Managing energy in a deregulated environment: Opportunity or chaos?
Be careful what you wish for. You just may get it!
A choice when your plant buys power. A single energy bill from a single source. The potential to reduce energy costs significantly.
As a result of deregulation, industrial plants are moving toward an energy environment akin to one they’ve always dreamed of. But is it really all they imagined it to be?
In many respects, yes . Deregulation of the electric power industry is bringing beneficial changes to the ways plant engineers manage their energy resources. As with most change, however, it does not come without a price. Deregulation demands that users become more knowledgeable about their own energy situations than ever before. To take advantage of deregulation, users must take definitive steps now to understand their energy requirements, formulate a plan for managing their energy resources, and acquire the expertise they need (either inhouse or from the outside) to handle the complex issues and tasks inherent in a deregulated industry.
Evolution of deregulation
What is deregulation and what does it mean for the average industrial plant?
In a deregulated market, the three primary components of electric service — generation, transmission, and distribution — are separated, or unbundled . Instead of purchasing power from a local utility, users may choose to buy it separately from another source.
Under current proposed legislation, only the generation portion of the industry will be deregulated. Transmission and distribution utilities will still be controlled by state regulatory commissions. In essence, various generation companies will sell power to users and deliver it over lines built, maintained, and repaired by the transmission and distribution companies.
These changes will give industrial users the freedom to choose an energy provider from any geographic location and to purchase services from more than one company. The resulting competition should cause energy prices between regions of the country to stabilize. However, facing so many choices after a lifetime of using a single local utility for power and service can be daunting.
Although deregulation offers the potential for controlling electricity costs and choosing service providers, it also makes the marketplace increasingly complex, fraught with new deals, fluctuating costs, special rate offerings, and concerns about reliability and quality.
In the beginning
How should a plant engineer respond to deregulation?
First and foremost with education. Deregulation is not a new issue, but it is one surrounded by complexities and confusion. Further, it is an issue that has been led primarily by industrial plants motivated by a desire to gain access to more economical energy.
Electric power deregulation, itself, is a states issue, with each state establishing its own rules and setting its own policies. The way to deregulating electric power was opened by the Federal Energy Regulatory Commission (FERC) in the 1990s and began to appear soon thereafter in states with relatively high power costs.
Deregulation of the natural gas industry had already occurred in the 1980s. Following the gas moratorium in the late 1970s and a subsequent disclosure in the early 1980s that gas reserves were sizable, large industrial consumers, primarily in the northeast and west, sought the freedom to shop for more economical gas, to line up their own delivery systems, and to control costs.
Now, with the deregulation of electric power, companies are in a position to buy both natural gas and electricity for plants nationwide with a single purchase. A user can select a separate supplier, transmitter, information provider, and billing agent and mobilize buying power with a centralized purchase. Deregulation involves more than choices, however. Issues range beyond competition to the need to ensure reliability and quality as well.
Some states are approaching deregulation more aggressively than others. Some are open to competition, some are not. The typical pattern has seen states with high-cost energy move more rapidly toward competition hoping to lower those costs. States with lower energy costs tend to move more slowly or to wait. More importantly, however, although only a few states are presently deregulated, others will inevitably follow suit.
Do your homework
Regardless of the condition of deregulation in their states, smart plants are taking steps now to prepare for a deregulated market. The more information a company has about its energy use patterns, the better able it will be to negotiate the benefits of deregulation. Every plant should know how its power is being used, should be able to identify its major loads, and know how to manipulate them. Among the most important initial steps is to form (or hire) a team of specialists dedicated to accomplishing these goals and give them the tools and support they need to do the job.
First and foremost, define and analyze current energy use levels and patterns . A facility must know its energy use patterns. A plant that doesn’t know how much energy it is using and where it is going cannot negotiate for and procure energy appropriately. Develop a plan and have equipment, including metering devices and data communications systems, in place to carry out that plan.
Make sure your energy bill is accurate. Many are not! Prepare load profiles for your facilities and for individual lines and machinery. Submeter various lines and study the equipment profiles. Look at the top ten energy loads in your plant and see what can be done to minimize them.
Advancements in information technology have made these tasks not just possible, but mandatory. Microprocessor-based systems have helped shape today’s energy world, allowing a truly competitive market to develop. Hardware and software advancements have made possible metering and monitoring as well as energy profiling and cost analyses. Without high-speed communications networks, for example, FERC-mandated bulletin boards for the dissemination of information and rates would be impossible.
Second, review your utility rate structures . Identify discounts and penalties and obtain information from a selection of power brokers and energy providers, not just one. Industrial customers should already be negotiating with utilities. In one case, a rate contract renegotiation with a local utility resulted in the utility dedicating 25 energy engineers to the corporation’s plants in the area to help them save energy. In return, the company signed a 10-yr contract with the utility.
The ultimate choices a plant makes depend in large part on the type and size of the plant and the options it has for mitigating risk. How energy intensive is the operation? If 12%-15% of all operating costs typically go to energy, the company should obviously pay more attention to managing energy resources than if the costs make up only 2% or 3%.
In the end, a plant must develop a portfolio of procurement contracts that reflects the various components of its energy consumption, with costs and risks apportioned accordingly. Deregulation offers users the ability to buy varying grades of power. Know the quality power you need and the quality you’re procuring. For some processes, it doesn’t matter. For others, quality is critical.
The cost of not being ready for deregulation can be significant. If a company uses $100 million of electricity annually, and deregulation would save 10% in energy costs, then every year it does not take advantage of those savings it loses $10 million. In addition, whatever plan a company develops should be revisited at least every 6 mo. The team responsible for plant energy operations should reassemble and evaluate what has been accomplished, what has worked, and what needs to be changed.
Deregulation has not and will not provide any automatic windfalls. It requires work by the user to determine the optimum strategies and take advantage of the benefits. A wealth of help is available from utilities, consultants, energy service providers, energy brokers, etc. Take advantage of it.
Building energy partnerships
Energy service companies of various types are available to provide a range of assistance, from monitoring and analyzing use to negotiating and procuring energy resources to managing all plant or corporate energy resources. Experienced and qualified firms know suppliers and price structures. They can offer services for improving overall energy operations and can investigate advanced technologies, including the use of alternate fuels and onsite generation.
Outsourcing energy management operations is a popular trend today as industrial companies strive to focus on core processes. Because of 3the expertise required to manage energy inhouse, many plants are seeking assistance from the outside.
In particular, consider outsourcing when capital equipment needs to be upgraded, when complex labor issues are involved, or when the plant is facing more stringent environmental requirements. Most energy service providers offer business and management skills as well as energy expertise. And although outsourcing can offer a variety of benefits, make sure your partner is competent in all energy areas and can demonstrate competency across the board.
What should a plant look for when selecting an energy service provider?
As with any other contractual arrangement, plants must exercise care when selecting outside energy services. Deregulation has seen the rise of innumerable firms offering products and services for energy management.
Some are more reputable than others. Examine a provider’s relationships with other clients and the breadth of services they offer. Energy services involve more than fuel procurement. Focus on firms that are interested in building relationships that are truly partnerships.
Where will deregulation lead?
In the long run, the end result should be a more competitive energy industry. Savings may not be as great initially because of allowances for stranded investments (unamortized costs of prior utility investments scheduled for recovery through regulated monopoly rates that would not be recovered under competition). Once stranded investment charges end, savings will be more significant. However, even in the first few years, large customers should be able to negotiate better rates in restructured electric markets through bilateral arrangements with suppliers.
In the short run, plants can expect continued diversity and change. Although the present administration has a plan for national deregulation, no firm action has been taken and none is likely. Because deregulation is occurring state-by-state, the issues will remain complicated and convoluted. (If a company operates in several states, it needs to know the rules that apply in each one.)
One expert sees the ultimate conclusion to deregulation as convergence: The commodity being sold will not be power or gas, but Btus. Industrial plants need energy. Deregulation offers the foundation for a competitive industry that provides energy in the same way as other services in our lives have been successfully delivered for years.
Plant Engineering magazine acknowledges with appreciation the special input to this article made by Cutler-Hammer, Pittsburgh, PA, www.cutlerhammer. eaton.com; Edison Electric Institute, Washington, DC, www.eei.org; Exelon, Philadelphia, PA, www. exeloncorp.com; Gas Research Institute, Arlington, VA, www.gri.org; and NGE EnergyPoints, Inc., Binghamton, NY, www.energypoints.com.
Special thanks to Exelon for providing the cover photo, which shows a refurbished power plant control room used to monitor and control power and gas use, as well as river water pumps. State-of-the-art microprocessor-based technology gives the operation precise, efficient energy control.
A glossary of energy terms commonly used when describing deregulation issues can be found on the Plant Engineering web site, www.plantengineering.com, along with the complete text of this article.
Deregulation offers plants a choice of where to buy energy, a choice in the type and amount of energy to purchase, and the potential for significant cost reductions.
Navigating through the maze of deregulation options to achieve cost-effective and efficient energy solutions can be both challenging and confusing.
Users who want to successfully negotiate the purchase of power must have detailed knowledge of their own plant energy profiles.
Like a Phoenix rising: An energy partnership breathes new life into a faltering site
For USX Corp., the old power plant on its 3000-acre site in Fairless Hills, PA, was just no longer profitable to operate. The steel manufacturer considered abandoning the economically undesirable operation and had already formulated plans to shut down the facility and install packaged boilers to supply steam for its processing. But then a partnership with an energy services provider not only saved the facility, but turned the operation into a dynamic, profitable endeavor.
Most of the facility was originally set up to provide services (air, water, etc.) for the hot-side production of steel. Burning methane gas generated by a landfill on the site provided a way to handle the emissions formed by the waste site. However, the company was under pressure from the state to reduce emissions at a time when the landfill was expanding. As a result, the company faced problems it did not want to handle.
Selling the power plant and the rights to the landfill gas to PECO Energy, Philadelphia, PA, removed an unwelcome aspect of the business from USX’s responsibility and allowed it to focus on its core business. In turn, the energy service provider took over the plant and is now able to supply USX with steam economically and efficiently. PECO Energy now owns the plant outright and also performs operations and maintenance services to the steel manufacturer on a contractual basis.
PECO Energy inherited an operation in which two 30-MW gas turbines had already been installed and were producing a small amount (about 6 MW) of electricity. Existing infrastructure also facilitated the establishment of the energy production operation. Piping originally designed to burn waste gas from the steel plant was already in place. A compressor station with three units pushes the gas from landfill through some two miles of pipeline to the plant. The remote site is inspected twice a shift, and also monitored and operated from the control room at the plant.
The facility is equipped with four boilers. Thanks to renovation efforts, three are now serviceable and two have been converted to burn natural gas. Steam, produced in the boilers at 850 psi, runs through the turbines. From an extraction point in one at the 300-psi level, steam is siphoned off and sent to a nearby mill to supply a USX sheet finishing operation.
The refurbishing efforts brought the 1950-vintage boilers up to 1990 efficiency levels. Changes in the burner management system, basically used to start and stop the burners, provide all the interlocks that had not been on the old burners. Combustion controls have also been retrofit into the system. The boilers can burn natural gas, landfill gas, and either #4 or #6 fuel oil. Fuel costs are reviewed daily and fuel selection decisions are made accordingly.
The project has been a successful one for both the energy service provider and the manufacturer. As part of the contractual side of the operation, PECO Energy also manages all the fuels for the site. Among its activities is the operation of a 13,000-V electrical distribution system.
The company has been able to compete effectively in the deregulated market, selling quality steam at a better price as well as using the plant to make electricity. Excess power now generated by the two steam turbines is sold into the wholesale power market. Financially, benefits realized by PECO Energy will pay for the acquisition of the plant over the length of the contract.
USX is now striving to build the once-failing site into an industrial park. As other businesses are established, the opportunity for its energy partner to sell power/energy resources will expand, although PECO Energy will have to compete with other providers to deliver the energy and resource management services.
Both PECO Energy and USX are quick to admit that the same opportunities for energy management would not exist if not for the landfill. However, both also agree that energy management involves more than fuel management and technology. Operational excellence is important as well. Staffing and operating the plant efficiently and earning the trust of the onsite personnel is of equal importance. By concentrating on all aspects of management, the companies were able to use all resources most efficiently to the benefit of everyone.
Another 10-step plan
Now that an industrial plant has choices about its energy supplies, providers, and costs, how can it be sure it is managing its resources optimally? Formulating a program, and adhering to it, is the best way to capitalize on the benefits of deregulation. Here are some steps to follow.
1. Put together an energy team. Be sure all company interests are represented.
Develop goals and consolidate control of your energy use.
2. Assemble energy information. Be a data gatherer: Know how and where your energy is used.
Understand the energy bills, load profiles, and peak demands.
3. Benchmark internally. Compare like energy loads. Determine which are most efficient and where changes need to be made.
4. Benchmark externally. Compare energy suppliers. Learn what energy costs. Compare use information against industry standards.
5. Develop an ongoing data collection and assessment strategy. Monitor energy use continually.
Know where you’ve been and where you’re going. If you need assistance, contact a third-party energy services provider.
6. Aggregate your energy loads. Combining loads almost always helps harness purchasing power and a better price.
7. Strive for flexibility. Deregulation has generated many alternatives to the traditional energy supplier. Use inhouse and outside expertise to choose the best options.
8. Diversify solutions. Don’t get locked into a single alternative. Services are being unbundled and rebundled. Maintain your market leverage and your right to compile your own package.
9. Compile an energy management plan. Develop a strategy on how, what, and when to buy energy. Make sure it is carried out.
10. Centralize. Costs are lower when buying power is consolidated. There will be fewer bills to buy and less elements to monitor. An energy partner can help watch over your interests and conduct rate negotiations. There are many from which to choose.
Information for this section was supplied by NGE EnergyPoints, Inc., Binghamton, NY. More information on this subject may be found in ”Piecing together the energy management puzzle: Take time to develop a strategic plan” PE, September 1998, p 64).
A variety of information and additional resources is available to those concerned with deregulation issues and energy resource management. A few are described here.
The Association of Energy Engineers has a number of resources that discuss energy strategies and deregulation. They include Energy and the Deregulated Marketplace, 1998 Survey compiled by Ruth Bennett Fowler; Energy and Environmental Visions for the New Millennium compiled and edited by Jana Ricketts; and Energy and Environmental Strategies for the 1990s compiled and edited by Mary Jo Winer and Marilyn Jackson. All are available from The Fairmont Press, 700 Indian Trail, Lilburn, GA 30247; 770-925-9388; web site: www.aeecenter.org .
Two books, Utility Negotiating Strategies for End-Users and Electricity Purchasing Handbook , both by John M. Studebaker, Ph.D., are available from PennWell, P.O. Box 21288, Tulsa, OK 74121; phone: 918-831-9421; fax: 918-831-9555; web site: www.pennwell.com.
The internet holds a wealth of information about energy management and deregulation. As a start, check out these sites.
– The Federal Energy Regulatory Commission home page provides timely access to FERC orders, notices, and rule- makings. www.ferc.fed.us
– Energy.com Corp. was formed to inform and educate energy consumers worldwide. The Ohio-based site’s mission is to draw together energy companies, product suppliers, and industry experts to provide tools and information for making intelligent energy decisions and purchases. www.energy.com
– Washington Energy Policy Group is a Washington- state-based site that provides leadership, information, analysis, and support for energy decisions that deliver an economically and environmentally sound energy future. www.energy.cted.wa.gov
– Washington (DC) International Energy Group, Ltd., provides energy companies with early-warning, strategic-support and broad-based analyses about emerging trends that help executives meet competitive challenges successfully. www.wieg.com
An energy glossary
Plant engineers and energy managers will undoubtedly encounter many unfamiliar terms as they consider deregulation and power management options. This glossary is intended to help sort through some of the phrases common in the electric power industry.
Cogeneration. Use of steam both to generate power and to heat adjoining buildings.
Co-op. Distribution entity in a rural area formed to expand electric service in these areas. A co-op purchases power from other producers or produces and provides its own wholesale power to its members. There are about 1000 rural co-ops in the United States.
DISCOs. Distribution companies that deliver power.
Electric power grid. A system of separate electric companies connected so that they can meet electric power demands, engage in economic power transmissions, and enhance reliability by providing additional back-up power paths. The grid contains more than 672,000 circuit miles of lines.
Energy Policy Act. Passed in 1992, the Act mandated that owners of transmission facilities provide access to the grid by delivering (wheeling) power to wholesale customers at cost-based rates.
ESCOs. Energy services companies in business to help customers use energy more efficiently, usually by handling conservation aspects of energy from the demand side.
FERC. The Federal Energy Regulatory Commission regulates the price of power and the rates that utilities can charge to move power from seller to buyer over their transmission lines. FERC Orders 888 and 889 provided open access to a more competitive wholesale power electric system and a framework for establishing an information exchange system governing the use of the transmission system.
Fossil fuels. Energy resources such as coal, natural gas, and oil that are made up of organic materials.
GENCOs. Stand-alone, nonutility electric generation facilities (such as independent power producers and merchant plants) that produce power.
Geothermal resources. Steam and hot water.
IOUs. Providing nearly 80% of all power in the United States, investor-owned utilities are companies owned by millions of small investors, either directly or indirectly through such investments as life insurance policies, retirement funds, and mutual funds. IOUs sell power at retail rates to various classes of customers and at wholesale rates for resale.
ISOs. Independent systems operators, established by utilities to ensure fair access to transmission assets, are responsible for dispatching generating assets on an economic basis so that all generators bidding into the market have an equal opportunity to participate.
MSWs. Municipal solid waste.
MUNIs. Electric utilities owned by the municipality in which they operate. MUNIs, which are financed through municipal bonds and self-regulated, provide approximately 11% of the nation’s power.
NERC. North American Electric Reliability Council administers voluntary rules, standards, and protocols that exist among electric utilities to ensure reliable electric power is available to consumers.
NOx emissions. Nitrogen oxide emissions, generated in large part by the burning of fossil fuels, contribute to the formation of acid rain and ground-level ozone.
Power pool. A consortium of utilities that formerly worked together under a single operator to dispatch electric power economically, a power pool is now primarily concerned with reliability. Because deregulation has taken the economic dispatch of power out of the hands of the power pool, its focus today is on maintaining the integrity of the system in the region.
PURPA. The Public Utilities Regulatory Policy Act of 1978 required utilities to buy power from nonutility generating companies that used renewable energy sources. Designed to reduce dependence on imported oil, the act played a major role in promoting competition.
Stranded costs. Estimated at $135 billion for the utility industry as a whole, stranded costs are the unamortized costs of prior investments scheduled for recovery through regulated monopoly rates that would not be recovered under competition.
TRANSCOs. Transmission companies that move power.
Information for this section was supplied by Exelon, Philadelphia, PA