Thanks to deregulation of the electric power industry, educational administrators soon will find themselves faced with a broad range of choices and opportunities, as well as potential dangers and uncertainties. For those who understand deregulation and its implications, these changes will open the door to substantial economies. However, purchasers who select equipment based on today's rates soon could regret their choices, and the amount at stake could far outweigh the capital cost of the equipment itself.
What will the deregulated electric power industry look like from the end user's point of view? Only two things can be stated with certainty: buying electricity in five years will be very different than it is today, and the early phases of deregulation will be turbulent.
One of the most visible changes will be that the services once provided by a single provider-the power utility-will be broken up and offered by different companies. The utilities will continue to provide transmission and distribution services, but they may or may not continue to generate electric power themselves. If utilities choose to continue as generators, they will form unregulated generating companies that will compete with other generating companies, such as merchant power plants and cogeneration facilities. Electric power marketers-entities that will not generate electricity but rather will buy it from a generator and sell it for a profit-will pay a fee to the owners of the transmission lines and distribution systems to cover the cost of moving the electricity they have purchased from the point of generation to your facility.
Electricity customers, free for the first time to choose among competing sellers, will have to navigate potentially dangerous waters when signing an agreement with a supplier. The relatively simple rate agreements that were the pattern for institutional users will be a thing of the past. Instead, suppliers will design packages that offer both increased benefits and increased risks for customers.
These risks and the strategies for managing them will color the market into the foreseeable future. This stems from the fact that electricity will be a commodity, bought and sold on hectic, high-pressure trading floors just as wheat and cattle are today. Price volatility is the hallmark of commodities trading, and electricity prices will be as volatile as any others. Thus, we can expect to see market prices for electricity being updated in "real time"-probably at hourly intervals to begin with, then at 15-minute intervals as the pricing technology is refined. The suppliers will offer customers lower prices and new services-but in return they will require the customer to accept additional pricing risk in order to protect themselves against substantial losses.
Making the right choice In a deregulated market, savvy customers will take advantage of real-time energy price fluctuations, as the technology for doing so becomes available. In fact, a few such programs are already in place, in limited areas, and their experience suggests how this approach might play out.
Under these special agreements, the utility agrees to sell its electricity at an "as-generated" price, and a dedicated two-way communication system is set up linking the utility and customer's facility. The utility uses this system to monitor the facility's transient energy load, to provide the customer with updated electricity prices-usually on an hourly basis-and for billing. The customer uses the same system to monitor both its loads and the cost of electricity. With hour-to-hour electricity prices always available, facility managers can reduce energy costs by adjusting the consumption to maximize the use of the lowest-priced energy-cutting back on the use of HVAC pumps, for example, during periods of higher electricity costs.
Some corporate and institutional customers derive additional value from this arrangement by tying the utility data system into a computer-based building management system (BMS). In that scenario, the BMS automatically determines which systems are turned on or off, or are operated at reduced capacity, to save energy. Active energy monitoring and control systems are a proven way to manage a facility's energy consumption efficiently, and they will undoubtedly prove more valuable after deregulation.
One excellent way to get an idea of the combined and complex impacts of economic, technological and planning forces in a deregulated energy marketplace is to consider the purchase of a new chiller plant. Every educational facility needs to replace or upgrade its chiller plant eventually, and as the economics of the selection process are being studied, the effects of deregulation make themselves felt early and unmistakably in the decisionmaking process.
Evaluating chiller systems Every modern school or university complex runs a broad range of large and small electrical systems: lighting, safety, transport, communications, computer, HVAC and chiller systems, among others. Of these, chiller systems pose a special challenge for facility managers-they typically represent one of the largest non-capital building-equipment investments for an institution; and if they are electric motor-driven they are highly sensitive to the cost of electricity because they tend to be operated out of necessity, at the most costly time of the day and year.
Even today, with deregulation still in its infancy, a facility manager considering a chiller replacement needs a way to account for the as-yet-unknown future effects of electric utility deregulation. This means having two kinds of information: first, as clear and up-to-date an understanding as possible of the deregulated electric industry; second, a strong knowledge of the different chiller technologies available.
Fortunately, several well-proven chiller technologies are now available in a wide range of capacities that use electricity, natural gas or high- or low-pressure steam to drive the refrigeration process, including:
-Electric motor-driven centrifugal chillers. These utilize a manmade refrigerant, which is compressed and expanded to provide the refrigeration effect. The centrifugal compressor is driven by an electric motor.
-Steam turbine-driven centrifugal chillers. These operate on the same principle as above, but employ a high-pressure steam turbine rather than an electric motor to drive the centrifugal compressor.
-Natural gas engine-driven centrifugal chillers. These also use a manmade refrigerant, compressed and expanded, to provide the refrigeration effect. A natural gas-fired diesel engine drives the compressor.
-Single- and two-stage steam absorption chillers. These use steam (low-pressure for the single-stage; high-pressure for the two-stage) to provide the energy to drive a refrigeration cycle that uses water as the refrigerant. The refrigeration effect is caused by the evaporation of the water under near-vacuum conditions.
-Direct-fired two-stage absorption chillers. These use the same principal as the steam absorption chillers described above, but use natural gas (combustion) as the energy source.
-Direct-fired chiller-heaters. These operate on the same cycle as the direct-fired two-stage absorption chiller, but with an additional feature that allows some of the waste heat to be used to heat water for other systems.
As the new retail market takes shape, facility managers will need a thorough understanding of these different technologies, the advantages and disadvantages of each, and how each will affect the energy profile of the facility. This will let them make better-informed decisions as to the type of chiller or combinations of chillers that can help their institutions negotiate effectively in the new retail electric market.
Analyzing options Typically, a facility manager weighing alternative technologies will perform an economic analysis. In this example, the analysis would evaluate the costs and benefits associated with owning and operating the various chiller technologies over the life of the unit, typically 20 years. The "winner" is the system with the lowest life-cycle cost. For such a study, one of the most crucial pieces of data is an accurate, reliable projection of utility rates-which, of course, is precisely the information that is no longer obtainable. As the electric utility industry restructures, rates may be expected to change repeatedly, and in some cases drastically, over the life of the chiller.
Is it even possible to perform a meaningful economic analysis without this critical information? At present, a limited but significant body of knowledge, gained from the small-scale experiments that have been carried out around the country, is available. This, together with the lessons learned from the deregulation of gas and other industries, make it possible to reach a reasonably "educated" decision, even today, as to a chiller system that will serve a facility well, both functionally and economically, during and after the transition to deregulation.
To see the effect of future changes in energy costs on the facility's operating expenditures, administrators also can supplement the economic analysis with a sensitivity analysis-a versatile analytical tool used to assess how dependent the outcome of an analysis is upon its underlying assumptions. In the case of a chiller replacement, the most critical variable in comparing alternative technologies is the cost of energy. For the purpose of this analysis, energy costs (i.e., electricity, natural gas, fuel oil) are altered, while all the other variables are held constant; this makes it possible to examine the impact of fluctuating energy costs and multiple chiller technologies on the overall life-cycle cost.
The special advantage of this analysis is that its results can be used to predict which chiller technologies will provide maximum flexibility for the particular facility as deregulation progresses. The key to such a selection will be flexibility-the more flexible the system, the greater the ability to minimize the school's future exposure to high energy prices, and the greater the opportunity for energy savings.
For more than five decades-longer in some parts of the country-the electric power industry has been an essentially unchanging, monolithic structure. The utilities generated electric power, and they sold it to residential, commercial and industrial customers under the umbrella of a very safe and well-regulated system. The customer could count on having an unlimited supply of electricity on demand (with rare exceptions), while the utility was allowed to charge a price for the electricity based on its costs, which included fuel, generation, transmission, distribution, billing, accounting and customer service. As the costs to the utility increased, they were passed on to the customer.
The bilateral nature of this system ensured that neither party was exposed to any substantial risk. The utility was assured a modest profit, and the customer was assured an uninterruptible supply of electricity within a fixed rate structure. Government regulations both prevented the utility from overcharging the customer and restricted the customer from selecting a different utility with which to do business.
For better or worse, this system now is being replaced with a radically different, market-driven system. In the near future, customers will comparison-shop for low-cost electric service-just as they shop today for low-cost long-distance telephone service-while the new power suppliers will charge market rates for electricity.
As the electric power industry becomes increasingly market-driven, the large established utilities will face a range of competitors: small upstart companies run by young entrepreneurs with no experience in power generation or utility management; large, multifaceted corporations; and large power marketers, well-trained in the business of buying and selling energy.
When it comes to getting a handle on the new economics of electricity, one New Jersey educational institution is putting itself out in front of the learning curve-partly as a result of having earlier commissioned a chiller plant study that turned out to be outdated before the recommendations could be implemented.
New Jersey City University (NJCU) is a small four-year college, situated on a unified campus in a residential area of Jersey City. The school operates four days a week in the summer and five days a week during the academic year. Most of the nine academic and administrative buildings are cooled with single-stage absorption chillers, most of which have been in service since the early 1970s. A central steam plant, fired by natural gas and oil, supplies steam to the campus.
With the chillers approaching the end of their useful service life, NJCU recognized that deregulation of electric power is imminent in New Jersey, and that the market now offers a wide choice of alternative chiller technologies. They decided to explore a range of different renovation and/or replacement options, and hired a firm to investigate multiple possibilities for their future chilled water system.
At the outset of the study, meetings were held with campus facilities staff to determine the status of the existing building systems and to obtain current utility-rate and energy-consumption data. As part of the analysis, the current status of the local utility's restructuring plans was investigated, as well as the likely impact of those plans on the selection of chiller technology or technologies.
The study will include detailed review of several alternative chiller technology options, including in-kind replacement of the individual building chillers, various central chiller plant configurations, and a number of satellite chiller plant configurations. These are currently under final review, and the university expects to begin placing equipment orders in early 1999.
This farsighted strategy is enabling NJCU to pre-position itself now to meet the coming changes in the electric industry. With electricity, natural gas and a year-round supply of high-pressure steam all readily available, the university will be assured of a highly flexible new chiller system, whatever form that system ultimately may take.