Cutting Energy Bills in Texas
Developing an Energy Risk Management Strategy

The Issues

Increased electricity and natural gas prices are creating unprecedented energy budget challenges for commercial, industrial, institutional and government utility customers in Texas. Most forecasts indicate that high prices and volatility will continue for the foreseeable future.

The Complications

Conceptually, the problem is simple -- energy customers can reduce energy costs by reducing energy use and, when possible, choose less costly pricing options. However, determining the best way to reduce energy costs in today's energy markets is difficult. Energy price uncertainty, complicated new electricity and natural gas pricing options in competitive market areas, uncertainty concerning potential efficiency and operational savings and the need to avoid investment risks make energy-related decisions exceedingly complicated.

Consequently, most energy customers rely on conservative rule-of-thumb evaluations, such as payback requirements, to make energy efficiency and purchase decisions. A recent study of efficiency investments in energy audit programs conducted by Texas A&M and other universities shows that most utility customers are paying from 10 to 30 percent more for energy than they would if efficiency and purchase decisions were made using modern risk management tools that explicitly consider energy price volatility and the customer's risk tolerance.

Avoiding energy efficiency and energy purchase decisions is a common reaction to a process that has become unbelievably complicated. An integrated approach to energy risk management requires answers to many questions including the following:

• What options are available to reduce energy use with efficiency and operating improvements?
• How do you determine appropriate efficiency/operating investment options given uncertain and volatile energy prices?
• Is it possible to guarantee efficiency-based cost savings?
• Given electricity price terms that range from one month to three years or more, what are the likely costs and benefits of selecting different terms?
• Is it possible to enter into a new contract before the current energy purchase contract ends?
• How do your energy costs compare with similar facilities?
• Can you get a better price with a different kind of electric meter?
• How can NYMEX-based futures prices, spot-market purchases and fixed price contracts be combined to provide both price reductions and limited risk exposure?
• How is budget flexibility (i.e., risk tolerance) incorporated in efficiency, operating and purchase decisions?
• Can efficiency, operating and purchase decisions be incorporated in a single comprehensive and consistent framework?
• What are the possible outcomes of efficiency, operating and purchase decisions and how likely are the various outcomes?

The Problem: Part 1

The greatest problem utility customers face in developing an energy risk management program is integrating information on energy efficiency, operational changes and, in competitive markets, pricing options in a way that reflects the organization's budget flexibility and risk tolerance.

Part of this problem reflects the failure of market forces to meet the needs of individual energy customers.

The inclination of energy efficiency firms is to focus primarily on selling larger equipment systems to the exclusion of considering low-cost operational and energy efficiency changes and energy purchase options. Addressing these low-cost options first reduces the return on the more expensive equipment system purchase; consequently, much of the quoted return on energy-efficient systems can reflect low-cost measures rather than an acceptable return on higher-cost energy efficiency systems.

In competitive markets, retail electric providers (REP) and energy consultants earn a fee based on electricity sales. If energy efficiency or operational changes reduce energy use, energy consultants make a smaller fee; consequently, no incentive exists to help clients evaluate options to reduce energy use.

The result is that most energy customers never receive an objective, integrated view of their options to reduce energy costs and protect against energy price volatility. Energy customers tend to view their energy problems through the lens offered by efficiency firms or energy consultants - that is, either primarily an expensive efficiency systems issue or primarily a purchasing issue. An integrated analysis of energy efficiency system, energy procurement and low-cost operational and efficiency options can provide an energy strategy that saves considerably more money in energy costs than possible when these issues are considered independently. In fact, uncoordinated decisions can substantially increase energy costs for years to come.

The Problem: Part 2

Developing objective information on all of the factors associated with energy costs resolves only part of the problem. The next question is: How are these options evaluated together and how can I make sure that a strategy meets my organization's budget flexibility and risk tolerance?

Uncertainty over efficiency-related savings actually achieved, weather variations, energy prices and other factors make an analysis of the costs and benefits of any energy strategy difficult. Without a reliable evaluation framework, many organizations rely on conservative rules-of-thumb such as a one-year payback.

The problem with a payback strategy is that most organizations end up paying much more for their energy than if they applied an energy analysis framework comparable to analysis applied to financial decisions. Our work at Texas A&M indicates that the approach described in the next section can save 10 - 30 percent in energy bills after paying for efficiency investments.

The Answer

"Cutting Energy Bills" workshops provide a review of efficiency, operational and purchasing issues and show attendees how to evaluate these options in a financial risk framework with a risk management process called Energy Budgets at Risk (EBaR)^TM . EBaR provides an evaluation of current energy price risks for each organization and quantifies potential risks and energy cost savings of individual efficiency and pricing options. Results from this process are matched to each organization's budget flexibility and risk tolerance to develop an energy risk management strategy that minimizes energy costs and protects against energy price volatility.

Workshops are designed for a nontechnical audience. Basics of energy efficiency, operational and pricing options are presented. Easy-to-understand descriptions of risk management principles are provided. Quantitative examples and case studies are used to illustrate the EBaR process.

The workshops are provided as a four-hour Texas A&M College of Architecture Continuing Education course. Attendees receive CEU credits and a Texas A&M Certificate of Workshop Completion.

Workshop Program

The Workshop Leader

Dr. Jerry Jackson is an energy economist and Texas A&M professor with thirty years experience in developing and applying innovative and practical solutions to difficult energy industry problems. His research interests in energy efficiency decision-making along with his consulting experience helping organizations evaluate energy use and purchase options led to the development of the new comprehensive energy risk management framework presented in this workshop.

He has consulted with more than one hundred organizations on energy-related issues including more than 20 Fortune 500 companies. A partial list of his clients includes: Capital One, Carrier Corporation, Florida Power and Light, Ingersoll Rand, Reliant Energy, the Southern Company, Tanger Outlets, Toyota, United Technologies, state energy agencies in California, Washington, Colorado, Indiana, New York, Pennsylvania, Texas, Michigan and New Brunswick, Canada, the US Department of Energy, national Research Laboratories and electric and gas utilities.

He has been active in promoting the application of new analysis tools to energy problems and has led dozens of seminars and workshops. In addition to his university teaching he has taught online courses for the Association of Energy Engineers. He has served as a US representative to a United Nations conference on energy modeling and was recently an invited keynote speaker at an international sustainability conference in New Zealand.

He is an expert on new energy technologies and their diffusion in the market. He has assisted leading US, Asian and European technology companies in new technology market analysis, new product design, and market strategy development. He is actively involved in development and analysis issues related to fuel cells, microturbines, combined heat and power and other new energy systems.

Professor Jackson has been at Texas A&M University since 2005. He publishes in both academic and industry publications. His previous positions include Chief of the Applied Research Division and a Senior Research Scientist at the Georgia Tech Research Institute and economist at Oak Ridge National Laboratory where his conservation policy analysis models helped guide US Department of Energy conservation programs and analysis at the Office of Management and Budget and the Environmental Protection Agency.

He holds a Ph.D. in economics from the University of Florida with a specialty in econometrics and a B.S. in mathematics from the University of Tennessee

Who Should Attend

• Energy managers and facility engineers with responsibility for energy use in commercial, institutional, government and manufacturing facilities.
• CEOs, CFOs, and other executives who want to gain a better understanding of Texas energy markets and strategy options.
• Executives and managers who have responsibility for energy budgets, energy procurement and energy efficiency investments in companies, institutions (e.g., hospitals) and government agencies.
• Individuals in businesses providing energy-related services including:
  • Architectural firms
  • Mechanical contracting companies
  • Energy service companies
  • Competitive energy providers
  • Electric and natural gas utilities
  • Energy consultants

Workshop Details

Workshops are designed for nontechnical audiences. Easy-to-understand descriptions of risk management principles are provided. Basics of energy efficiency, operational options and energy purchase characteristics are briefly reviewed. Examples and case studies are used to illustrate the EBaR process. More detailed agendas are available for the Austin and Houston workshops

Continuing Education Credit

Attendees receive CEU credits and a Texas A&M Certificate of Workshop Completion.