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CFOs are getting cash back for reducing their companies' energy use.
Alix Stuart, CFO Magazine
December 1, 2011
Three years ago, executives at privately held Mission Produce jumped into the green-energy movement by joining a "demand response" program. In exchange for a small upfront payment from its local utility, plus the promise of greater financial rewards down the road, the company agreed to turn off cold-storage units, lights, air conditioning, and other industrial equipment whenever the utility asked it to.
While the decision could have posed operational risks, in some ways it was an easy one to make, says Jake Nixon, process-improvement and project manager for the avocado grower. To date, Mission has made between $10,000 and $25,000 per year from the program, while maintaining full control of its energy use. When a heat wave coincided with a bumper crop of avocados, for example, the company simply declined to meet its full energy-reduction requirement. The worst that can happen, says Nixon, is that the utility will decrease the capacity a company can sign up for the following year, limiting the upside potential.
Whatever the promise of wind, solar, and other forms of alternative energy may be, demand response is one sustainable energy option that companies can take full advantage of right now.
In its most basic form, demand response is a mechanism by which companies use less energy when energy costs are highest, shifting their activities to off-peak times. The programs generally involve a utility buying an option from a company or other energy user that stipulates that the user will stop using a certain amount of electricity when asked, usually when demand soars. The value of such programs to utilities has so far lain largely in what has not happened: blackouts, brownouts, and the need to build new power-generation plants to meet increased demand. For a company, the deal means cash, and, perhaps, some goodwill on the sustainability front.
Supply and Demand
"The market for demand response has matured quickly — the business didn't even exist five years ago," notes Kyle Smith, executive vice president of energy and carbon management for Pace Global, an energy consulting and management firm. In those five years, a crop of companies has sprung up to act as middlemen between utilities and corporations, including EnerNOC (Mission's provider), Comverge, and EnergyConnect (now owned by Johnson Controls). Utilities are also racing to offer programs themselves; in one example, Constellation Energy acquired demand-response provider CPower last year to quickly expand the program it had started internally.
The availability of demand-response programs still largely depends on geography, since only some states (California, Texas, and several on the East Coast) that have deregulated energy can offer it.
As popular as demand response has become, however, experts caution that it should not substitute for a comprehensive
corporate-energy strategy. "Demand response is a wonderful thing, but it's a blunt instrument," says George Goodman, executive director of Climate Savers Computing Initiative, a group founded by Google and Intel to make IT equipment more energy-efficient. That group's research has found that most companies have yet to implement even basic energy policies, like turning off idle computers at night.
Indeed, a sophisticated energy-management strategy like demand response is not on most CFOs' radar screens, says Craig Williams, leader of MyCFONetwork, a private network for financial executives in eight cities. And those who are aware of it tend to be skeptical. Williams says one manufacturing CFO in his network reacted to the idea negatively, saying, "I can't stop or slow down operations at three in the afternoon when I have an assembly line, salaries [to pay], and deadlines to meet. I would be losing money by participating in such a program."
The risk to operations is a major turnoff to turning off. Before agreeing to their deal, in fact, Mission Produce employees ran a test to see how well avocados held their temperature over time to make sure the company could reduce energy consumption when asked.
And it's worth noting that not all contracts are as lenient about noncompliance as Mission's. "Make no mistake: demand response is not a free option you can just take advantage of," says Smith of Pace Global. He says that how much flexibility a client firm will agree to, such as how much power it will turn off and how little notice it will accept, is always negotiable, and can increase or decrease the value of the demand-response contract. But "if you've been paid for the right to curtail your load and then are not able to, oftentimes you have to make the utility company whole," by paying for any additional energy the utility had to buy, he says.
A Starting Point
Simply considering demand response, however, can prompt companies to focus more intently on overall energy usage. At Mission, for example, signing up for the demand-response program "spawned more ideas and projects," says Nixon, ranging from prioritizing the use of the energy-efficient machines it already owned to taking advantage of a rebate from its utility that allowed it to upgrade and automate equipment to conserve power. The company now has equipment programmed to turn on and off automatically every day, with special rules for how to handle demand-response events.
Even though the idea of turning off lights and machines when they're not in use is basic, it's a lesson more companies should learn. As Gene Lynes, CFO of Ecova, an energy-and-sustainability-management consultancy, notes, "There's good money in demand response, but the value really lies in the pure reduction of consumption."
"With a single desktop computer, if you use power management throughout the night so that it's effectively off, you can realize a per-desktop savings of up to $60 per year," says Goodman of Climate Savers Computing Initiative. Yet fewer than 20% of companies use such strategies now.
Implementing such simple energy-management strategies is becoming easier all the time, Goodman says, thanks both to equipment that is increasingly energy-efficient and to third-party software that can direct computers to wake up and go to sleep at the appropriate times (including before and after a virus-protection update).
More firms are also taking the human element into consideration, offering incentives like extra budget money for curbing energy use. "Companies need to establish some common bonus structure or budgets so that everyone has skin in the game," Goodman says.
The upshot: whether or not demand response ultimately makes sense for a company, the concept can be an inspiration for both large and small projects that reduce energy waste and cost. As CFOs focus more on the cost-savings aspects of the sustainability movement, participation in a demand-response program is one option that could pay off right away.
Alix Stuart is senior editor for growth companies at CFO.