Open Market: Q&A with Yardi Energy
- Jan 17, 2017
Property owners are increasingly exploring new energy procurement alternatives and improving their measurement of energy usage. As utilities and municipalities require greater use of submetering, commercial owners are following their multifamily brethren down a path toward increased measurement of tenant usage. Yardi Energy Regional Director Margaret Carey evaluates the state of today’s energy market and where she sees it going.
Let’s start with a broad question: What are the current trends in energy procurement?
Procuring energy on the open market has been around since 1999. California was the first market, and that closed almost immediately. New York was the second market. Each state chooses to deregulate in their own way because the powers of the state allow them to deregulate their electricity markets and set the policy and direction and rates accordingly. And New York being the second, New Jersey being the third, they have really been the paradigm of how states do deregulate.
Almost half of the United States has a deregulated energy market; the other half does not. In those markets (that do), some are more competitive than others. And the reality is that, from a policy issue, there has not been that much change in the deregulated movement in this country. With the new administration, it’ll be interesting to see what happens, whether or not we’ll move forward in having more states deregulate.
Deregulation was supposed to save people money. Initially, it did not. But the markets are now much more stable, and because we have a glut of natural gas and shale, we’ve seen that the deregulated markets have more beneficial rate structures than some of the regulated markets. But we’re seeing rates now that are very, very favorable for folks to go out in the open market and buy their power.
How well do you see building owners dealing with that opportunity?
The large commercial and industrial (owners) have been participating in every market that’s deregulated for quite some time. … How do we take the lessons learned and the sophistication of buying power in the open market and the analyses that are done, and the contract negotiations that have been done for the very large commercial guys, and how do we bring that to the smaller commercial and some of the residential? I think that’s the opportunity and that’s the challenge. … Because in this web of deregulation, there are many organizations out there that pretty much take advantage of the small commercial and the residential community. And what we’ve seen over the last five, maybe six years is that consumer protection boards within these states—the board of public utilities, public service commission—are taking a stronger stand to protect the smaller consumers. I think, once again, there’s an opportunity to help folks navigate, and that’s the direction that we have to go in: Help these organizations and users to take advantage of the deregulated market. And, quite frankly, not get taken advantage of by rogue (energy) brokers or transactional companies that truly just want to execute a contract, walk away, make a ton of money and not provide any service.
What are some of the pitfalls owners encounter if they come up against some of these companies? What’s happening to them?
They may be slammed. That was a term that was coined during the telecommunications breakup, which is now 25-plus years ago, where if someone got your account number, they would automatically put you in a contract without your knowledge. And that contract could be not beneficial to you. We have that still going on. But also, if someone is going to listen to a transactional type of broker, the broker or the organization that is trying to do this transaction may not fully disclose the true terms and conditions of the contract. Because often what will happen is they’ll get a very favorable rate for maybe the first three to six months, enter into a two- to three-year contract, and then guess what? The rate is dramatically changed subsequently. What’s happening now is the consumer advocates are demanding that there be transparency. There has not been full transparency with a lot of these organizations, whereby you do not know what their fees truly are. And some of their fees are dramatically inflated.
Do you find that the proliferation of alternatives is helping keep some of these companies more honest, helping with the rates in general?
Actually, I think the best thing that ever happened to this market is the polar vortex back in Winter 2014. You did not need much expertise in energy to be a licensed energy services provider (ESCO). A shoemaker could almost become an ESCO. (With) the polar vortex, some of these guys did not take positions, did not hedge the consumption that they were being put to task to buy on behalf of all of these customers. And guess what? In January, February and part of March in 2014, the markets quadrupled. So the price of electricity quadrupled. And if you didn’t fix your price of purchasing on behalf of your clientele prior to that, you were in trouble. Many of these ESCOs went out of business, which, personally, I think is a great thing. A lot of the rogue participants were no longer able to cover their positions in the market, and they went belly up. I think that was a rude awakening for many, and I think it ultimately helped the consumer.
What are the most important considerations to be making when buying power?
What’s your real estate hold strategy? Are you a long-term holder or a short-term holder? Are you planning on selling this particular asset within one, two, three years? You have to understand your hold-or-sell strategy. That will help dictate the pricing strategy that you’re going to implement for that power procurement position.
(And) I want to know what my occupancy is in a property, because everything is all about the consumption of energy—what are my consumption patterns—because I need to go into the market and buy that volume of energy, in a certain-pricing-product way. My leasing strategies over a period of time.
What are my operational conditions? Am I planning on replacing a chiller? Am I planning on doing a major lighting retrofit? Am I planning on putting an ice storage or a LOBOS system in? What are my operational objectives? Am I going to be embracing energy-efficiency technologies that will also impact and affect my energy consumption?
Those are the three major criteria that need to be answered. And then you look at historical patterns of energy usage and correlate that with the answers to those questions. Then you go out and put together a request for pricing that mimics your real estate strategy, your leasing strategy and your operational strategy. Because one never wants to overbuy.
It sounds like a lot of data to collect.
It’s all about analyzing the data. Through smart meter technology, we can simply take 15-minute interval data from any building to see how it performs. We use this data to model and analyze patterns through graphic representation to fully understand and show how that building uses energy.
And we may, in certain market conditions, realize that 40 to 60 percent of the energy is base building and that it’s really used essentially 24/7. Well, if I can understand that, then maybe, given a very stable market condition, which is what we have now, where prices are low and the bandwidth of volatility is very narrow, we may look at that as an opportunity to buy the baseload requirement for a building.
A lot of that might be off peak, and off-peak prices are typically a lot less than on-peak prices. So I might be in a position where I’m going to execute a pricing strategy and a contract that would lock in a certain level of load at a fixed price and ride the market for the rest because I think there’s more in the market where prices might even come down. And if I see that price point come down, I’ll lock in some more load. So I’m going to be watching that market and I’m going to be watching the load. There are various pricing strategies that can complement market conditions and can complement those three criteria: real estate hold, occupancy and leasing strategy, and operational issues.
More municipalities and states are focused on smart metering. How widely on the commercial side do you actually see smart meters being used?
I have this line that I’ve been saying for over a decade: You cannot manage that which you do not know. By simply receiving a bill, that does not give you information. Let’s look at the commercial real estate space. … The vast majority of properties are owned by a real estate entity and they lease it to tenants. Those tenants are responsible for, typically, as low as 50 but often 70 percent of the actual energy utilized—I’m really talking on the electricity side, not on the heating side. So if tenants are not metered, if tenants are not given data and information on how they’re using energy, how in the world can they change their behavior?
By metering tenants’ load—and we saw that under the Bloomberg administration with some of the local laws—any property 50,000 square feet or greater in New York City is going to (require) tenants to be submetered. Because if you cannot measure, you cannot manage and you cannot reduce. We want tenants to take control of their energy destiny, because as landlords that own the property, they can really only control the public light and power. The way they can inspire tenants is by actually metering the tenants and providing not just a bill but some real metrics as to how they are using energy. And perhaps how they are stacking up relative to other tenants within the building or in like-minded industries.
How do you see this catching on among commercial owners? Is it being driven more by the municipalities and utilities or are owners motivated by cost savings?
I think it’s a combination of what you just suggested on the municipality side but also on the commercial side you have sophistication. You have sophistication on the ownership side and you have sophistication on the tenant side. I would suggest that tenants are also pushing this, because they, too, want to control their energy destiny. People want more control, not less control. And we have a lot of environmental issues that people are aware of—tracking carbon, being part of all these LEED reporting structures, etc. We want people to be more engaged—and I think tenants want to be more engaged, and I think owners want to be more engaged.
Once you start to report on this and you have real data—and you can only have data if you’re metering, right?—what we’re seeing is that not only do owners of real property want to meter their tenants, they want to start metering various pieces of equipment throughout the building so that they can manage the operation of those pieces of equipment more effectively. They can find fault. Part of the whole Yardi LOBOS fault detection system is, “Let me report on, maybe, some of my outliers.” I might have a fan system, I might have a pump, I might have a cooling tower, I might have three of each of these. Why is one an outlier? Well, guess what? I’ve got the data, I’ve got the information, it’s sitting here on a dashboard. Now I can ask my engineer, “Look at Fan System 16. What’s going on? Maybe there’s a problem with the belt.” Now that we have data and information, we’re all moving toward more smartly run buildings. The Internet of Things.
What role do you see alternative energy playing?
I think it’s a big play. Utilities like ConEd have a huge interest now in solar. You also have requirements on the state level to have renewable sources as part of the utility mix. I think you’re going to start to see battery storage be an interesting and much larger play to shed loads during the peak periods by having a battery that stores energy and using that energy to cut people’s peak demand. By cutting peak demand, you change a property’s load profile, and by changing that, you reduce energy consumption, and you’ll affect the price of the power, as well. There’s distributed power, whether it be through wind or fuel cells or solar or ice storage or battery storage. Depending on the type of property, one or many of those could be applicable. But it’s all about the economics of that transaction.
I think a lot of owners are buying renewable energy credits because they want to do the financial transaction to help support renewable energy. … It really is a matter of looking at what works in each property. … And then, of course, there’s the whole optimization. Optimize that which you have—which, again, is a LOBOS type of situation: Let me take your HVAC systems and optimize them, provide good comfort at less energy and use less energy and optimize the systems. Well, the way you optimize the systems is that you do it without algorithms and smart technologies. You can’t have an engineer sitting, looking at a computer and making small incremental changes every minute or two or five. You want to do that with smart technology, and you do that with software and algorithms. We’re absolutely moving in that direction.
Originally appearing in the CPE-MHN Guide to 2017.