Integrating Renewable Generation with Your Strategy for Managing the Three Energy Cost Drivers

At this year’s EnergySmart conference, I had the opportunity to present to the people that are responsible for managing the energy use of America’s commercial, industrial and institutional (C/I/I) market segments—an evolving and complex job to say the least. Up until a few years ago managing energy for these segments was a matter of addressing the three energy cost paradigm: ‘how much you use, when you use it, and how much you pay for it’. Now, there’s a crucial fourth dimension to consider.

The fourth energy cost driver is who owns it—a consideration that provides a powerful opportunity for energy users to take control of energy-generating assets like they do revenue-generating assets.

Starting with the basics, I discussed a case study of a hospital in California that included an onsite solar photovoltaic generation project in a broad-scope energy services contract. The system was originally sized to offset approximately 80 percent of the hospital’s consumption and a tariff switch implemented to increase the value of net metering credits generated by the solar array. As the project evolved, the solar system size was reduced from two to one megawatt and while the net metering credits were more valuable, the greater share of consumption from the grid was also purchased at the higher rate.

When Borrego Solar performed post-installation production and bill analysis, it was determined that the customer was not realizing the expected savings. After returning to the original rate, the 7 percent projected savings were realized. This example poignantly illustrates the importance of a holistic approach to distributed generation (DG) that includes all aspects of energy usage and procurement as well as planned upgrades and efficiency measures.

As illustrated above, a solar DG system is more complex than its engineering description, which is a system that converts energy from the sun into electrons and delivers them to the electrical grid. You might think of the solar array as a mint that cranks out money on a predictable schedule. That is a more apt descriptor of how energy and financial managers can get their arms around a solar system as an asset.

In those terms, you can treat solar systems like other value-generating assets in your portfolio, which requires deciding whether to buy or lease and operate in-house or outsource, comparing financial returns, and determining procurement and hedging strategies for fuels and production inputs. These are all correct and begin to provide the framework for procuring and managing a solar generation system. However, reality is a bit more complex for most energy-consuming organizations that want to take control of their own generation and hedge against utility price increases.

Expanding on the analogy of a mint, a solar DG system produces something that looks more like multi-colored tournament poker chips. Like the differently-colored poker chips, electrons generated by a DG system have different values and they vary by time, location and—most important—what ‘casino’ (i.e. utility) you are playing in. The factors that impact the value of the electrons generated by the system include:

• Whether the systems’ production offsets onsite load or is exported to the grid
• If exported, is their value set by a Feed-in Tariff or by net energy metering rules
• Is the net energy metering regime remote/virtual or on-site? If remote/virtual, are credits applied monetarily or volumetrically?
• What tariff(s) are in place and is a rate switch advisable?
• Are additional incentives and/or credits available and, if so, are they fixed or variable?
• How does solar production interact with on-site load and the tariff? How is the system optimized for time-of-use (TOU) tariffs and are demand charges impacted as a result?
• Is energy purchased from the utility or through competitive supply contracts and how much to rates vary?

Perhaps the most important guidance that I can offer is that these considerations impact not just the financing and economic evaluation of the solar system but the system design itself.  In addition, the market, regulatory and technology landscapes are changing rapidly—sometimes on a weekly basis!  In many cases, the incentives and regulatory structures that impart the greatest value to going solar are capped or set to decrease as time or adoption progress. 

It is critical that organizations considering solar partner with vendors that can provide a choice of engineering and financial solutions that are optimized for them and are deeply involved in the markets that they serve in order to capture all of the benefits available.

Stay tuned for my next post on ownership models for distributed generation