Mandates Drive Efficiency Industry
Stronger policies could help more firms cut energy costs, boost profits
Efficiency First | May 2, 2013 | By Jim Dulzo
About the Author
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at firstname.lastname@example.org.
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|Keen Solutions' Steve Morse and Tim Pulliam say efficiency mandates and incentives help their company cut energy costs--and boost profits--for the commercial enterprises they serve. (Photo courtesy of the Traverse City Business News)|
TRAVERSE CITY—Six years ago, Tim Pulliam was frustrated.
As a part-time teacher at Northwest Michigan College, he could see that students were very interested in the science and practice of energy efficiency, but so many people were missing out on opportunities to save money by making their own buildings more efficient.
“Everybody was talking energy audits,” Pulliam recalled, “but only one percent were acting. I thought, ‘That’s stupid! Let’s not do any more audits; let’s do action plans.’”
Those action plans must have been real doozies.
Today, Pulliam and partner Steve Morse operate a $5 million-a-year business in Traverse City, Keen Technical Solutions, that they say enjoys triple-digit growth by helping companies down the street and around the country save millions of dollars by using less energy. Launched from a table in a Wi-Fi equipped, downtown beer-and-burger joint, and financed by their own home equity loans, Keen now employs 14 people in Traverse City and 15 across Michigan and the U.S. Its website ticks off the grand total of the energy dollars it’s helped its customers save so far—and the total is well past $26 million.
Keen is an “energy services company,” or ESCO, and its success is not unique: ESCOs form a hot business sector that’s growing by more than 10 percent a year.
“Our industry grew right through the recession, even though it crippled so many companies,” said Donald Gilligan, president of the National Association of Energy Service Companies, a trade organization with close to 100 members.
Pulliam credits Michigan’s “energy optimization” (EO) standards, enacted the year he and Morse launched Keen, as a key to their initial, shoestring-powered success. He said similar standards in dozens of other states aided the firm’s rapid, coast-to-coast growth.
The standards require utilities to help ratepayers collectively cut energy use—typically 1 to 2 percent a year—by offering things like free home energy assessments and high-efficiency light bulbs to homeowners, and cash rebates to companies to help finance large projects, like high-efficiency lighting and heating and cooling systems.
“They came at the perfect time,” Pulliam said of the EO-driven utility rebates. “People didn’t know who Keen is, and we come in, and people are skeptical, but now you have your utility validating these measures and offering rebates. They helped spark an entire industry that we built this business around. It simply was not on everybody’s radar five or six years ago.”
Now, as community leaders in towns like Holland, Ann Arbor, and Traverse City ponder different ways to accelerate efficiency investments by homeowners and businesses, ESCOs are emerging as a most effective way to help not only large public buildings save energy, but also private firms with smaller buildings.
Jessica Wheaton, Traverse City Light & Power’s marketing and community relations coordinator, said her municipal utility is glad to have companies like Keen working in its service area.
“ESCOs are experts in the field,” she said. “They typically have a clear understanding of what the local utility companies offer for programs and incentives, and they are able to walk customers through the entire process from outlining the energy efficiency upgrades that should be made to actually implementing the upgrades.”
That meshes well with the goals of community leaders who like the idea of using efficiency to boost local businesses’ bottom lines, keep local skilled tradesmen busy, and cut climate-changing greenhouse gas emissions.
But the experience of Keen’s first customer—Cone Drive Operations Inc., a longtime Traverse City business that makes gear assemblies, including worm gears for a new solar power plant rising in the Mojave Desert—reveals that it may take more help from local, state, and federal agencies to make sure efficiency programs can help the entire business community save as much energy as possible.
Beyond Low-Hanging Fruit
Pete Ostrowski, Cone Drive’s environmental health and safety manager, said his company sees strong economic returns from its initial, Keen-managed efficiency investments. Savings from new, high-efficiency lighting covered their initial cost in under two years. Cone Drive then had other contractors install a new chiller and compressors.
The result: Last year the company used less electricity than it did in 2008, even after adding three shifts of solar gearbox production and new, automated assembly, cutting, and grinding equipment.
Ostrowski said rebates from TCL&P, which helped cover the cost of the new equipment, made the projects “no brainers.” Cone and Keen are now considering next steps to save even more energy dollars. But there’s a catch.
“Today we are into the stuff that Keen says has longer paybacks,” Ostrowski said. “That’s more than we can spend. Our finance people are saying, ‘Get it down to three years and we’ll listen to you.’”
Businesses use significantly more energy than homes—TCL&P serves about 8,500 homes and 3,000 businesses, but sells 80 percent of its power to the businesses—so helping companies like Cone Drive take next steps is crucial to cutting energy demand, which puts downward pressure on utility rates. But while Ostrowski and Pulliam are highly complimentary of TCL&P’s rebate program, which helped the city-owned utility stay ahead of its state EO goals, they would like to see the utility expand the program. Right now, it operates on a first-come, first served basis and limits rebates to $15,000 per company, per year.
“We’re looking at eight different projects with Tim to prioritize,” Ostrowski said. “He’s laid out costs, rebates, savings, and return on investments; it’s between 3.6 and 5.8 years, so it would be nice to offer rebates to get us down to three years.”
Wheaton confirmed that TCL&P’s commercial customers show “great interest” in the rebate program and that “many of our customers utilize ESCOs for their efficiency work.”
She added that, in 2012, TCL&P paid local businesses close to $200,000 in efficiency rebates from its general fund, rather than from an on-bill EO surcharge, used by many other Michigan utilities. Currently, there is no public discussion about surcharging to expand the fund’s current reach; given TCL&P’s 11,500-member customer base, a $2 monthly surcharge would slightly more than double available rebate dollars.
Pay Now or Pay Later
Pulliam sees the challenge differently, however.
He said he tells his efficiency customers: “You need to stop thinking about what it’s going to cost. It’s costing you more not to do anything. You can continue to send that extra energy money away, or you can unlock those assets that are in your old equipment. We can provide the capital if that’s an issue. But, every day you don’t act, you are wasting money.”
Like most ESCOs, Keen gets its upfront capital back by taking a cut of the client’s saved energy dollars. The company also has a full-time employee who figures out rebate opportunities that the local utilities are offering—and how best to use them—as well as how to take full advantage of state and federal tax incentives.
“It’s critical for what we do for our customers,” he said. “People can get really confused with the incentives.”
Depending on his client’s tax situation and the specific state and utilities, Pulliam said his clients can cut a project’s overall cash outlay by up to 35 percent.
He also said stricter utility rebate guidelines would make his job easier.
“There are certain things that maybe don’t deserve rebates—and that’s not good for anybody,” he said. “We don’t want to give energy efficiency a bad name.”
State By State
NAESCO’s Gilligan added that, to keep the country on the path to a highly efficient, globally competitive economy, state policies like Michigan’s EO requirements are essential.
“The state policies definitely drive the rebates,” he said. “Those minimum requirements are there because it didn’t work very well when it was just up to the utility to take voluntary action. Energy efficiency was way under-invested.”
Gilligan, like Pulliam, said that sharply different state efficiency standards affect ESCOs’ ability to help their clients.
“Sometimes the incentive programs are so cumbersome to apply for, it’s not enough to justify the effort and time delay involved. Some programs run out of money, so you have to wait for the next year’s budget.”
But, he said, rebates or not, the economic argument for efficiency remains powerful, and utilities should be required to keep helping their customers use energy more efficiently for as long as it’s cost effective.
“The test is, what is the marginal cost of a new generating plant,” he said. “If a utility can show it can build and operate a new facility for less than it would cost to save the same amount of energy, then they should build it. But I’ve never seen that happen.”
Pulliam is optimistic about the future of his company, ESCOs in general, and what efficiency can add to a community’s, or a nation’s, economy.
“I think it is a huge market,” he said. “Companies are starting to understand that the greatest cost lies in taking no action. Between state, local, and federal programs, with various loan funds, and our own funding mechanisms, every day there are more reasons for people to say ‘yes’ to efficiency.”
Jim Dulzo is the Michigan Land Use Institute’s senior energy policy specialist. Reach him at email@example.com.
** Full disclosure: Tim Pulliam is a member of MLUI’s Board of Directors.