Utilities Manager: Where Did the Promised Savings Go?

0409-um-savings_ing1Reducing energy use is an important economic decision that should be based on sound financial data, measurements and calculations. Most businesses, though, are making economic decisions based on inaccurate (often inflated) dollar savings projections. Thus, the period needed to recoup their investment is much longer than they have been told. Let's look at how this happens.

Most energy-saving companies, consultants and government entities use an "average cost per kilowatt-hour (kWh)" to calculate dollar savings for their energy projects. The building owner is told that the "average cost per kWh" times the number of kWh saved is your projected dollar savings. On its face, this is a reasonable and traceable method. In reality, however, it can grossly overstate  the savings.

There are a variety of ways to derive an "average cost per kWh." Such numbers can come from utilities, government statistics or from dividing the cost—or some portion of the cost—of a bill(s) by the number of kWh used.

As an example, we'll take a monthly bill from one of our clients that is on the PECO Energy Company (Exelon) High Tension (HT) electricity tariff.

  • This Exelon Website tells us the average price for the PECO HT rate was $0.0505/kWh in 2007.
  • This U.S. Energy Information Agency Website tells us that the average price of electricity to commercial customers in Pennsylvania was about $0.089/kWh in September 2006.
  • If we divide the total cost of the September 2006 bill of $25,012 for our client's facility by the number of kWh used that month (265,000), we come up with a cost of $0.0944/kWh.

0409-um-savings_img2

If we reduce the kWh use of this building in this month (September 2006) by 25%, or 66,250 kWh, we come up with the dollar savings calculations using the three "average costs per kWh" numbers shown in Table I.

Any of these three numbers is commonly used to calculate savings. The problem is that they don't correspond to the actual savings our client will realize.

One reason is that the amount of money that an energy reduction project will save depends primarily on the number of kilowatt-hours of use (kWh) and the kilowatts of demand (KW) reduced each month and throughout the year—not just the kWh reduced. Actual dollar savings depend on how these two are linked through variables such as winter, summer, heating, demand ratchets and rate blocks, just to name a few. Some commercial electricity tariffs are mind-boggling, containing 30 or 40 or more independent and linked variables. It is these complex rate structures that determine your bills and savings.

Research, model and verify
If you want to accurately determine financial savings, you must first research, model and verify the formulae for the rate structures that comprise the applicable tariff. That way, when you plug in the kWh and KW numbers for the month—along with other numbers such as power factor, sales tax, energy efficiency surcharges, etc.—you come up with the same cost as the utility for that month and tariff.

In our example, we've modeled the tariff and already know the kWh, KW and cost (and other variables) of the monthly bill. To see the real savings from your energy reduction effort, enter the reduced kWh values into our algorithm of the tariff and calculate the actual bill. The difference between the bill without the kWh reduction and the bill that reflects the kWh reduction is your actual savings (in real life, we would calculate a historical baseline cost for that month and subtract the current month bill from the baseline cost to calculate the real savings). As shown in Table II, we can now compare the "savings" from the three average costs per kWh to the actual reduction calculated from the model of the tariff.

Overestimating savings
Why does simply using average cost per kWh usually lead to overestimation of savings? If we chart the algorithms for this tariff, we can see how all the interlocked variables and rate block costs actually contribute to the bill. This data in Fig. 1 shows the different cost blocks produced by the example facility with its unique kWh use and KW demand relative to the PECO HT tariff (every building uses different amounts of electricity and its interactions with the rate will be different).

0409-um-savings_img3

Because of the complexity of the interactions between kWh and KW, we can see that there are three different pricing blocks for kWh use. The first block of use is charged at about $0.18/kWh while additional blocks cost much less. Note that this first block accounts for $17,219 of the $25,012 bill.

0409-um-savings_img4

Here's the million-dollar question. If we reduce kWh use by 25%, from which blocks did the dollar reductions come? The answer is shown in Fig. 2. In this example—as it is in many cases—reductions are weighted toward the less expensive kWh blocks. Therefore, if most of your kWh reductions come from the block priced at $0.03/kWh, your actual savings will be much less than if you use an "average cost per kWh" of $0.089/kWh.

Conclusion
Businesses need and deserve accurate data and numbers upon which to make sound economic decisions. That's why it is so important for you to remember that actual dollar savings depend on the structure of the tariff and the electricity consumption of the facility in question.

The only way to accurately quantify savings and paybacks for energy reduction projects is to enter actual kWh, KW and other pertinent values into the algorithm of the tariff and calculate dollar savings against a baseline. Otherwise, your savings will usually be inflated—in some cases by a factor or two or three— and the paybacks on your investments will be much longer than promised or expected.

Paul Grover is CTO of Kilawatt Technologies, Inc., of Shelburne, VT, which provides measured energy reduction services to improve operational efficiency of commercial and institutional buildings. Telephone: (802) 985-2285; e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Newsletter Sign Up



Your First Name:

Your Last Name:

Your E-Mail Address:

Would you like our Newsletter?:

Enter verification image value
  

Congratulations to Our Recent Survey Winner

Paul Kimble, a Vibration Analyst for General Motors, was chosen at random to win a $100 gift card for completing our recent online MT Buying Cycle Survey. You could win, too! Watch your e-mail for our next survey request.

Featured Supplier: Brady

bradyBrady Worldwide Inc. is an international manufacturer and marketer of complete solutions that identify and protect premises, products and people. Our products include high-performance labels and signs, safety devices, printing systems and software, and precision die-cut materials. Along with being a global leader in industrial and safety printing systems and solutions, we have been the company you trust when performance matters most since 1914. We serve customers in electronics, telecommunications, manufacturing, electrical, construction, education, medical and a variety of other industries.

Click here for more.

Featured White Paper: Spraying Systems Co.

SSCo Logo Color w tag

Clean Tanks Faster and Lower Operating Costs

Understanding all the tank cleaning equipment options is difficult because not all tank cleaning nozzles are created equal. Let Spraying Systems Co. show you how to reduce cleaning time, minimize liquid consumption and improve cleaning effectiveness. 

Click here to download the White Paper.