care of the mice. That doesn’t work anymore. Why? Because the market calls for cheap food, and that’s why prices for many items have remained the same or even fallen in the past 25 years – for sure when adjusted for inflation.
A prosperous market serving these advanced programs consists of few firms that really know what they are doing. Spreading it around isn’t cost effective, nor will it last; i.e., transform the market. Market transformation agents want the 1950s farm with today’s cheap food. They cannot both be had.
[1] Locked out of the market means other firms provide program funded services to end users, free or massively subsidized by the program.
[2] Ground source heat pump systems work great for many applications and have many strong attributes, but like everything else, they are not the best in all applications, particularly for residential when competing against natural gas. Refer to the referenced report.
Energy Management System: Not Another Litter Box
In recent weeks, I have been spending considerable time examining energy management system projects for energy efficiency program evaluation on the east coast. My conclusion is this: blown opportunity abounds.
The program documentation for one particular project drips with evidence that the project is a free rider, which means the project would have happened anyway in absence of the program. How do I reach this conclusion? First, the calculation methodology could work if the user knew what they were doing, but it is clear they either don’t know what they are doing or don’t care to get it right – sell the project, throw some information at the utility in return for cash. Second, it is a dual fuel (gas and electric savings) project. It appears the project was sold on the merits of electric savings, and the gas savings were pasted on like duct tape holding a tail light in place – again, hand waiving for cash. Lastly, the return on investment with a simple payback period of about 10 years isn’t nearly good enough for a commercial office building.
The larger issue is the building HVAC design and the seemingly blown opportunity with this energy management system. This reminds me of the question, “So what keeps you motivated and going all these years in energy efficiency, Jeff?” Part of the answer is there is an infinite volume of stuff to learn in this business. In this case, one never ceases to see weird HVAC system designs, regardless of how many hundreds of buildings have been examined.
The aforementioned facility appears to have been built in the 1980s based on its architectural features. Stick with me through the next couple sentences. The documentation is poor and inconclusive and leaves me guessing, but it has the fingerprints of a variable air volume system with packaged terminal air conditioners on the perimeter. For most people who don’t know what this means – think central ducted and cooling system in a home with an electric space heater and window air conditioner in each room, to boot – but this is more like an apartment with the central heating and cooling system AND separate heating and cooling capability in each housing unit; or in this case, office. Central systems battling it out with crappy motel-like equipment. You know – human sacrifice, dogs and cats living together; mass hysteria.
The first blown opportunity is construction of this mess. The design of the HVAC system in this building is the polar opposite of what we posited in last year’s American Council for an Energy Efficient Economy, aka ACEEE, Summer Study for buildings. It is overly complex, duplicative, and primed for heating and cooling systems fighting one another. In this case, the heating is delivered by super costly electric resistance heat, and the central heating system (fuel source = natural gas) provides only about 20% of the heating BTU’s. The rest is from electric toaster coils. Meanwhile, central areas of the building probably need cooling all the time, and so, the central system provides it, likely to the perimeter areas as well.
The second blown opportunity is concurrent with the installation of the energy management system. This customer installed an energy management system at a cost of maybe a couple dollars per square foot. There is no mention of controlling stuff to minimize or eliminate rampant simultaneous heating and cooling, and I’ll bet my house that this is occurring excessively. This sort of blown opportunity is unfortunately more the norm than the exception.
Articles are published far and wide talking about the energy efficiency potential in buildings, but the industry is too ignorant, and I say this with affection, to capitalize on the real opportunities. The uninformed observer would think these sorts of energy management systems would be milking the last drops from the turnip when that is not the case at all.
Our industry needs to transform to what I call knowledge based programs for large commercial and industrial sectors. Recruiting an army of “trade allies” (I hate that term) to do the heavy lifting, unsupervised, is not nearly enough. Program implementers need to do far more than herd cats.
Leveraging projects with knowledge includes things like design, specification, scope of work review, and optimization of the design and control sequencing prior to implementation; followed by functional performance testing of measures once implemented.
This leveraging maximizes benefits for everyone involved.
- Customer saves more energy; gets higher ROI
- Happy customer = good business for cat
- More impacts for program
- No free riders
What’s not to like?
Holy Cow, Fumble!!!!
Yale and Environmental Defense Fund socialites[1] have published an article for Nature (you can purchase the article with a federally backed low-interest loan or borrowing against the negative equity in your home) indicating that rebound effect is over-hyped. Rebound, snapback, backfire, fumble, boot, bogey, crash, and other terms are used to describe consumers’ change in behavior to use efficient energy consuming products more because they are cheaper to operate.
Sometimes one needs to use perverse reasoning beyond social norms (no not that) to shoot down illogic. First, consider that behavior change is the golden pinnacle of any energy efficiency portfolio. It is dancing, screaming, itching, squealing, fevered feeling, hot, hot, hot… right now across the country. The American Council for an Energy Efficient Economy (ACEEE) can barely keep up with the growth of its BECC (Behavior, Energy and Climate Change) conference. A webinar featuring highlights of the conference was recently overwhelmed and they are offering a second showing. Get it?
Why is the fumble theory bogus? Because 98%[2] of the populous never thinks about energy efficiency, consumption, or cost. And therefore, behavior change is extremely difficult. Perhaps this 98% figure can be backed by evaluation studies of OPower, which puts residential customers’ energy consumption compared to their neighbors’ in their face – to shame or motivate them to do something. OPower savings for the demographic with the highest levels of savings due to merely informing customers how their energy use compares with others and with their own historic use, is about 2%. Bingo.
Therefore, it is very difficult to move the needle by informing bluntly and regularly in your face, how can people claim the needle will go the other way if consumers buy hybrid cars or LED lights? It just isn’t going to happen, especially with electric or hybrid cars.
Really. First off, if an electric car owner decides to take the scenic route to work, he will be walking half the way and his car will be impounded by the state patrol. Secondly, why would anyone want to drive these things more than they have to anyway? They have automatic transmissions. They scream nerd and they are the unsightly modern day version of the Ford Pinto or AMC Pacer. Thirdly, the folks who buy these cars are true believers. They haven’t used a plastic bag since before the artist formerly known as Prince was… Prince. They don’t spray their dandelions with 2-4D, they harvest dandelions and toss them with their salad. In fact, they don’t even keep a lawn. They have an enormous indigenous flower and native weed, er plant spread but they may steal the neighbors’ dandelions before the neighbors are afforded the joy of dousing their lawn with chemicals.
Or, consider the smarty pants author, who burns wood exclusively to heat the home in winter. The wood comes from dead/dying trees on the lot, a chainsaw, and muscles. No girly hydraulic wood splitter here. Although the fuel is free, time is finite and scarce and it takes time to cut, chop, and haul wood. It isn’t to be wasted. In fact, not only is the fuel “free” and renewable, less of it is burned relative to conventional sources as the thermostat is set to essentially keep the pipes from freezing using the gas-fired furnace. All the while, natural gas prices, adjusted for inflation, are probably as low as they’ve ever been.
The point is, folks who buy stuff to reduce energy cost are likely more prone to behave favorably rather than wastefully. The key phrase in that sentence is “to reduce energy cost”. Consumers who upgrade to day-bright, efficient high bay fluorescent fixtures to replace their crappy yellow high pressure sodium or buzzing metal halide or dim and fading blue mercury vapor or constantly burning out incandescent lights; just to avoid these unpleasant attributes and have a brighter space with better color, indeed may save less. But in this case, probably not because the junk the new fixtures replaced, with exception of incandescent, never gets switched off due to delayed warm-up time to come to full brightness.
Consumers may purchase efficient equipment and waste energy like crazy for any number of reasons, including poor system design, not understanding how systems work, poor control sequences, and all of the above and then some. I simply do not believe people think, “I have an efficient boiler so I’m going to keep it 80F 24/7 inside”. Or, “I have insulated walls so I’ll just leave the windows open”.
HOWEVER, since many Americans spend every cent of their earnings just before payday – right down to “Can I afford the king size or do I just have to settle on the regular Snickers bar?” – saving energy and money will result in more buying and more energy to produce the stuff or services provided. Spending less on energy will allow these people to purchase more junk to fill their garages with, such that they have to park their gas guzzler outdoors. But wait a minute. These people aren’t going to buy anything efficient anyway. There you are.
As an added bonus this week, the image nearby is presented. What is it? A natural gas flame on a cook stove? An “infrared” photo of the sun? A lost but now found Van Gogh? The bottom side of synthetic car-wash sponge? You guessed it! – it is the H5N1 avian influenza virus. This will bring you joy the next time you are incapacitated with a 104F fever, aches, and can’t swallow anything – just knowing your body is filled with billions of these beautiful organisms.
[1] Article doesn’t say if they are professors, students or janitors.
[2] A guess.
Bounteous Savings at Home
Continuing on from the surface scratch delivered in Refrigerator Sitcoms and Lethal Toaster Ovens, this post provides more fact, fiction, and maybe some things you’ve never considered for saving energy.
First, I came across some interesting data while reviewing evaluation reports for a major Midwest utility last week. Recall in Bait and Switch, and again backed by ACEEE as explained just last week, regulatory agencies need to stop stopping fuel switching from dumb uses of electricity to smart uses of natural gas. The specific item is the electricity guzzling clothes dryer. As it turns out, the saturation of electric clothes dryers in this utility’s service territory was 84%. The average number of loads per household is about 6.6 – call it 7. Doing a little ballpark math; with 117 million households[1] in the country, guesstimating about 85% have their own laundry equipment, we have available 106 billion kWh to dry clothes. That is equal to 24 typical 500 MW power plants running full tilt every hour of the year, or what China adds to their power supply in about four days[2].
A few more interesting tidbits on wash machines: savings from wash machines are due to the wash machine itself, (hot) water savings, and dryer savings as these washers spin more water out of clothes before being tossed into the dryer. Considering a residence that has electric everything (water heater and dryer), savings are roughly 210 kWh per year for an efficient wash machine. About 10% is from the washer itself; 50% from reduced water heating, and 40% for the dryer. To calculate savings for natural gas, find a consultant. Furthermore, about half the customers have electric water heaters (OMG!), but only about half the loads are washed with warm/hot water. This is figured into the mix above.
And BTW, swapping out all the electric water heaters would take down another 18 large power plants.
Speaking of China, here is another tip you won’t see anywhere: buy good stuff and keep it for a long time! As you know, since you are reading this, about 27 months ago, Michaels Energy was hatched out of Michaels Engineering. Last month, we dropped Michaels Engineering completely and rebranded with a new logo. The molt is complete. However, I still have clothing with the Michaels Engineering and the former Michaels Energy logos, and to me this stuff is as fresh as the cheese in the grocery store. Once you’re old enough to not be charged extra for car rentals and married or in some other committed relationship, no one cares or pays attention to others’ attire. So, now I have a bunch of date stamped clothes I would otherwise use for another 15 years. Energy saving tips: buy good stuff and don’t rebrand. You’ll save money and energy and reduce the trade deficit, but unfortunately may put someone making 78 cents per hour out of work.
Then there is this classic: use the dishwasher and not the sink to clean dishes. Question: does this factor in washing the dishes with the tap before putting them in the dishwasher? Does it also include not blasting water full throttle out of the tap when washing them by hand?
Energy saving tip: don’t buy so much crap. The street I live on is pretty typical of every neighborhood I’ve been familiarized with. Whether it’s one, two, or now typically three-car garages, peoples’ cars are parked outside because their garage is full of crap: toys, bikes, exercise equipment that was used for 11 days, various recreational vehicles, four or five half-completed projects. It’s especially hilarious when the vehicle is a behemoth SUV parked outside. These owners then start their cars 15-20 minutes in the morning before heading off to work to defrost the windows and warm the interior a little. In the summer, they are sizzling hot already in many cases. Save your upholstery, leather, vinyl, and paint job by clearing out the garage and parking the car where it should be. Buy good stuff and maintain it.
Energy saving tip: close the garage door already! Many homes with attached garages have substantial insulation such that they can lessen the heat loss through the connecting wall. Closing the garage door also keeps the cars warmer in winter to reduce the temptation for warming them up in the morning. It also helps thaw snow and ice off the car. A non-energy benefit is keeping varmints out of the garage. It doesn’t get any easier for mice to walk in through an open garage door. We also had a robin one spring that insisted on building a nest on our garage door opener. Wouldn’t be pretty.
Energy saving tip: eat venison. That’s right. This would save enormous quantities of energy. These 150 pound rodents are a bane to farmers, motorists, gardeners, and arborists. The DNR should eliminate bag limits altogether. Savings include no artificial resource consumption, unlike cattle that produce one pound of meat per ten pounds of food, generally corn, and an ocean of water. It’s locally grown. It’s practically organic. It reduces garden damage, increasing home-grown food production and all the savings with that. It would save millions of dollars in car damage and reduce injury, and even death, due to crashes. Do you realize how much energy an auto body repair shop uses? And finally, it allows my beloved trees to grow above waist height. Speaking of waists, it’s much leaner and healthier, packed with iron and protein, and just might keep some people off the defibrillator[3].
[1] Census.gov
[2] Enlarged to show texture (i.e., a mild exaggeration)
[3] Provided pork or beef fat isn’t mixed in 1:1 to make sausage.
One of these Days
Our friends at the American Council for an Energy Efficient Economy (ACEEE) have published another source report worthy of a post on this blog. The title of this report is Frontiers of Energy Efficiency: Next Generation Programs Reach for High Energy Savings, which can be found here.
The report is quite a detailed whomper, but I gravitated to the commercial and industrial sections of the Executive Summary to see what they have to say. They are singing our (Michaels) song all the way baby, and we can hum to that tune. Only my dogs will listen to my lyrics in some sort of multi-tone delivery. The only song I can sing really well is Pink Floyd’s “One of these Days”.
For commercial, ACEEE’s tune is completely in line with recent post “End of Lighting”. Cost effective LED lighting is not there yet in terms of cost effectiveness as an alternative to linear fluorescent sources. Wonderful. Instead, pay dirt is in systemic designs that a simpleton could not mess up. These include single zone systems such as ground source heat pumps, variable refrigerant flow, and “efficient” rooftop units. Papers presented on our website and one presented at the ACEEE Summer Study, as luck would have it, are available for more detail.
They go on to say that for new construction “design tools and standardized designs of common building types have been developed to achieve higher performance for a greater number of new buildings.” Well, by golly! This too sounds familiar. However, I would add that programs need to foster and guide market players through these cookbooks as normal people, including contractors, don’t live and breathe energy efficiency on a daily basis. The options need to be boiled down into distinct recipes for design builders for construction. There are also, as outlined in the above linked ACEEE paper, systems that should be avoided because they are easy to dork up operationally, and there are others for which efficient heating and cooling sources are just not available in the market. These include packaged rooftop units, which serve something like 70% of commercial building space in the country.
Continuing on with existing facilities, ACEEE promotes systems commissioning, retrocommissioning, and “strategic energy management”, the definition for which can be boiled down to setting targets, working toward them, and keeping an eye on things. Yes, indeed, these are no brainers, but not normal.
Commercial buildings can be split into two groups: those for which there are great energy-saving opportunities and those that have little opportunity. The latter group is cheating. They don’t provide ventilation. They may not have air conditioning (lots of schools in the Midwest). They simply don’t maintain facility spaces meeting ASHRAE standard 62 ventilation and ASHRAE standard 55 comfort conditions at all times.
Similarly, ACEEE says the big money for energy savings for industrial end users is with process optimization. I would add to this supporting system optimization. Industrial customers are extremely reluctant to mess with their direct process, as this could affect their product quality. Instead, typically a huge amount of energy is consumed and wasted by supporting systems: cooling water systems, fans, pumps, blowers, refrigeration, compressed air, as a few examples, and especially the control systems that serve these systems. They say the next generation of programs must move beyond equipment replacement – well, hallelujah!
Lastly, just as I mentioned in November, utilities, but especially regulators, need to get off their fuel-switching-fixation horse and promote programs like combined heat and power (CHP). As ACEEE states, backing my post, CHP reduces costs for all customers. Possibly, they explain why in the rest of their tome, I explained why in Bait and Switch. Nearly all new power generation plants are fueled by natural gas. They generate electricity and dump huge amounts of heat to the surroundings (rivers, lakes, air, whichever the case may be). The conventional wisdom is that CHP incentives for electric customers would benefit gas utilities by driving up gas demand. Oh really? Where does the electricity otherwise come from anyway? Natural gas![1] Get over it.
For this week’s “I told you so” finale, The Wall Street Journal reports that the budget deficit for the first quarter (October-January) shrunk compared to a year ago, “partly as a result of a surge in individual income-tax revenue in December.” And, “The revenue boost might have been a one-time event. The Congressional Budget Office earlier this week said an increase in withholding taxes in December might reflect early payment of some compensation, because people were anticipating higher tax rates in 2013.”
Just following through on a promise from a mere three weeks ago, taxes matter.
[1] On the margin that is, and on the margin is where utility programs operate. It’s all about the last kWh or kW to be provided.
Taxman, Yeah, I’m the Tax man
Taxman, Yeah, I’m the Taxman
Thank you American Council for an Energy Efficient Economy for clearing the decks to talk about tax policy and energy efficiency – enabling me with its Three Tax Reforms to Encourage Modernization of the Manufacturing Sector.
Allow me to divulge some truths about our confiscation, er I mean, federal tax policies. In five words: small business gets the shaft. Small businesses earn their profits in the US and they are pass-through entities, the profits from which are taxed at the 
owners’ personal tax rates far above typical effective corporate tax rates. The IRS extracts a pound of flesh for every three pounds produced. Corporations; not so much. (see the chart nearby). I can tell you why/how but that’s a story for beer time somewhere.
A case study in monetary and tax policy perversion of capital: Interest rates are nearly zero as the Ben Bernanke prints money to finance the deficit and debt[1]. Taxes (the “cliff”) are set to rise in a few days so what are corporations doing? Dumping cash to shareholders. Costco for one is borrowing $3.5 billion to pay a one time $3 billion special dividend to shareholders. The debt will be repaid by future earnings. And former CEO, Jim Sinegal wants the rest of us and in particular small business to pay higher taxes. Hypocrite.
In fact, as of last week reported special one-time corporate dividends totaled roughly $23 billion and note, Apple with $90 billion in cash is not included in this list.
Conclusion: taxes matter.
The first proposal by ACEEE is to lower the tax on repatriated money. ACEEE claims the cost to the treasury would be low. I disagree. The cost to the treasury will be negative. In other words, the treasury will increase its haul because the current 35% of $0 is $0. Ten percent of hundreds of billions of dollars is billions and billions of dollars – not even counting the ensuing corporate, income, property and all kinds of taxes business expansion in the US will deliver. I have no doubt the majority of lawmakers in Washington are clueless about these things. A confiscatory tax rate that can / will be / is avoided produces no revenue to the treasury. The result is a pre-cliff surge in tax revenue in 2012 on LOW taxes followed by a dearth next year. I’ll provide the data when it becomes available.
- Bottom line: I strongly agree with ACEEE that repatriated dollars should be taxed at a far lower rate, if taxed at all.
The second proposal is to use accelerated depreciation to get a near term tax benefit from energy efficiency projects. ACEEE claims this will not cost the treasury anything because it simply shifts the tax burden to out years. I too like this policy but I would want it across the board. Defining an energy efficiency project would be a mess. Trust me. We have seen many absurd claims in self-directed (customer directed) / opt-out (of EE programs) projects. Companies, let alone the IRS, do not know what energy efficiency is. For example, spending money to consolidate manufacturing to one facility, or from two shifts seven days a week to three shifts five days a week is NOT energy efficiency. But customers think it is.
- Bottom line: I agree with ACEEE but let’s use accelerated depreciation across the board for all types of investment.
The third proposal is a tax credit of 35% of the investment in EE to be repaid over 10 years. I understand the benefit but linking it to reality is a bit more complicated than the first two. If the project lowered energy consumption by the cost of implementation over 10 years (e.g., 10 year payback), this gives the customer a tax incentive in year one to be repaid over the 10 years. So it seems like financing the tax payments.
- Bottom line: This wouldn’t be attractive to me and like the second one, it is too burdensome and easily gamed.
Number four is Jeff Ihnen’s idea: lower the corporate tax rate across the board and nix all the perverting tax loopholes and credits. Let’s move from the highest corporate tax rate in the world to one of the lowest, say 10%. Eliminate the tax on repatriated capital. The treasury is getting nothing from it now and allowing those dollars to flow back will allow companies to expand here in the US, creating corporate income tax, jobs and associated personal income tax. A summary of enormous benefits:
- Jobs – Washington’s clueless fixation.
- Higher tax revenue.
- MORE energy efficiency[2].
- Insourcing jobs.
- Capital will flood into the most productive country in the world – ours.
- Greenhouse gas reduction – think of that! China is building coal plants willy nilly. The US is shutting them down ON TOP of being more energy efficient and more productive.
Everyone except perhaps our foreign competitors and Washington wins here. However, there remains one mammoth obstacle: ignorance and/or lust for power in Washington. Lowering and flattening the tax code while getting rid of deductions and credits takes away power, manipulation, and ability to divide the electorate to win or buy the next election.
[1] Home owners may think this is good but there is no free lunch and I can explain that another day.
[2] Energy efficiency builds the bottom line and taking less in taxes makes it more attractive.
Old School EE
Forging on from last week’s Arthur Fonzarelli crash into Arnold’s chicken stand, this week I will posit some challenges and problems presented with state takeovers of energy efficiency programs. Per last week’s post, Wisconsin has fallen from 8th place in the nation to 17th place since the state essentially took over its energy efficiency programs. This is according to the American Council for an Energy Efficient Economy, ACEEE, a well respected national think tank (my term) and advocacy organization for energy efficiency.
One problem is the money moves further away from where it is collected. The further program spending is from the point of collection, the less care there is in its cost effective investment and avoidance of waste. This is natural, and it is a fact. A local, charitable non-profit is going to more carefully spend its money because local donors are right there to see the results for themselves. If they want continuing donations, the local charity will be very frugal. Moving on to local government, citizens know school board members, city council members, county commissioners, and so forth. Do you think these representatives are going to be a little more sensitive to their largess when constituents may verbally tear them apart while filling up the tank at Kwik Trip or blast them in front of everyone at the next board meeting?
On the other end, taxing and spending at the federal level comes with very little accountability or care. We have revenue rolling in from all over the country – income, payroll, Medicare, excise, corporate, and a few dozen other taxes and fees – and we have spending at 1.5 times that rate all over the world. Spenders don’t care about taxpayers because they are not personally confronted by them. The people responsible are insulated like mob bosses. Write to one. You’ll get a form letter describing how great their legislation is on an unrelated topic. Nice. Have you ever been around a US senator or house representative? They ooze with goo, and slide like (per my Tennessee friend) a greased eel in a barrel of snot.
When money is collected by a utility and spent for its customers, there is clearly more responsibility in spending that money. For one thing, they are under the eyes and thumbs of the regulators. They are in Wisconsin too, but the regulators hand pick the administrators, and thus there is an inescapable bias – like what is the best car on the market – mine because I selected it and I’m smart. It’s human nature, man. That’s all I’m sayin’.
Utilities have relationships with customers, and those are very important to the utility. For state-run programs, not so much. This presents another round of challenges.
First, good account managers understand their customers’ businesses and needs. They are a tremendous resource and lever in a utility-run program. With utility-administered programs, money is budgeted for account managers to assist with energy efficiency projects, so they are deeply involved in many cases. For state run programs, not only is the budget absent, there is no carrot (goals) for saving customers’ energy. Account manager time is extremely taxed so if it isn’t part of their responsibilities, they simply will not / cannot help.
Another result of not understanding customer business and needs is a lack of deep, structural, and lasting energy efficiency planning. It is akin to the difference between long-term planning for a small business such as ours versus hitting quarterly earnings targets for a large corporation. There is a huge difference between twisting a customer’s arm to replace all their lighting and throwing some program money at them, versus digging in and solving problems, reducing maintenance costs, improving productivity, and increasing profits and operating income – and maintaining and in fact continuing down the road. Account managers live for this stuff. We live for this stuff. Persistence!
As alluded to in last week’s post, Wisconsin’s programs are low-cost and widget[1] based. The programs are very similar to those in Illinois and Michigan. Recall that while Wisconsin slipped from 8th to 17th since 1998, Michigan climbed from 46th to 12th (ouch). Michigan also has low-cost widget based programs, but Michigan is very new to energy efficiency (and programs are run by utilities). Conversely, Wisconsin represents a very mature market for EE.
Meanwhile, utilities in neighboring Minnesota and Iowa, two other mature markets, have moved on to successful industrial, process, retrocommissioning, and new construction programs for commercial and industrial customers. They have vibrant energy analysis programs to assist customers with identifying, planning, and prioritizing implementation of cost effective measures. Wisconsin point-blank shuns this sort of informational / road-map assistance to guide complex customers to higher profit and improved cash flow.
Furthermore, where utilities own the programs there is de facto competition among them to look good to their customers and to the regulators. There is vibrancy. Things change. Things improve. They have to keep pace. They want to be better. In absence of this: same old, same old, until the entire state is compared against others and then the results aren’t liked.
In my 17 years in the business, I can tell you the days of en masse studies and energy audits rotting on the shelf with no ensuing action; and customers not caring about energy cost and not viewing energy as a strategic resource have changed dramatically.
We were even told by one of our major utility clients in a neighboring state that their management sees energy efficiency as a source of income rather than a “red headed stepchild”[2] as it used to be viewed. Times have changed, dramatically. Like Dan York from ACEEE mentioned in his letter to the Cap Times, “neighboring states rank higher than Wisconsin because they continue to push for higher energy savings through increased investments in energy efficiency. Wisconsin, by contrast, is standing still and by doing so, is getting left behind”.
[1] Widget-based simply means standard option A versus more efficient, somewhat more expensive option B.
[2] I’ll trade gray hair for red if anyone is interested.
Adrift
Being a critic and a manager, I always love it when somebody else does my work for me and I can lay low, because I often feel like a grumpy old man. For example, some of my guys are tougher and harsher than I am on issues, people, and their work both inside and outside the company.
On a related note, there is a big difference between whining and complaining. I use a more vivid term for the latter, and I’ll leave it to the reader to guess what that is. How does one define the difference? The difference is whining has a woe-is-me connotation, and “me” has not done, and is not doing anything about it. “Me” has not suggested alternatives, made any changes, taken the snake by the fangs, talked to the right people, voted, written letters to the editor, met with the person they’ve had a grievance with, and so on. Instead, “me” whines to people who have no control over the situation, say a spouse. Can you relate? One of the Tough-Mudder pledges includes, “I do not whine. Kids whine.”
Kids are allowed to whine because they are not mature enough to live with the consequences of bad decision making. It’s for their own good. Parents set the rules and therefore parents must be petitioned for changes. Come to think of it, this isn’t whining at all. Go for it kids. You are clearly qualified and in the right position to complain to parents incessantly, and per definition, tell the ignorant parents they are directly responsible for your oppression.
Ok.
The American Council for an Energy Efficient Economy (ACEEE) recently issued their state by state report card, and I didn’t pay that much attention because things don’t change a ton from year to year. However, one thing I checked on is Wisconsin’s standing since Focus on Energy (FOE) began. For those who don’t know, Focus on Energy is Wisconsin’s state-run energy efficiency program portfolio. Back in the 1990s the stakeholders thought deregulation was going to sweep the industry and there would be competition for electrons. And although there would be alternatives, Wisconsin, as did some others[1], took programs away from the utilities and centralized it to the state level.
Wisconsin’s first giant mistake was to have a major branch of the Wisconsin State Government be responsible for the program. I believe that was the department of administration. Shortly after going statewide with the pilot phase, the governor and legislature raided the cookie jar and eviscerated FOE when the first budget “crisis” hit as a result of the recession preceding the current never-ending one. Then it moved under the purview of the Public Service Commission (PSCW) to shield it from cowardly lawmakers.
Nevertheless, since just before FOE (1998) to present day, Wisconsin has fallen from 8th in the ACEEE ranking to 17th. It is dead last among neighboring states: MN-9th, IA-11th, IL-14th, and MI-12th. I noticed Michigan was ranked 46 in 1998!
Ok. I wasn’t going to point this out in this blog, except for a letter to the editor from ACEEE’s Dan York, published by Cap Times (Capitol Times – Madison). Mr. York did my work for me as described above.
A spokeswoman for the PSCW claimed FOE has fallen behind in spending but not in results and therefore, ACEEE’s rankings were wrong. Mr. York responded with the smackdown letter to the editor, stating that ACEEE incorporates both spending and results into its rankings, and he also thanked Wisconsin for paying attention.
What is the problem? Cue up my opinions. While the program has moved out of direct control of lawmakers and the administration, it still has a heavy dose of political influence. I have met and know, to some degree, especially with reinforcement of many, many people in the industry, the staff at the PSCW. While I have some disagreements with their views, this I can say: they clearly have the best interest of the state in mind, and in fact, at the top of their decision making processes.
Does anyone need examples of problems with the political system? Per Winston Churchill: “…it has been said that democracy is the worst form of government except all those other forms…”. A few keywords and phrases regarding our political system/democracy: endless protesting, tea party, senators hiding out at Super 8 in other states, occupiers, budgets not being passed for four years, totally partisan legislative voting.
I have no evidence of PSCW staff being politically influenced, but the commissioners themselves are political appointees, “serving”[2] at the pleasure of the governor. I do not know how, when, or for how long commissioners are appointed, as I know for the US Supreme Court (SCOTUS).
Anyone think even SCOTUS is blind to ideology? Everything SCOTUS decides is personally and/or politically motivated. If justice were blind, many decisions would be 9-0. Instead, decisions are massively partisan. A couple courts ago, we could just get rid of eight judges that always split the vote 4-4 and keep Sandra Day O’Connor, the “swing” vote. More recently, just keep Anthony Kennedy, the swinger. The point is, partisanship seeps into everything at state and federal governments. This is a problem, and there are others as well.
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I haven’t watched prime time TV for 25 years at least, but I remember an episode from Happy Days, ironically set in Milwaukee, when The Fonz was having an identity crisis and he had to recapture his cool by jumping 14 barrels or something stupid like that. Complete with drum roll, just as he cleared the ramp, they cut it off, “To Be Continued” for next week (when he crashed into Arnold’s chicken stand).
To be continued.
[1] Many switched back to utility-run programs
[2] As though the political class works for free and don’t have to follow the rules they make for the rest of us.
Lessons from NYC Benchmarking
New York City recently completed its report for the benchmarking of all its “large” facilities, generally with square footage of 100,000 or greater. The results of the study are not surprising. You may be thinking, “Who cares about NYC?” Answer: this post includes universal challenges with benchmarking whether it’s Batswana or the Yukon.
The benchmarking was completed using ENERGY STAR Portfolio Manager, which as far as I can tell ranks buildings by source Btu[1] per square foot, otherwise known as energy intensity. For example, it uses a factor of 3 for electricity, which is one over the efficiency of delivering electrical Btus to the site. In other words, it takes 3 units of energy from coal, natural gas, nuclear fuel, etc, to provide one unit (Btu) of electricity.
Findings
Finding #1: Energy intensity varies all over the place, by factors of 4:1 to 7:1 depending on building type. Buildings at the high end of energy intensity consumed 4 to 7 times more energy per square foot than miserly buildings. This is not surprising and can be due to a myriad of factors.
- First, energy intensity can vary by a factor of three between misers and hogs.
- Second, some may be “cheating” because they provide no ventilation for their occupants. You know, clammy caves.
- Third, some buildings may not be fully occupied, although decent benchmarking should account for this, but it’s still a crap shoot.
- Fourth, some buildings are difficult to classify – they may legitimately have five building types – retail, healthcare, residential, office space, and lodging in a single facility.
- Fifth, there are plenty of places to screw up and make mistakes. More on this later.
Finding #2: Older buildings have lower energy intensities. This is consistent with a white paper I wrote a little over a year ago and with a related paper presented at the American Council for an Energy Efficient Economy (ACEEE) Summer Study for Buildings last month. Stunningly, the energy intensity by building vintage in five categories decreases in each step from newer buildings to older buildings. Older buildings use less energy. There are no hiccups. The reason is, HVAC designers lost the forest amongst the trees, started going down paths of centralized heating and cooling systems that are terribly complex and poorly understood. See the papers noted above. Older buildings may, for example, have window air conditioners with horrible efficiency and old steam radiators, but they damn well have the radiators off when it’s hot as blazes outside and the window shaker is running. This is typically not the case with the newer Rube Goldberg colossi HVAC systems. It would be surprising to not have cooling at the central air handler and some heating going on at the occupied space even when it’s 85F outside and the humidity is thick as a stick of butter.
Finding #3: NYC buildings are more efficient than others in the nation. Haha, har har, hardy har har. I don’t buy this at all. The results may say so, but first the data set for comparison is almost 10 years old, from 2003. But you just said Jeff, that new buildings waste more energy. Yes, but not many buildings adding to the “new” (post 1960) have been built in that period, and secondly, energy use in buildings tends to rise with rising plug loads and associated energy required to offset those loads (cooling).
Finding #4: Apartment buildings have a smoother and narrower (more uniform) distribution curve than office buildings. Again, this gets back to the single zone systems one is likely to experience in apartment buildings versus the enormous variation of systems one would see in these office buildings. The single zone systems provide heat or cooling and not both at the same time. This results in two things: lower energy use and more predictable energy use.
Challenges
Cited Challenge #1: Building square footage. Yes, this can be challenging, but it is easy compared to other challenges that weren’t noted. These include the usual cases where one meter – electric, steam, chilled water, and/or natural gas serve more than one building. E.g., district metering. How were these allocated? Conversely, many times buildings have multiple meters, sometimes for logical reasons such as additions. At other times, a large gas supply to a boiler plant may be interruptible and there may be a second meter serving a kitchen, and that is on firm / non-interruptible.
Cited Challenge #2: About 100 consultants provided the benchmarking services and data. Whoa! Thirty firms did most of the buildings. Nevertheless, I can all but guarantee some of these firms have no business providing these services. Benchmarking is like chiropractic or physical therapy. You need to read the symptoms (building characteristics), assess the patient (energy data and how it matches what you see and hear), and use subtle tests to confirm your findings – does it make sense?
Cited Challenge #3: A compilation of stuff I noted above with multiple buildings served by single plants, utility meter data by service address and not by facility (difficult to match meters to specific facilities), having a building address with no matching meter address, and so on.
Learning Curve
All credit to the auditors and authors. They have recognized the data as a bit shoddy and unreliable and thus it will not be made public on a building by building case. My humble suggestions would be to sharply reduce the number of benchmarking companies to a handful that really know what they are doing. While it is always far easier to recommend than do, give them access to utility customer information systems so they can investigate meter discrepancies themselves. This is not intern work or work for statisticians or MBAs. It requires experts with a long track record of evaluating facility fingerprints and recognizing whether the energy data provided is the right data, all the data, and only the data that applies.
[1] Btu = British thermal unit which is the energy required to raise a pound of water (think pint of beer) one degree F.
