By 2015, potential US sales in the central utility plant construction and replacement market are expected to approach $70 billion. An additional $110 billion will be invested in non-utility generation projects and $7.5 billion in consumer-based cogeneration projects—driven by widespread customer discontent with rising fuel prices, poor power quality, and the need to replace aging infrastructure. Yet, seizing the opportunities in this market will require suppliers of consumer-based energy solutions to meet significant challenges.

Several factors are driving the growing interest in consumer-based energy solutions, including more efficient and environmentally friendly customer-based central utility plants, turbine- and engine-based cogeneration systems, and enhanced power quality systems. One increasingly significant factor is the uncertainty of the fuel supply, which we see reflected in price volatility. For example, the Energy Information Administration projects 2004/2005 average winter increases in fuel prices in the US of 12% for natural gas and over 20% for fuel oil.

In October, oil hit an all-time high of $55 a barrel. At the same time, energy-related expenditures are approaching 9% of the gross domestic product of the US—amounting to roughly $2,500 for every citizen in the country. It is a very significant issue today, one that has captured people’s attention. It is something that businesses can not ignore.

Customers are also paying the price for utility companies’ diversification and merger and acquisition (M&A) activities. Over the last 10 years, utilities have made significant investments in diversification into unregulated businesses, such as energy services, telecommunications, and mechanical service and contracting, to try to create additional returns for their stockholders. By and large, those ventures have not panned out, which has had more to do with the utilities’ corporate cultures than the potential of the business ventures themselves. Combine that with the M&A activity among utility holding companies looking for a bigger piece of the distribution market. The utilities paid significant premiums for both types of activities, and they are or soon will be passing these costs along to customers.

Reliability and Quality
Escalating costs are not the only issue; customers also have well-founded concerns about power reliability and quality. Their worst fears were confirmed in August 2003 when eight northeastern states and part of Canada suddenly went dark. Part of the problem is that the market had underinvested in the infrastructure, that is, the core transmission and distribution system. Another part of the problem is the challenge of getting the power to the load.

Look at where the markets are growing—Long Island, NY, for example. Utilities have struggled for years against opposition to building a cable across Long Island Sound to bring in additional electric supplies from Connecticut. The same types of problems exist in New York City, Chicago, Los Angeles, and other major metropolitan areas, in which right-of-ways are a very limited commodity. It’s a difficult situation. As a result, the utility industry is not likely to catch up soon to the demand for reliable energy.

Another factor driving the selection of consumer-based energy alternatives is compliance with increasingly stringent air emissions regulations. Many industrial and healthcare facilities are running older, oil-fired central utility plants. Their owners are finding it increasingly difficult and costly to remain in compliance with environmental regulations. As they consider the options for replacing or extending the life of these aging plants, they are looking for a system that is efficient both thermally and environmentally.

At the end of the day, customers—as captive utility customers—have grown increasingly frustrated by their lack of control over price, quality, and reliability. They are aware of the impact of these issues, not only on the cost of doing business, but also on their ability to deliver reliable service to their own customers. They are looking for ways to take matters into their own hands.

Onsite Cogeneration Comes of Age
Onsite cogeneration is one increasingly attractive solution. Cogeneration provides the benefits of low-cost thermal energy; reliable, cost-competitive power; and reduced emissions. Over the last five years, there have been dramatic, if not exponential improvements in fuel efficiency, footprint, controls, and environmental mitigation. For example, where chillers once required between 1.2 kW and 1.4 kW per ton, they now routinely operate between 0.5 kW and 0.7 kW per ton. That’s almost twice the efficiency, on average.

At the same time that productivity has increased, the footprint—both size and weight—of onsite systems has shrunk, thanks to advancements in microprocessor, combustion, and materials technology. That’s a key to the feasibility of onsite generation for many customers because space is at a real premium. Combustion turbines and engine generators can operate using natural gas and/or diesel fuel as well as landfill gas. Moreover, some of the newest engine generators and gas turbines have dramatically limited capital requirements to meet environmental emissions limits due to much more efficient combustion.

What was at one time a technology limited to the “ideal” application—such as a paper mill, with a 24-hour load and an industrial process that created fuel for the cogeneration system—has become a realistic option for a broad range of customers. And the greater the demand for this technology, the more it will become commercialized, and the better the improvements will be.

Another thing that’s driving this technology is its use in developing countries, such as China, India, and Pakistan, which are seeing a surge in manufacturing and a related surge in load. These “package power” alternatives can be put in place quickly to meet those needs. Onsite generation is also driving the worldwide oil and gas business. Virtually all offshore oil production—pumping out a collective 88 million barrels of oil every day—is driven by onsite combustion turbines sitting on the platforms.

The Life Cycle Sale
Both energy service companies and original equipment manufacturers face significant challenges in meeting the needs of the growing market for onsite cogeneration. The first is making the “life-cycle sale.” In choosing onsite generation, clients are making a long-term, complicated decision with implications for future cash flows that involve financing, construction, design, fuel, and performance risks. This requires that clients engage multidisciplinary teams to assess and make decisions for energy.

For many of them, this is a revolutionary approach. Accepted practices have generally disaggregated the energy decision-making process—facilities addressed end-use equipment, accounting paid the bills, purchasing bought the commodities, finance approved capital expenditures, and so forth. Client education and a comprehensive development and sales process are essential to the success of an energy service company in this market and, in many cases, we have to enlighten clients and change the way they do business.

For example, take design-build, in which a client goes to one firm, which evaluates, designs, builds, and, in some cases, operates the facility. Many clients have never done design-build, so they might hire a consultant to look at what is possible. Then they hire an engineer to do preliminary design, and a construction manager to buy and manage the installation of the mechanical, civil, and electrical packages.

This model does not work for this business because it requires a tremendous amount of time, and time is money. Moreover, it doesn’t work because the various players’ compensation is not tied to the system’s performance over the long term—the real economic benefit. In fact, the life-cycle sales process and the design-build-operate-and-maintain model are absolutely joined at the hip. It saves clients a lot of money and time, establishes a partner who shares risks and rewards, and it produces efficient systems that are built for the long term. It’s the right solution. Clients need to be educated as to the benefits of a single-source life-cycle provider.

The Bigger Fool
There are and have always been market participants that promise “something for nothing.” These energy service companies come and go, but always have a negative impact on the market because they consistently over-promise and under-deliver. For example, EMCOR recently lost a project to a development company that promised the client they would replace a 35-year-old, 15-MW/4,000-ton cogeneration and central utility plant—for nothing. Essentially, the savings were supposed to cover the cost of the plant. Almost two years later, there is still nothing built, and both parties have spent substantial sums of money on legal fees.

Who is the bigger fool? We believe that successful energy companies will make credibility a key priority, because as the market becomes better educated, companies that promise something for nothing will be seen in the cold, clear, light of day. Unfortunately, where the industry could have had another success story, instead it gets a black eye.

The Promise of Technology
Although cogeneration technology has improved dramatically, there is a “bleeding edge” associated with it, as with any technology. It’s the constant challenge of commercialization. Original equipment manufacturers sometimes move their projects to the field before they are commercially ready. (The sales effort always outpaces production and engineering.)

Clients make energy decisions based on hard economics, which are heavily dependent on the manufacturer’s performance promises. This makes underpinning service agreements and complimentary risk management essential. In effect, the manufacturer must become a performance partner. That is why EMCOR always tries to partner with big commercial players on the technology side. As partners, we share both the risk and the rewards associated with the project.

Outsourcing Initiatives
Just as there are significant challenges associated with the distributed energy business, there are also great opportunities. Increased pressure on clients to focus on their core businesses has driven outsourcing initiatives in many areas. This is particularly true in the energy arena, in which there is a significant level of technical complexity and specialization combined with market chaos—price fluctuation, re-regulation, and technological change.

These factors have created opportunities for new niche players. Moreover, these opportunities exist both in good and bad economic times. In good times, when the economy is very robust, cash is available, and the market is fluid—companies build their balance sheets by adding capacity (new office buildings, new factories). When they build capacity, they need additional energy, and they need it quickly.

Outsourcing to an energy services company is a viable solution in poor economic times as well. When the economy is difficult, companies look for cost reduction. They take existing capacity and try to make it as efficient as possible. In this environment, as well, the distributed energy business is a very viable solution.

Scale of Capabilities
Suppliers who possess financial strength, broad geographic reach, and in-house service capabilities will have a significant edge in the distributed energy market. Clients need confidence that they will be served consistently and credibly across their operations, which do not recognize the traditional regulatory and geographic boundaries of the utility industry. They want a supplier who has the scale to meet their needs in every location.

Historically, that has not been available to clients because the suppliers have predominantly been the utilities, which worked within their utility franchise. An infrastructure service business that can work for a client in New York City, Seattle, Phoenix, Toronto, and London—and, even more importantly, deliver a consistent product in all five locations—will have the edge.

Building long-term relationships with clients to meet their energy asset and service needs is essential to doing business in this market. The supplier that is willing to invest the time, money, intellectual resources and patience to become a trusted partner will be successful. Traditional players have homogenized and commoditized the client relationship for years. Clients have paid the price, and they know it. At EMCOR, our explicit strategy is to build this business one client at a time. We’re not a mass-market business that is fundamentally operationally focused. Instead, we’re client focused. And, in order to be effective for our clients, we have to be partners.

Interest in consumer-based energy solutions is growing, driven by customer discontent with rising fuel prices, poor power quality and unreliability, and the need to replace aging infrastructure. Captive utility customers are looking for alternatives that will enable them to take control of their energy fate and ultimately strengthen their competitive position.

In order to seize these opportunities, suppliers will have to meet the challenges associated with life-cycle development and sales, customer education, something-for-nothing competitors, and new technologies. Yet it’s never been a better time for energy services companies with the requisite knowledge, scale, and culture to form long-term partnerships with their customers.

GENE MARTIN is president of EMCOR Energy & Technologies, Norwalk, CT.

DE - May/June 2005