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Demand Response:  Taking Energy Management to a Whole New Level

By Richard Manzolina
December 2010

Many of today’s savvy hotel owners and managers have achieved a reasonable level of control in the management of their electricity consumption.  Whether born of necessity or simply a desire to be more “green,” today’s hospitality leaders are often among those at the forefront of their organizations’ efforts toward reducing electricity consumption, shrinking their carbon footprint, and promoting their organization’s sustainability goals.

For these seasoned owners and operators, many of the more popular energy management solutions have already been executed.  Retrofits of incandescent lighting to compact fluorescent have become commonplace.  The use of Variable Frequency Drives (VFD’s), state of the art just twenty years ago, is now a common specification for most mechanical installations.  Some have even installed or upgraded their buildings’ energy management systems to further streamline and measure energy consumption while ensuring guest comfort.  

So what do all these energy management solutions have in common? They focus on minimizing the consumption of electricity while maintaining the same product or output…the same temperature is maintained, same lighting levels, etc. etc. However, for those looking for an even higher level of energy efficiency, consider one of the latest trends in managing utility costs in a deregulated marketplace, a trend which focuses on eliminating rather than minimizing selected electrical loads at strategic times of day. Generally, this concept is referred to as Demand Response programming.

With the advent of deregulated energy markets, consumers no longer enjoy the automatic luxury of fixed utility costs year round from their local utility, at least not without paying a premium.  Instead, the economic laws of supply and demand are alive and well, treating electricity as a commodity, the price for which rises and falls in response to changes in supply and demand.  The good news is, along with subjecting consumers to price and service volatility (remember Enron and California’s electricity debacle in 2000), deregulated markets have also brought competition — and with it a host of new products and services that can not only save money on electric bills, they can actually make money. Demand Response programming encompasses some of these exciting new products.

The concept is simple. Over time the demand for electricity grows as the population grows.  Historically, the response to this added demand is the construction of more generating capacity, i.e., more power plants.  But building power plants is a slow, expensive, and often an environmentally insensitive method for addressing incremental increases in demand. This is particularly true when incremental demand is not steady but rather is a function of relatively short-term spikes in demand such as those occurring during hot weather.  So rather than raise the bridge of capacity, many markets have found a way to lower the river of consumption by deploying one or more load management tools known as Demand Response (DR) programs.
Demand Response gives consumers the ability to voluntarily reduce their electric consumption by a pre-determined amount in response to a notification from their supplier or ISO during a demand event. An ISO is an Independent System Operator, a company that coordinates, controls, and monitors the operation of an electrical power grid.  This reduction can be done manually by building personnel, or remotely by an ISO using building automation software.  In exchange for a willingness to participate in such a program, consumers are paid a stipend depending on the amount of power they can save.  These stipends vary in magnitude depending on jurisdiction and rate tariffs, but annual payments as high as $40,000 per megawatt or higher are not uncommon, and that’s just for participating in the program…before the consumer actually does anything to reduce load.

Consider this scenario:  It’s a 95 degree August day, with 90% humidity.  The local utility is having trouble keeping up with the region’s demand for power.  Rather than risk a brown out, the utility triggers a demand event, asking all their Emergency Demand Response customers to initiate their energy reduction plans. In turn, program participants scale back their consumption, usually for just a few hours, to help the utility through this period.  In exchange, customers receive a payment, per KW, for the power they did not, but normally would have consumed.
Some hoteliers might respond with the thought that this notion sounds great in theory, but when the ballroom is full and restaurants are jammed, the last thing they can tolerate is turning off the lights or raising air temperatures. Admittedly, energy savings are useless if they cause guest dissatisfaction.  But what if the energy reduction was transparent to guests and employees?  A consumer’s energy reduction plan need only be as conservative or aggressive as the business can tolerate.   In this instance, why not focus on back-of-house loads that are invisible to guests.  Or better still, why not use the emergency generator, and move electrical loads off the utility.  By doing so, the utility gets their needed power savings; the payments received will more than defray the cost of generator fuel, and electricity will be saved while normal operations continue unaffected.  

One of the first questions raised in this scenario is about wear and tear on the generator.  Moreover, conventional wisdom has it that it is unlikely that most operators will have a sufficiently large supply of fuel on hand available for such events.  

The answer to these conditions is that Emergency DR events are historically infrequent, averaging two or three times a season, if at all, and they usually last just a couple of hours.  In fact, the number and duration of events is often contractually capped, limiting customer exposure.  Once more, participation remains voluntary.  If consumers fail, or choose not to reduce their power consumption when called upon, many ISO’s will limit the subsequent cost exposure to the value of the initial participation payment, literally making the program risk free.

The scenario described above is just one of the many product offerings available in the marketplace today that has its roots in the principles of Demand Response, or more accurately stated, in the time value of the consumption of electricity.  Emergency DR focuses on assisting the utility in meeting its system’s peak demand without having to add capacity or bring another power plant on line.  

Other DR programs utilize different triggers but work in a similar manner.   For instance, Synchronous Reserve is a DR program that works much the same way as the Emergency DR, but has a shorter notification period, shorter duration, and typically occurs during overnight hours.  Unlike Emergency DR which occurs during peak times when power grids face an exhaustion of their generation or transmission capacity, Synchronous Reserve occurs when power plants are undergoing maintenance, or a transmission line failure has occurred and the grid needs short term reductions in consumption to help balance the electrical load across an entire city or region.   Like Emergency DR, Synchronous Reserve also has the potential for tremendous financial benefit with no cost exposure for participants, along with the added benefit of the nighttime application… making participation truly invisible to guests and most other building occupants.

A third DR program is Economic, or Market Demand Response.  The concept here is to voluntarily reduce consumption and sell the excess power back into the marketplace when the demand for and value of electricity is high.  Of course the consumer is not actually selling power as much as they are selling their rights to buy power at a certain price for a certain time…a price lower than the market value.  To liken it to our national pastime, think of Market DR as trading your team’s future draft picks for today’s home run hitter…but only for one game. It’s a strategic move that can produce high reward with low risk.

Let’s assume a contract with a third party electric supplier for a fixed rate of $.08 per KWH.  On that same hot summer day described above, the demand for electricity is so high that the open market has pushed prices up to $.50 or $.60 cents per KWH.  Using the market monitoring features of an Market DR program, the hotelier can voluntarily reduce their consumption and offer their excess contracted power back into the market place at a rate well above of $.08 cents but well below market rate — an action that can literally increase revenue and lower expenses within the same transaction.

As the old adage goes, time is money.  Fortunately, there is no better time than now to consider implementing some of these valuable energy management strategies.  ISO’s work feverishly during winter months to meet early spring contracting deadlines which are the cut off for participation in the following summer’s demand response program. Assuming that the hospitality operator is in a deregulated marketplace, there is no better time than now to look into how Demand Response programs might benefit the organization’s bottom line.

Demand Response programs are just the tip of the iceberg when it comes to the marriage of technological innovation, competitive market innovation, and energy management strategies.  Many other products are available to today’s smart consumers of energy who realize that the value of electricity as a perishable commodity can far exceed the value of the electrons themselves.  Properly managed, deregulated energy markets are creating both purchase and curtailment products that simply never existed before — products that can transform an old fashioned energy conservation program into a comprehensive energy strategy that combines conservation, load balancing and targeted revenue generation.

Richard Manzolina, CEOE, is the Director of Building Services at Akridge, a full service real estate firm based in Washington, DC.  Richard’s position affords him responsibility for oversight of all maintenance activities throughout Akridge’s management portfolio of seven million square feet of Class “A” office space.  In addition, Richard oversees specialized functions offered by the Building Services team, including LEED and system commissioning, project management, energy management, and utility procurement.  As a twenty-year veteran of the facility management industry, Richard specializes in helping owners and operators realize the full potential of their physical assets through pragmatic execution of predictive maintenance programming, technological advancements, and capital reinvestment.   He has worked with multiple lodging operators such as Hilton, Hyatt, and Gaylord, and maintains a Certified Engineering Operations Executive designation from the American Hotel & Lodging Association. Richard is a member of Cayuga Hospitality Advisors.

Reprinted with permission from Cayuga Hospitality Review.  All rights reserved.


Cayuga Hospitality Advisors

Cayuga Hospitality Advisors Articles of Interest:

Distressed Hotels: Adding Value / Jim Burr / November 2010
Managing Dynamic Data to Enhance Guest Experiences / David Sterling / August 2010
Let's Talk Tourism / Jason Swanson / June 2010
Making Meetings Work - A Step by Step Guide / Robert Woods & Florence Berger / April 2010
Demand Management: An Update* / Bill Carroll and Mac Noden / April 2010
Investment Decision Criteria for the Gaming Industry - Time to Revisit and Review / Stephen Sherf / March 2010
2010: A Year of Challenges for Restaurants; Thriving in Another Tumultuous Year / Michael Lukianoff / February 2010
Make Sure the Right Contingency Plans Are in Place; Secrets of a Hotel Asset Manager / Jim Burr / October 2009
Update on Adoption of International Financial Reporting Standards (IFRS) for the U.S. Hospitality Industry / October 2009
Do You Think Like a Leader or a Manager? / William P. Fisher. Ph.D. / October 2009
A Wake Up Call, The Shadow of 9/11: Terrorism and Premises Liability for Hotels / Carroll Dubuc / September 2009
You Need to Reset Your Exit Strategy / Jim Burr / September 2009
The Electronic Guestroom / Jules A. Sieburgh / September 2009
LEADERSHIP: The Basis for Management / William P. Fisher Ph.D. / September 2009

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