Income Guarantees Approved for FirstEnergy and AEP – Customers to Pay More for Power

firstenergymonopoly

In December, EPCO took a stand against the power purchase agreements that FirstEnergy and AEP presented before the Public Utilities Commission of Ohio (PUCO). Over the last several months additional hearings were held, and experts testified for each side, regarding the viability and potential consumer costs of the proposals. On March 31, the PUCO issued their ruling in favor of the power purchase agreements for both FirstEnergy and AEP. The complete order with opinions from the PUCO can be read here.

The PUCO has given FirstEnergy and AEP approval for an eight year rate plan. This plan will go into effect over the summer, following a set of auctions on pricing later this spring. Simply put, the customers in these territories will be subsidizing FirstEnergy and AEP to ensure they turn a profit through 2024. FirstEnergy has argued that over the eight year term, the rates consumers pay will be lower in aggregate (projected at $256 million), following an initial increase in the first couple years.

However, many in opposition including the Ohio Consumers Council believe this deal will cost consumers at least $3 billion over the eight year term. Some estimates have even put the cost to consumers at nearly $6 billion. There is clearly a stark contrast regarding the potential cost to consumers. This divide is due in large part to differing assumptions regarding where the natural gas market, and state of renewable energy, will be in the future.

To understand this argument better, let’s take a brief step back to evaluate how we got here. Historically, most electricity in Ohio has been produced from coal fired plants. But over the past five years, half the large coal fired plants in the state have been retired.  During that time, generation from coal dropped from 82 percent throughout Ohio to 59 percent.

There are two significant reasons why this shift has occurred. First, the influx of natural gas in the market has provided a less expensive and cleaner alternative to coal fired generation. In just the past couple of years, the price for natural gas is down roughly 60 percent and trading below $2 on the stock exchange. The second issue is the increased cost of compliance due to additional federal and state regulations levied on coal and nuclear plants.

The utilities were able to successfully argue to the PUCO that their coal fired and nuclear plants are unable to compete in this changing market. As more natural gas fired plants come online, and additional regulations are issued, it has become exceedingly difficult for FirstEnergy and AEP to compete. In order to ensure that their plants stay active and produce the necessary power for the regional grid, they required a subsidy from the consumer in the form of an income guarantee.

The utilities have argued that natural gas pricing is going to dramatically increase to bolster their claims that rates will precipitously rise in the future. According to their logic, once rates increase their plants become more competitive. The utilities added that the need for the income guarantee is short term until the market turns in their favor.

The only problem with this argument is there is nothing to support the utilities claims. To the contrary, a great deal of research, data, and market analysis has shown the opposite trends have, and will continue, to occur. The current freeze on the Ohio renewable energy portfolio is likely to expire by the end of the year. Even Governor Kasich has come out strongly opposed to any continued freeze.  Once this current legislation expires, private investment in renewable energy will continue at an increasing pace. Furthermore, many of the projections that FirstEnergy has cited have already been proven wildly incorrect. Natural gas prices continue to plummet to historic lows and show absolutely no signs of significant increase over time.

Groups such as the Ohio Consumers Council have vowed to challenge these rulings at the state level, while others seek appeals through the Federal Energy Regulatory Commission (FERC). Despite claims to the contrary, it is unlikely to change the outcome of the PUCO ruling. At this time, EPCO is warning clients that rates will be increasing in the near future. The PUCO ruling will result an increased cost of doing business that ultimately will adversely affect business growth and development in Ohio. As such, the best course of action to take is reducing the amount of electric consumption at your facility through a comprehensive set of energy efficiency measures. Be sure to consult your energy advisor on what your next steps should be.

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Capturing Tax Incentives from Energy Retrofits

firstenergymonopolyAs we approach the month of April, we draw closer to the deadline to file our taxes. Though we all experience a bit of dread at this prospect, tax season doesn’t always have to carry a negative connotation. Unknown too many of the clients I work with, are a number of tax exemptions or incentives for the energy related retrofits that they perform. In many cases, the value these deductions present can be as lucrative to the project as the energy savings themselves.

Below is a very high level (and overly simplified) overview of three tax mechanisms available in the market today. There are certainly more to consider (qualified leasehold improvements and bonus depreciation), but these represent the most reoccurring opportunities I have found for my clients. Some have strict deadlines regarding when you can claim the deduction while others require detailed engineering studies. It is important to be aware these opportunities exist, but ultimately, you will want to work closely with your tax professional to capitalize on the full value.

EPAct 179D

This is probably the most commonly used tax tool we can offer to our clients. This federal legislation was passed in 2005 to provide a tax related incentive for businesses to curtail energy consumption. It offers up to a $1.80 per square foot tax deduction for improvements made to buildings. The deduction is available in three equal parts related to HVAC, Building Envelope, and Lighting. Each is eligible for a deduction of $0.60 per square foot.

Case Study: Recently, I worked with a manufacturing client on an LED retrofit for their facility. The building is approximately 40,000 square feet. This project was eligible for the $0.60 per square foot deduction through 179D. Their write-off on their tax returns is $24,000. To determine the actual monetary impact, we simply multiplied their deduction by their effective tax rate. A top end tax rate of 39.6% yields a value of $9,504 of avoided tax payments.

Removal and Partial Disposition

This tax deduction allows you to write down the remaining depreciable cost basis of what gets thrown in the dumpster during a renovation or improvement of a building. Everything with a deprecation schedule can be included. It is a one-time tax benefit for building owners that can also incorporate the labor on the project. Each building and retrofit project is unique, so deduction values will vary. It is not uncommon to capture 15% to 25% of the total renovation value.

Cost Segregation

This is an approved IRS mechanism to accelerate depreciation of certain assets. Typically, most owners will utilize a straight line deprecation schedule of 39 years for their whole building. Cost segregation breaks our various components of the building and accelerates their depreciation schedule. Some key elements of cost segregation include the following.

  • Depending on the component, depreciation schedules can be reduced to 5, 7, or 15 years
  • This can apply to anyone who spent $250K or more on a building or $200K on leasehold improvements
  • The building should have been acquired or renovated in the last 15 years
  • Benefits will vary, but a general rule of thumb is $50,000 Income Tax Deduction per $1 million of building cost basis.  Benefits will range based on building type

 

Taxes always appear complicated and challenging to understand. Do not allow that to be a deterrent. There are too many great opportunities in the market to capture additional value for the work you are already performing. In addition, in many cases, I have found the deductions my clients can claim often make projects more tenable because of the reduced payback period. If you do not already work with a tax professional that can help you understand your options, feel free to contact me directly (eauerbach@energyplanners.com) and I can help pair you with a reputable professional in your community.

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4 Essential Tips to Prepare for the Next Recession

2016 is off to a rocky start and some economists are predicting a recession. Over the first two weeks of the year, the markets are trading down over eight percent. Chinese stocks have dropped more than 20 percent and have entered into bear-market territory. As the second-largest economy behind the United States, a slump of this nature will have an indisputable effect. Regardless of the direct fiscal impact to the U.S., the volatility in China will continue to send ripples through the global economy.recession-blog-photo

The dramatic decline in oil prices will also play a large role in the instability of the US economy. The price per barrel has dropped below $30; a 12-year low. The past year has seen prices plummet nearly 39 percent and almost 17 percent in just the past month. This has certainly been met with glee by consumers, as the price at the pump has dropped below an average of two dollars nationwide. However, the players on the world stage aren’t nearly as elated. China’s woes have further exasperated the market while oil producing states, such as Saudi Arabia and Russia, have seen dramatic declines in profits. Many smaller fracking and energy companies in the U.S. may be forced to shut down as well.

Furthermore, the fiscal policy of the Federal Reserve has amplified volatility. Continued tightening of monetary policy will reinforce the dollar’s strength and weaken U.S. exports. In turn, this could negatively impact the manufacturing sector, which represents over 12 percent of the U.S. GDP, and nearly nine percent of total employment (in 2013). Many news outlets have cited a December Citi Research report projecting the likelihood of a recession in 2016 at 65 percent, the highest odds in several years.

As the economy continues to foster uncertainty and instability, I am advising many of my clients to begin taking steps to protect themselves against a potential recession by years end. Here are four industry tips to get you started.

1. Evaluate Existing Contracts
•  Review in detail all your current and proposed equipment maintenance and service contracts. Be sure all maintenance and service agreements have significant returns on investment. Don’t simply allow contracts to roll over; instead negotiate for the best terms possible.
•  Evaluate your gas and electric generation contracts. Be knowledgeable on the current state of the market. It is extremely likely there has been a dramatic shift in market conditions since your last contract. Review with your energy advisor if you are uncertain on prevailing market value or contract terms.

2. Modify Behaviors: Little Changes Can Cause Big Savings
•  Turn off ancillary office machines and lighting when not in use.
•  Shut down non-essential equipment during down-time in production.
•  Evaluate facility energy systems to remove vampire power in standby mode.

3. Institute Controls and Energy Management Systems
•  Install a comprehensive controls platform and dashboard to enable you to monitor and manage your energy systems from one devise.
•  Mount sensors when possible to ensure systems such as lighting aren’t in perpetual use.
• Incorporate variable frequency drives (VFDs) on mechanical equipment to control the speed and energy output of motors.

4. Create a New Income Stream-Take advantage of the suite of utility rebates, tax incentives and financing structures that will increase your energy portfolio’s return on investment.
• Enroll in the “RIGHT” demand response program that will compensate you for curtailing energy usage at times when the grid is overly taxed.
• Talk to your advisor about maximizing energy related tax deductions (EPAct 179D) and capitalizing on accelerated depreciation.
• Take advantage of the many financing solutions available that provide immediate net savings for energy related projects. These are offered by many traditional banking institutions, Port Authorities, PACE financing agencies, and in the form of Energy Service Agreements (ESAs) by reputable energy planning companies.

The markets and the economy are cyclical. It is inevitable that we will have downturns and recessionary periods. We cannot predict what the next recession may look like, but we can take steps to lessen its effect. Working with an energy advisor, instituting long term energy management plans, and making low-to-no-cost investments, will better protect your business, resources and most importantly your wallet.

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2016 Energy Industry Predictions

2016-energy-predictions-blog2015 has proven to be a very interesting and dynamic year in energy. Events large and small have had an economic impact both globally and locally across the country. A few notable highlights include this year being the hottest year on record, oil prices trading below $35 a barrel, and renewable energy possibly reaching a global tipping point.

I have spoken to many clients over the past couple of months inquiring about what 2016 has in store. The most frequent inquires I get pertain to what will happen with the markets, legislation, and regulations affecting how they will do business in the upcoming year.

I spent the better part of the fourth quarter researching and interviewing fellow industry experts to ascertain where the industry will go in 2016. Below are my energy industry predictions for 2016.

  • Nationally, the supply of natural gas is up compared to this time last year. The regional transmission grid (PJM) serving Ohio has announced it has adequate capacity to meet energy demands this winter. This winter is projected to be warmer than average. Taken collectively, this means businesses should expect energy prices in our region to trend lower and costs to be down this winter compared to last year.
  • After two consecutive summers of dramatically increasing electric rates, consumers in northeast Ohio can expect much better pricing during the summer of 2016. Many consumers wisely locked into longer two and three year fixed rate contracts over the past two years. For a large number of consumers, those contracts are expiring during the first half of 2016. Now is the time to explore new contract terms with your energy advisor.
  • LED lighting technology, efficiency, and pricing improved dramatically over the past year. Though there will continue to be improvements to the technology, it is unlikely the industry will achieve improved pricing at quite the same rate. Businesses that have been waiting to install LEDs until the market reaches a plateau on pricing, may want to consider 2016 as the year to make their move.
  • Contrary to popular belief, there are still incentives available for energy efficiency retrofits; you just need to know where to look. There is a very good likelihood that SB 310, which froze the energy portfolio standards in Ohio, will expire by the end of the year. That means businesses could expect a return of the rebates First Energy once offered. But large electric consumers still have incentives they can capitalize on in the form of an exemption to costly riders attached to their electric use. Businesses should consult their energy advisors to learn more.
  • Columbia Gas of Ohio customers will continue to have access to favorable rebates. Columbia provides service to a majority of counties throughout Ohio. Their rebate program is very comprehensive extending from residential to commercial and new construction.
  • President Obama’s Clean Power Plan will continue to foster dialogue and potential turmoil within the energy market. State lawmakers and utilities have cited that the plans objectives will prove prohibitively costly to plant operations. A number of states, including Ohio, have already filed suit against the EPA in court. Either way, the end result will affect energy markets.
  • The Federal Government passed, and signed into law, a $1.1 trillion budget and tax extenders bill at the end of 2015. Included was an extension of Section 179D in the tax code that allows for qualifying businesses to receive up to $1.80 per square foot in deductions for eligible energy efficiency projects.

The energy markets are historically too volatile to perfectly predict. One certainty though is those businesses that are prepared with a plan are better insulated against unexpected weather anomalies, global crises, and unforeseen regulations. Be sure to consult with your energy advisor about implementing a contingency to properly manage your energy portfolio in 2016!

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Energy Upgrades—Is Total Cost of Ownership the Best Way?

total-cost-of-ownershipWhen evaluating energy upgrades, the #1 question a business will ask is always, what is the return on our investment (ROI)? How much am I (really) going to save from doing this project? Traditionally in energy efficiency projects, Total Cost of Ownership analysis is the universally accepted way of determining ROI. While total cost of ownership is a good benchmark for evaluating the value of energy upgrades, it isn’t the ‘be all end all’ way of determining the projects benefits. In this blog, I’ll discuss total cost of ownership analysis, as well as additional methods for getting the most accurate ROI projection for your energy efficiency project.

Total Cost of Ownership (TCO) is defined as, “an estimation of the expenses associated with purchasing, deploying, using, and retiring a product or piece of equipment. “ Let’s look at a school system deciding whether or not to upgrade to LED lighting. While the florescent lights the district is currently using has a lower starting price, LED lights may have a better value over an extended period of time. If the total cost of ownership shows an advantage of LED lights over florescent lights in the next 2-5 years, than the LED lights are most certainly the better choice. However, there are complicating factors, such as access to capital, alternative capital expenses, and the current economic situation of that particular school district that should also be considered.

A total cost of ownership analysis takes into consideration multiple factors including initial cost, product lifespan, energy cost to operate, frequency of maintenance, expense of product replacement, hours of operation, utility incentives, and how the product will be used. While this is the go-to method of gauging the value of energy efficiency projects, EPCO likes to take this analysis a step further. It is common practice to determine TCO by using industry standard figures for maintenance, repair and operation (MRO) expenses. EPCO has found this isn’t always the most accurate method for determining ROI in energy upgrades.

At EPCO, we believe interviewing the client and understanding their unique energy fingerprint, is the best method for understanding the true inputs and cost of operational expenses. Some businesses have energy expenses that are higher than the industry standards. For example, manufacturers that operate and run equipment more heavily during second shift will likely have a more unfavorable load profile than their counterparts producing mostly during first shift. This effects avoided cost values. EPCO will always review historical billing and consumption patterns to determine the true value of an energy efficiency project.

Although SB 310 led to the discontinuation of small commercial energy rebates throughout northern Ohio, larger businesses and school systems have the potential to capitalize on remaining incentives and tax credits for energy efficiency projects. One such example is receiving an exemption to costly utility fees and riders that appear on all electric consumer bills. EPCO has the expertise to identify, prepare, and submit exemption applications on behalf of clients. Most energy firms overlook this option, but it has added benefits for many large businesses and school districts.

Total cost of ownership is the standard way of determining the added value of energy efficiency projects. Though this analysis can give an accurate judgement of savings with projects, industry standards are not always the best indicator of true ROI. It is important to take an individualized, case-by-case approach, when evaluating energy efficiency projects. To learn more about how this could help your organization, email EPCO at info@energyplanners.com, or visit us at www.energyplanners.com

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Ohio’s Ranking Drops on ACEEE Scorecard for Energy Efficiency

Every year, ACEEE (American Council for Energy-Efficient Economy) ranks states on their energy efficiency policy and program efforts and also provides recommendations for ways that states can improve their energy performance. The State Scorecard is a benchmark, which serves to encourage states to continue “strengthening their efficiency commitments as a pragmatic and effective strategy for promoting economic growth, securing environmental benefits, and increasing their communities’ resilience in the face of the uncertain costs and supplies of the energy resources on which they depend.” Last week, the 2015 State Scorecards were released and Ohio was ranked 27th. This is a drop from Ohio’s 2014 placement at 25th.

This drop in ranking is no surprise after Ohio became the first state to reverse energy efficiency and renewable fuel mandates in 2014. Ohio Governor John Kasich signed Senate Bill 310 in 2014, which froze annually-increasing energy mandates until the year 2017. At which point, the “the automatic levels are to be restored”, a provision that Kasich requested to be part of the legislation, according to The Plain Dealer (Cleveland). The bill also included language that establishes a legislative study committee tasked with evaluating the effectiveness and future of the original portfolio standards.

Senate Bill 310 counteracted Ohio Senate Bill 221, which was passed in 2008 and established the efficiency standard. Under Senate Bill 221, Ohio ranked #1 in the nation for advance energy and renewables, “bringing in more renewable energy facilities than any other state,” according to JobsOhio. Under the legislation, utilities can count improvements made by their own customers and also roll over any savings above a given target into the next year. Language in SB 310 created a provision that permits large industrial users to opt-out of utility offered programs; allowing these users to develop and institute internal programs. Concern has arisen that this may adversely impact the effectiveness of the utility offered programs; potentially increasing the cost and burden of compliance on smaller commercial entities.

Overall, the passage of SB 310 has negatively impacted the implementation of commercial energy efficiency retrofits throughout the First Energy territory. Unlike other state utilities, First Energy has opted to discontinue any rebates for energy efficiency work performed by its customers. As a result, there has been a decline in the number of small and mid-size commercial entities instituting energy efficiency related projects. This concern may persist beyond the current two-year freeze in place under SB 310.

Recently, the legislative study committee released a report recommending an indefinite freeze on the mandates. This has largely been met with criticism from environmental groups, politicians and industrial entities alike. In response, Governor Kasich stated that “a continued freeze of Ohio’s energy standards is unacceptable”. There is much debate still to take place before a final determination is made on the future of Ohio’s renewable and energy efficiency portfolio standards. EPCO will continue to provide additional review and analysis as more information becomes available.

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EPCO Energy Infographic

Recently EPCO decided to evaluate the influence our team has had within the energy marketplace. We were curious to know what the economic and environmental impact has been from the projects we have facilitated over the past couple of years. To that end, we identified several key metrics from each projects portfolio, and put it into an infographic to share with prospective clients.

We were really pleased the results, and have opted to share it with the larger community. The numbers speak for themselves, but there are three metrics I would like to highlight.

  • $1.87 million in annual energy savings
  • Average project payback period is 0.96 years
  • Energy savings are the equivalent of more than 11.1 million pounds of coal burned

All Projects Infographic

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The Time to Shop for Your Natural Gas is Now

It’s hard to believe, but the summer is slowly winding to a close. Even though days are still long and temperatures are high, now is when you want to start thinking about your natural gas contract.

Many businesses, non-profits, and residential consumers only consider their natural gas rate in few instances. It may be when winter arrives and the heat gets turned on or simply when your current contract expires. After all, for most, natural gas comprises a relatively small percentage of monthly expenses.

There is however a number of non-residential entities that pay a considerable amount for natural gas through the winter. This includes manufacturers, hospitals, schools, and even churches. In some cases, reducing rates by a matter of cents can add up to thousands in annual savings.

We have seen the adverse effect a cold winter can have on the budget. Just think back to the beginning of 2014 when the nation was overcome by the polar vortex. This of course was unexpected for most and hit many hard in the wallet.

Now though is the perfect time to negotiate your natural gas rate. Currently, gas reserves are up more than 5 percent over last year and prices have trended down these past 12-months. As we get closer to the winter season, the prices will go up. This is a function of supply and demand. Purchasing now enables you to capitalize on lower rates. If you signed a 12-month contract at a higher rate, renewing now will save you money during the following winter.

You have several options for exploring a natural gas contact. If you are a smaller consumer, there are programs through your utility and local brokers you can work with. Be sure to understand the terms of the contract offered and the fine print. Consult an energy advisor if you are unclear about any terms in the contract.

Additionally, most local chambers of commerce will offer their membership what is known as community aggregation programs. If you are not already part of your local chamber, you may want to consider exploring the many benefits they can offer.

If you are a larger consumer, spending perhaps $10,000 monthly on energy or more, there are additional options available to you. The market has become rather sophisticated with a number of products to select from. Though you may be experienced in managing your companies’ energy portfolio, it certainly would benefit you to explore options with your energy advisor to ensure you are making the most informed decision.

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Why Energy Benchmarking Is For You

Energy benchmarking is an extremely valuable tool in today’s energy marketplace. However, many who manage energy portfolios today are not taking advantage of the resources available to benchmark their facility. Anecdotally, I have found, this is due in large part to the fact many do not know or understand what benchmarking is.

When you benchmark your facility, you are tracking the total electricity, natural gas, steam, water and other utility that your building consumes. In many circles, this is also known as your building performance. Once you have collected the requisite data, you can compare your building performance to facilities that are similar in size and operation to your own.

I recently took time to meet with a colleague, Justin Kale of Energility, to better understand the value proposition of energy benchmarking. Justin is a specialist in this field and shared the following thought.

“Benchmarking is similar to the use of a compass when navigating a path. It is a great way to establish where you’re at and monitor your position over time. This enables you to see how far you have come over a period of time with respect to building energy performance.”

Benchmarking provides the busy CEO, CFO or facility management team, baseline information to be able to compare the energy portfolio of their building to other buildings in their peer group. Once you identify areas for improvement, you can begin to craft an energy plan. Benchmarking gives those same professionals the opportunity to prioritize the deployment of capital resources or achieve recognition for past project implementation.

There are a number of great resources that are accessible in the marketplace to help facility managers to benchmark their performance. One of the more prominent tools is the Energy Star Portfolio Manager. It was created by the EPA to be an “online tool you can use to measure and track energy and water consumption, as well as greenhouse gas emissions”.

Benchmarking will enable facilities to make informed decisions on where investments should be made regarding their capital projects. Ultimately, knowing how your building operates and where weaknesses exist will allow you to reduce consumption, costs, and operational expenses. Furthermore, benchmarking is a process that many can do on their own by leveraging the tools in the marketplace. Whether through the EPA and its Energy Star programs or the Lawrence Berkley National Laboratory, the resources exist to manage this process on your own.

The final thought I will leave you with is benchmarking can aid you in staying ahead of impending energy mandates and legislation. Whether federal or local, the energy landscape is rapidly changing. It will prove far less costly to become energy efficient on your timetable rather than someone else’s.

As always, if you have questions or concerns about energy benchmarking, consult an energy adviser to help you make the best and most informed decision.

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