Insights The New Energy ROI - Part I
Resiliency | Optionality | Intelligence
By Jeff Suderman, Senior Strategist, IBTS and Dustin Knutson, Director, Energy Services
Energy has become a hot topic for cities, counties and states. However, when words become buzzwords we need to analyze them carefully. Is energy simply a short-lived trend on its way to fad status? Is it an example of another troublesome euphemism (think 'human collateral damage' or the ambiguous concept of ‘sustainability’)? Or does our abundant use of the word energy simply signal the significance of this issue?
A simple means to analyze the importance of a topic is to examine it through the STEEP model (Figure 1). This tool is used to help us consider the various external factors which can affect a municipality. The STEEP acronym represents social, technical, environmental, economic and political considerations. When a topic such as energy has strong relevance in more than one component of this model it is generally more significant.
As we use this tool to consider the topic of energy, we find it intersects with all these areas. For example, energy plays an important role in our social lives as almost every modern necessity and convenience – from automobiles to your cell phone – is enabled by it. Energy also intersects closely with technology as evidenced by the complex solar, wind and nuclear energy generations systems we use. Energy has significant impact on our economic lives as studies show a 1% increase in energy consumption typically results in a 1% increase in economic output. Since domestic energy demand is expected to increase by 20% by 2020, this is a significant economic issue. The environmental impact of energy creation has been a hot topic for the past 20 years and we project it to continue to remain so in the foreseeable future. Finally, energy is a significant political issue as evidenced by the Gulf War or the ongoing debate over the Keystone XL pipeline. With the myriad of services provided by IBTS, ranging from home inspections to solar energy generation to city management, energy is a constant undercurrent in all of our work. The importance of energy is more than a passing fad!
We believe that energy is one of the top 5 drivers which will shape our collective American and global future. At the recent Bloomberg Energy Summit, Alaskan Senator Murkowski defined energy as our bumper sticker for success because it enables nearly every aspect of modern life. Furthermore, Fatin Birol, Chief Economist at the International Energy Agency in Paris believes that "the world of energy is facing a period of unprecedented uncertainty.”
Dustin Knutson, Director of Energy Solutions at IBTS, notes that the current focus on energy is occurring for several reasons. "Economic restraint, natural disasters, rising environmental concerns, technological advances and social activism are some of the key drivers bringing energy to the forefront of agendas at every level of government.”
Senator Murkowski (Alaska), the ranking member of the US Senate Committee on Energy and Natural Resources, recently outlined five attributes of desirable energy solutions: abundant, affordable, clean, diverse and, secure. Her committee’s recent report, Energy 20/20, outlines seven broad energy strategies which should guide our energy future: producing more, consuming less, clean energy technology, energy delivery infrastructure, effective governance, environmental responsibility and “an energy policy that pays for itself.”
This topic was the theme of the recent Bloomberg Energy Summit in New York City. The conference agenda utilized three terms to define energy issues and provide a model for future solutions. Understanding these themes – resiliency, optionality and intelligence – will equip you to understand and respond to your future energy needs.
Energy resiliency is one ingredient of a prosperous energy future. By definition, resiliency is the ability to recover, persist, or thrive amidst disruption. We only need to examine the effects of Hurricane Sandy to be reminded of the importance of resiliency. The post-hurricane photo of New York City (Figure 2) demonstrates both the positive affect of energy resiliency and what occurs when we do not have it.
Low resiliency is often caused by planning efforts which consider only 'best-case-scenarios'. In contrast, resiliency requires thoughtful consideration of 'what is the worst that can occur’? For example, during Hurricane Sandy, Goldman Sachs possessed one of the few fully operational buildings, a direct result of worst-case thinking and energy resilience efforts. In contrast, important buildings such as hospitals and police stations demonstrated low resiliency during this critical period.
The existing U.S. electric grid lacks resiliency because it is primarily built using a linear structure. This means that a single felled tree can cut power to thousands of customers. One way to reduce the impact of any individual failure is to replace this linear structure with a looped one. Our IT communities have understood this concept and build redundancy in computer networks and data storage systems. Redundancy means that a component of a system to go down without affecting the entire network. Communities such as Naperville, Illinois, and Chattanooga, Tennessee have developed smart-grid adaptations. By installing looped systems reliability has increased between 50% and 80%. These systems also deliver specific data about exactly where problems are occurring which allows a quicker response to those without power.
Unfortunately, utilities have been slow to adopt looped systems, even though smart switches were developed in the 1990’s. Florida Power and Light, whose customers experienced multiple hurricanes in the early 2000’s, was among the first to do so. John Kelly, Director at the non-profit Perfect Power Institute believes that most utilities are very averse to change and innovation, a symptom of historic monopoly power structures.
Resiliency is not the same as energy reserves. Resiliency requires that we build regenerative capacity, sense emerging risks, respond to disruptions as they occur and then learn and transform in the process.
Resiliency shares a symbiotic relationship with optionality. We are familiar with the adage about not placing all your eggs in one basket. In marketing terms, corporate strategy usually benefits from multiple product lines and diversification. By providing products or services across different sectors, companies widen their scope of business thereby cushioning themselves from unexpected fluctuations in any one product. For example, many of us own mutual funds which are comprised of a multitude of stocks. While we could invest heavily in one stock, many choose to diversify investments as a means of safeguard against the risks commensurate with the ‘eggs-in-one-basket’ strategy.
This same premise must be applied to the energy sector through diversification of energy systems. Sometimes labelled an ‘energy mix’, optionality provides us with buffers to the different factors that adversely affect our energy supply. If the price of crude oil or coal dramatically increases, the ability to shift energy supply to cost-effective natural gas or consumer-generated solar energy from micro-grids can cushion unexpected change. For example, Essential Power (www.essentialpowerllc.com) is an energy company that exists to provide energy on an as-needed basis. With power plants that can be up and running in 30 minutes, this example of optionality provides users with a means to provide energy amidst a crisis or during periods of energy supply variation (e.g. weather induced fluctuations in solar or wind power generation).
There are three ways to approach optionality. First, we must develop technical solutions. This includes the development of mini-grids, managing energy demand, improving energy efficiency and creating power storage. Second, solutions must be operational. This requires investment in research and development, market and sector diversification and expanding the use of energy coalitions. Finally, solutions must consider financial implications. This includes strategies such as not overinvesting in capital, creatively structuring finance and hedging (protecting yourself from unexpected market fluctuations). Furthermore, some argue that optionality needs to be enabled through a fourth approach, political guidance and enablement. However, there is widespread belief that optionality can be curbed through over-regulation and political interference. It should be noted that increasing our energy mix is a strategy which has bipartisan support on Capitol Hill. Therefore, optionality provides energy security and resiliency through diversification.
Finally, energy success must be enabled by intelligence. This is achieved by combining the usefulness of machines and technology with human capital.
For example, the concept of net metering allows consumers to produce and even sell their own energy back to power companies. Net metering is accomplished by allowing citizens to develop micro-grids through personal solar panel farms or wind turbines. States such as California embrace this as a means to address resilience and optionality. Louisiana recently debated the merit of net metering practices. However, due to public demand the proposed disbandment was overthrown and Louisiana continues to allow energy consumers to also be energy producers. The consideration of returning to old ways of doing business through centralized power generation is an example of how intelligence is required to break old ways of thinking.
Market intelligence helps facilitate smarter consumer behavior. The use of strategic foresight, long range planning, helps us anticipate future energy needs and not be caught in the reactive loop of responding to today’s problems. Additionally, the concept of ‘big data’ is a means to mine the vast amounts of energy information we have at hand to make it usable. An energy example of the use of big data is the FRED project. The Free Energy Data system compiles energy-use data from diverse sources and normalizes it into a common format, resulting in energy intelligence. FRED assembles these data into a seamless, comprehensive picture of energy supply and demand from 1960 through 2035, across all fuel types and demand sectors. Therefore, technological solutions like FRED help us identify energy problems and opportunities.
Another example of energy intelligence can be found in a recent report entitled, The Renewable Global Futures Report. This comprehensive look at renewable energy projected five trends which are key drivers. While this report in-and-of-itself is enlightening, the appendix lists over 51 energy forecasts! This resource is an example of the immense repository of information available. However, this intelligence must be analyzed and contextualized to make is usable in your field.
Finally, intelligent solutions must be enabled by investing in people. Education and training are essential for our staff. For example, IBTS has recently launched a series of training and certification seminars for government building maintenance managers. We found that the recent government grants to increase buildings’ energy efficiency were not paired with training for existing workers to maximize and maintain these new technologies. These long-term infrastructure investments must be coupled with investments in those who keep the systems operational.
Winston Churchill once said, "Americans will always do the right thing, after they have tried everything else." While this characteristic Churchill statement is insulting, it can also serve to exhort us as we think about our energy future. The three components of ROI – resiliency, optionality and intelligence – are all profitable tools which can help us prepare for our energy future.