March 10th, 2010
By: Tom Routley
For a number of years now the federal government has provided tax incentives for the production of clean energy. These incentives are primarily in the form of accelerated tax depreciation (50% per year on a declining balance basis) and have been provided for in the form of Class 43.1 and more recently Class 43.2. The incentive is the economic advantage of deferring cash tax payments through the exemption from the conventional tax depreciation rules based on the useful life of the asset.
In this article I will review the 2010 Budget’s enhancements to these tax incentives.
As a reminder, Class 43.2 includes equipment that conserves or generates energy through:
- The use of a renewable energy source (e.g. wind, solar);
- The use of waste fuels (e.g. wood waste, landfill gas); and
- The more efficient use of fossil fuels (e.g. high efficiency cogeneration systems producing both electricity and heat).
As is the case with most tax legislation, there are a number of restrictions on the access to these accelerated tax depreciation deductions driven by policy dictates. The following is an example of a restriction subject to expansion in the 2010 Budget:
Prior to this Budget, heat recovery equipment has only been eligible for Class 43.2 if the heat recovered from electrical or cogeneration equipment is reused by the same equipment to generate electricity or, in the case of heat generated directly in an industrial process, reused directly in an industrial process.
Heat Recovery Equipment
The 2010 Budget will expand access to this Class 43.2 for new equipment acquired on or after March 4th, 2010. The primary expansion is to eliminate the restriction on heat recovery equipment to only those situations where the recovered heat was reused in a process of the same type that generated it. The following example was provided in the 2010 Budget to clarify this new expansion rule:
Qualifying equipment will now include equipment that used to capture waste heat generated by a boiler in an industrial process for use in heating the plant – and even nearby buildings.
However, as usual, there are still some small technical limitations on access to this new type of qualifying equipment.
District Energy System Distribution Equipment
There is one other expansion of access to Classes 43.1 and 43.2, and that is for distribution equipment used in a “district energy system”. In general terms, a district energy system is viewed as consisting of a central generation plant and a group of surrounding buildings that circulate steam, hot or cold water though underground pipes. For district energy system distribution equipment to qualify for Classes 43.1 and 43.2, the equipment has to be distributing heat produced by electrical cogeneration equipment. More recently, space-heating technologies such as active solar and ground-source heat pumps also qualify for these Classes.
The 2010 Budget provision related to district energy system new equipment acquired on or after March 4th, 2010, will broaden Classes 43.1 and 43.2 to include the distribution equipment that is used to provide heating or cooling through the use of thermal energy provided primarily by an active solar system, ground source heat pump system, heat recovery equipment or any combination of these, provided the generation equipment itself qualified for these Classes.
Policy Thinking
It is important to note the fiscal policy thinking behind both provisions. The tax break for Heat Recovery Equipment is viewed as incenting the use of this equipment to displace the use of fossil fuel driven energy sources. The District Energy System Distribution Equipment incentive is viewed as increasing the economic viability of such systems through efficiencies of scale. It also reflects some effective lobbying.
Final Thoughts
Given the progression of more generous rules regarding the delivery of federal tax incentives for clean energy (i.e. in particular the continued peel-back-the-onion approach to restrictions on access to them), it would appear that the federal government is committed to encouraging the private marketplace to invest in this sector.
It seems to me we will shortly have to stop referring to these tax incentives as “green-wash tax breaks”. Like other cases of green wash, these federal tax incentives for clean energy looked good on paper, but dissolved on closer inspection. Sounds-good policy, but through the impact of the many technical restrictions and, more importantly, the lack of tax-paying corporations (there is no economic benefit to be gained for an accelerated tax deduction on a tax return drowning in losses), these efforts have not generated the results intended by the policy wonks. But with the improvements in the Canadian economy and the federal onion peels all over the floor, we may finally be getting somewhere.
Tom Routley is a chartered accountant with over 30 years of experience in both the Canadian and United States income tax rules related to energy tax incentives, tax-efficient financing and R&D tax incentives.
Categories: Energy Management General
Tags: Canadian Federal 2010 Budget, Clean Energy Generation, District Energy System Distribution Equipment, Heat Recovery Equipment, Tax Incentives
March 4th, 2010
By: Peter Rowles
The topic of climate change has been hotly debated for the past 20 years. Until recently, scientists, politicians and business leaders, especially in North America, have not been able to agree on the existence of the problem let alone what measures should be taken to mitigate it. It is only recently that consensus levels have dramatically increased. Even the Terminator, Arnold Schwarzenegger, admits that climate change is real when he says, “The facts are there, that we have created… a self-inflicted wound through global warming.” It is now generally accepted that climate change is real, immediate and requires substantive action.
Why is this important to organizations? Since the production and use of energy accounts for 80 per cent of carbon emissions, energy is the major contributor to global warming and climate change. Most organizations know that they can have a significant impact on the levels of carbon emissions by how they source energy and how efficiently they use this resource. If organizations have this ability then why are we not seeing it happen? The answer is quite simple — money. Up until now, no cost or value has been placed on the carbon that is being pumped continuously and increasingly into the atmosphere. The potential economic impact of climate change on biodiversity, agricultural production, human health, and business is huge and yet none of these costs (referred to as externalities) have been assigned to the production or use of energy.
Since 1997 and the introduction of the Kyoto accord, there has been a recognition that financial mechanisms are required. These mechanisms offer various forms of a carrot and stick approach that is, rewarding those who reduce emissions and penalizing those who do not. A carbon tax on energy is one type of financial mechanism. This is currently being tried in British Columbia. Arguments in favour of carbon taxes include:
- Higher cost savings for energy efficiency projects;
- Predictability;
- Fast implementation;
- Transparency and simplicity;
- Less opportunity for manipulation; and
- Possible rebates to taxpayers.
The main detriment would be the unwillingness of politicians to introduce new taxes, which could have a substantial negative economic impact on companies or organizations incapable of responding in a timely manner. There are also concerns that the increased tax revenue will not be used as effectively or wisely by the government as it could be in the private sector.
This leads to the introduction of carbon markets to curb emissions using a mechanism commonly referred to as ‘cap and trade’.
A functioning carbon market has three primary participants — the buyer, the seller and the regulator. The buyer is typically an organization mandated by a regulatory body to achieve a certain level of greenhouse gas reduction or maintain emissions below a certain threshold. The seller is normally a regulated organization that has exceeded its targets, resulting in emission reduction credits which can be sold in a carbon market. The seller can also be a non-regulated organization that has created offset credits through direct emission reduction projects.
The attractiveness of this system is that it directs the emission reduction activity to those most able to cost effectively implement the reductions. Those who are unable to make reductions in a timely or economic fashion are able to purchase credits in the marketplace to meet their regulated obligations. Ideally, the price per unit for a carbon credit would be less than the equivalent cost to make the reduction from directed action for the buyer. This process provides a mechanism for the market to quickly and economically achieve targeted emission reductions.
The sulfur dioxide cap-and-trade system instituted in the United States in the early 1990s was effective in efficiently reducing acid rain emissions from power plants. Although a cap and trade system for carbon will be significant larger and more complex than the sulfur dioxide system it is intended that, if designed properly, the following benefits will be realized:
- Certainty on the level of emissions reductions achieved;
- Reductions are attained at the lowest cost;
- The development of new cost effective technological solutions; and
- Lower cost to governments to implement.
From an organization’s perspective either approach, carbon tax or cap and trade, will improve the economics of alternative energy and energy efficiency projects. Applying a value to carbon emission reductions associated with energy use presents a greater opportunity for organizations to meet or exceed their energy management objectives while making a significant contribution to saving the planet.
Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.
Categories: Environmental
Tags: Cap and Trade, Carbon Management, Carbon Tax, Greenhouse Gas Emissions, Reduce Carbon Emissions
March 1st, 2010
By: Tiffany Richmond
Organizations are prompted to take a holistic view towards carbon management with the issue of greenhouse gas emission constantly topping government agendas and compelling scientific evidence indicating that climate change is real(1). Organizations are not just looking at their own operations and how to manage their own emissions but now are looking at their supply chain and examining activities they have undertaken. Some suppliers are now expected by some of their global customers to demonstrate greenhouse gas emissions management, awareness and action, in order to maintain business relationships(2).
The Carbon Disclosure Project (CDP) recently released its Supply Chain Report 2010, highlighting findings from forty-four Member companies about how businesses are responding to the call for action and transparency in managing carbon and climate change in their supply chain.
Tracking the life cycle of a product’s and/or service’s carbon footprint from idea to final product is the depth organizations need to take when measuring their carbon management activities. According to the CDP Supply Chain Report, organizations should address the impact of carbon on their supply chain because 50 percent of a product’s value is typically derived from it. Therefore, when a consumer purchases your product they are also buying the supply chain that helped deliver it.
The CDP Supply Chain Report recommends that you measure your suppliers against four dimensions to assess their current status of carbon management capabilities. These four dimensions are defined below:
Strategic Risk Awareness
Evaluating the strategic awareness level of your supply chain and its perceived risk associated to climate change is a key starting point. Measure the awareness levels of risks related to regulatory developments, cap and trade exposures, mandatory technology requirements and energy carbon taxes. Also, assess your suppliers understanding of risks as it relates to physical changes to the environment due to extreme weather, temperatures, rainfall patterns, flooding and rising sea levels. Innovative suppliers will look beyond the risks of climate change by turning these risks into opportunities.
Carbon Reduction Ambition
The next step is to evaluate if your suppliers have any carbon reduction targets or strategy set in place today. The CDP Supply Chain Report, reports that the number of suppliers committed to reducing companywide emissions is relatively low, with only 38% of suppliers having a clear and detailed reduction plan in place. It’s important to distinguish whether your supplier’s targets are Absolute or Intensity emission reduction targets. Meaning, are goals defined by a period of time (absolute) or a ratio relative to a business metric (intensity)? Typically absolute targets will deliver greater emissions reduction than an intensity related goal. Also, you should evaluate whether these targets are short or long term. Sustainable targets should be 10 to 15 years in length.
Reporting Capabilities
Transparency and accuracy of data is the heart of a successful carbon management strategy. You should measure the level of reporting capabilities that your suppliers have and the validity of the data. You should ask questions such as; do your suppliers have an established emission baseline? Are they publicly reporting their emissions data? Is this data verified by a third party? It’s important to note that the lack of standard reporting methodology is a challenge that many organizations are facing today.
Implementation Practice
Lastly, despite documented climate change strategy, are your suppliers taking any action to implement measures they’ve set out for themselves. This will distinguish between who is serious about carbon management and who is not. Important questions to ask include do your suppliers have any governance mechanism in place for carbon management? How important is the issue of climate change at board level? Are there any incentives for employees to achieve corporate reduction targets?
The next step is to collaborate with your suppliers. You will be successful if you engage with suppliers and share best practices regarding carbon management. Incorporating incentive measures into your collaboration is a fundamental step to take. Rewarding suppliers for emission reduction plans and achievement of targets will only encourage change management. Achieving change management will be the difference between organizations that are successful and those who are not.
In summary, it’s important for organizations to address their suppliers about carbon management activities and understand what they’ve accomplished. Building a sustainable business also means building a sustainable supply chain.
To download the CDP Supply Chain Report 2010 Click Here.
1 Intergovernmental Panel on Climate Change Fourth Assessment Report, 2007
2 Carbon Disclosure Project Supply Chain Report 2010
Tiffany Richmond is an enthusiastic marketing guru and is responsible for online marketing strategies at Energy Advantage Inc.
Categories: Environmental
Tags: Carbon Management, Carbon Reduction Targets, Climate Chanage, Greenhouse Gas Emissions
February 25th, 2010
By: Peter Rowles
How do you measure and verify something you can’t see? The task of convincing today’s skeptics that your actions have created energy use and cost savings can be a daunting one. Hopefully this article will shed some light on this topic.
Verifying savings is important for an organization for many valid reasons. In some cases, it is necessary to verify savings so that suppliers or ESCOs can get paid for their work. Many government agencies and utilities require monitoring and verification before releasing incentive payment. Finally, from an environmental perspective, monitoring and verification enables the creation of greenhouse gas emission reduction credits – a valuable asset once cap and trade systems are implemented.
Providing proof can be a painful experience as the comedian Rodney Dangerfield relates about his childhood, “I remember the time I was kidnapped and they sent a piece of my finger to my father. He said he wanted more proof.” Sometimes you just don’t get enough respect.
A Little History
Energy saving projects has been in demand since the oil embargo in the early 70s and the resulting savings verification has been an issue and an impediment since the beginning. In 1994, the DOE and Lawrence Berkeley National Labs joined forces to create a standard protocol for Monitoring and Verification (M&V) which was initially published in 1996. The International Performance Monitoring and Verification Protocol (IPMVP) have been updated several times since then with the most recent edition being released in 2007.
Basically the IPMVP provides four (4) options to verify energy savings:
- Retrofit Isolation: Key Parameter Measurement – only key parameters are measured while others are assumed.
- Retrofit Isolation: All Parameter Measurement – all of the parameters of an Energy Conservation Measure (ECM), are measured.
- Whole Facility – Utility meters are used. Individual ECMs are not metered. It is generally used when energy savings are substantial and the adjustments are excessively complex for Options 1 & 2.
- Calibrated Simulation – A simulation model estimates the amount of energy used by a facility when there is no data available for the baseline.
Routine vs. Non-Routine Adjustments
It is said that the only real constant in life is change. As a result, changes occur during the implementation of an ECM that needs to be considered in the savings calculation. The IPMVP divides these into Routine Adjustments and Non-Routine Adjustments.
Routine Adjustments are the factors expected to change routinely during the reporting period, such as weather, production volume, occupancy etc. Non-Routine Adjustments are those factors which are not usually expected to change, such as facility size, the design and operation of installed equipment, the number of weekly production shifts, or the type of occupants.
Avoided Energy Use vs. Normalized Savings
Two different models, Avoided Energy Use, or Normalized Savings are used to calculate savings based on these adjustments. In the Avoided Energy Use model, the routine and non routine adjustments are made to the baseline. The actual measured energy use is subtracted from the adjusted baseline to determine savings. This is illustrated in the following graph:
In the Normalized Savings model, the baseline energy use is adjusted to reflect “normal” operating conditions. The reporting period energy use is adjusted to reflect what would have occurred if the facility had been equipped and operated as it was in the baseline period under the same “normal” set of conditions. These normal conditions may be a long term average, or those of any other chosen period of time, other than the reporting period.
My preference is to use the Avoided Energy Use model as the adjustments are only made to one data set i.e. the baseline energy use.
The M&V Plan
The M&V Plan should be prepared and accepted by all parties before the project starts. This plan should provide a clear description of the IPMVP option being used as well as all the parameters that will be used to calculate savings.
The plan should account for the many obstacles that can affect a successful M&V project. These include:
- Impractical contract clauses;
- Budget and staff constraints;
- Unreliable utility data (content and supply);
- Misunderstanding of obligations and expectations;
- Wrong monitoring option or duration;
- Changes in building equipment and operation; and
- Smoke and mirrors.
To avoid these obstacles, a qualified, independent third party should be engaged to oversee this process.
“Trust, but verify” was a favourite expression of the late President of the United States, Ronald Reagan. It is likely a favourite saying of many senior executives. Once you have verified your energy savings, what should you do next? I would recommend greenhouse gas emission reduction credits, the topic of my next article.
Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.
Categories: Energy Efficiency
Tags: Energy Conservation Mesaure, energy savings, M&V, M&V program, Monitoring and Verification
February 22nd, 2010
By: Pat Ferguson
In today’s difficult market environment business decisions are being weighed more carefully than ever. Typical project valuation indicators such as ROI and simple payback times are no longer good enough. Savings from energy efficiency projects can be lost in the fog of obfuscating external factors. The focus is now on reducing carbon footprints and, by direct relationship, energy consumption. Too many high level executives can’t rationalize what 100,000 kilowatt hours of savings means to them and their business. In this context, it has become extremely useful to model energy consumption in terms of each firm’s unique key performance indicators.
If you are a restaurant it may be the number of meals you serve, if you are a retirement home it may be the number beds you have occupied, if you are an industrial manufacturer it is the number of widgets you make; establishing an energy cost-per-output is the first step in the process and is unique to every business model. Typically organizations expend vast resources to measure the cost of their inputs per unit of output yet ignore energy, a fundamental input into any business process output unless you’re output is giving advice such as a psychologist, even then, giving advice in the dark is disturbing, you’ve got to keep the lights on.
Defining your energy costs of production is an essential step to understanding how energy affects your productivity and profit margin. The most important action is to generate a baseline of energy cost-per-KPI. Once you know that you are using 40 kWh of electricity per widget you can effectively compare your energy efficiency across time in a way that is meaningful to every member of the organization. Too often energy expenditure is considered by a select few operational employees. Expressing energy in a metric everyone can understand aligns the interests of the entire organization and can act as a measuring stick for different business units. Doing this allows you to track the effect each business unit is having on the company-wide energy cost-per-KPI and reward performance accordingly. Eventually, once most business are measuring energy cost and consumption as a function of production levels these key metrics will provide important benchmarking applications to measure comparative performance among competitors as well. This, of course, depends upon impending energy and environment disclosure requirements.
A considerable benefit of expressing energy consumption in terms of KPI’s is the identification of major energy cost drivers. Developing an energy management plan is not overly useful if you don’t know what is driving your energy costs and what level of impact they have on your final output. By finding out which of your business processes have the highest cost per KPI you can then focus on improving the energy efficiency of those processes. In many cases the processes that can have the most impact are often the last to be considered if the cost-per-KPI data has not pointed you in the right direction.
Any business that wants to stay profitable must grow. Forecasting the costs associated with growth has long been a terribly inconsistent and difficult task to perform. In respect to energy costs this can be especially complex if costs-per-KPI have not been evaluated. With an energy cost-per-KPI metric the forecasting of future energy costs becomes a simpler exercise. The cost-per-KPI function can easily be reversed to determine what energy costs would be for varying levels of output. Production levels can then be forecasted and a sensitivity analysis can be performed to estimate the future cost of energy with various production levels. Similarly, a consumption-per-KPI calculation can be reversed to determine energy consumption requirements for certain levels of production; this will come in handy when planning energy infrastructure during facility expansion. At this point it helps to classify which energy costs are variable and which are fixed. It may be helpful to go so far as to determine variable-cost-per-KPI and fixed-cost-per-KPI functions separately. This information will also aid your organization while developing hedging strategies to reduce exposure. The forecasts can be used to determine how much energy will be required and, as a result, how large purchasing deals must be to guarantee adequate energy at a reliable price point in the future.
The evaluation of energy efficiency projects can also be made clearer through the use of cost-per-KPI metrics. ROI’s and simple paybacks do not tell the whole story. It can often be beneficial to examine how each measure may impact the cost-per-KPI metric. In this way the business impact of energy reduction projects can be evaluated next to labour-related and financing measures which are typically measured against your key performance indicators already. Measuring against KPI’s can also clarify the interrelationship between projects implemented concurrently. Typically, deriving the impact that a single project has on costs or consumption is impossible when multiple projects have been implemented at the same time. Measuring against KPI’s and drilling these values down to business units or cost centers help to clarify the impact each measure has on the company’s overall performance.
All companies may see value in diffusing energy related information in terms the entire organization can understand, however implementing this process requires a great deal of focus on gathering and maintaining effective and up to date datasets. Measurements against KPI’s are only as good as the data that is being used. Developing and implementing a comprehensive data plan focusing on accuracy is fundamental to effective measurement. The best KPI’s are leading indicators; keeping this information up to date is essential and crucial for effective reporting.
Using a cost-per-KPI metric will increase the clarity and effectiveness of communications throughout the business units of your company. When everyone can see the impact energy costs have on their business process they align themselves to manage the impact their individual business unit has on the company as a whole. The use of consumption-per-KPI metrics are invaluable when forecasting future energy requirements and developing hedging strategies. Cost-per-KPI metrics can be used as performance indicators themselves and can be used to compare the viability of energy projects as well as the performance of business units.
The old adage says “you can’t manage what you don’t measure”. Expressing energy as a per-KPI metric ensures that a firm is not only measuring the impact energy has on its operations, but that it is being measured in a meaningful way to all the firm’s stakeholders and decision makers.
Pat Ferguson is a business strategy and energy trend analyst developing analytics and corporate energy management programs for Energy Advantage Inc.
Categories: Energy Efficiency
Tags: Energy Consumption, Energy Cost per KPI, energy efficiency, energy management, Key Performance Indicators
February 17th, 2010
By: Peter Rowles
You can’t manage what you don’t measure. This is the nuts and bolts of the continuous improvement energy management model. In energy management circles it is referred to as Monitoring & Targeting (M&T). Managing energy without an M&T program is like playing golf without a scorecard.
M&T involves the monitoring and analysis of energy use data and the reporting of this information to the appropriate personnel. M&T works by comparing actual energy use to a baseline, a budget or preset targets. In the case of preset targets, energy use is related to key performance indicators, which are typically operational factors such as production, or occupancy. By continuously comparing actual energy use against the model (or target), personnel can identify energy waste and take action to reduce waste or maintain energy efficiency improvements.
A good M&T system for utilities will assist in:
- Reducing energy costs through on-going optimization;
- Identifying energy supplier billing errors;
- Increasing options and minimizing risks for energy procurement;
- Quickly identifying energy usage problems or wasted energy;
- Prioritizing energy related capital expenditures;
- Providing feedback to managers and employees reinforcing energy awareness activities;
- Improving forecasting and budgeting of energy use and cost; and
- Enabling compliance with emissions reporting requirements.
The main components of an M&T program are monitoring, analysis, reporting and follow-up.
Monitoring
Monitoring involves the regular and consistent collection of energy use and energy cost data. This data can be retrieved from utility invoices on a monthly basis, from utility metering devices, which are equipped with outputs for customer use, and sub-metering devices (located in process, production or other operational areas). M&T can be applied to any energy-related consumable such as natural gas, electricity, steam, water, and/or compressed air. M&T systems can be manual, stand-alone data acquisition or integrated with existing building energy management systems. Information can be collected monthly, weekly, daily, hourly depending on the cost-benefit to the end user.
Analysis
Analysis of historical energy data is used to create a baseline or benchmark against which future energy use data can be compared. The objective of this analysis is to determine the mathematical relationships (or model) between energy use and factors affecting energy use. As mentioned earlier this can include weather or specific production and operational parameters.
The resulting baseline model can be used to represent energy use in the past or expected energy use in the future. It provides a valuable benchmark for measuring the results of procedural changes that affect energy use, tracking investments in energy efficiency projects, or identifying new patterns of energy waste.
In most cases the model is a simple linear relationship correlating energy use and specific parameter such as heating or cooling degree days. In some cases, it can be more complex and may include other factors (i.e. multi-variant regression) such as work-in-process inventories, product mix, and process variables.
In addition to the baseline model, a target model should also be established based on budgets, best practices or energy reduction goals. Best practice criteria can be based on industry norms or benchmarks from similar or identical processes. The targets need to be a combination of best practices and best performance. When the targets are compared against the actual energy use on a regular basis, a framework is established for maintaining accountability and providing clear information on energy use performance.
Reporting & Follow Up
Reporting from an M&T system must provide the basis for action. These actions could include responding promptly to unexpected energy use changes or providing input into long-term decision making with respect to budgeting, forecasting or performance measurement. The application of a statistical technique called CUSUM (cumulative sum of differences) provides the ability to measure these changes. Basically, the difference between actual energy use and predicted energy use is accumulated over time. An upward trend indicates poor performance; a downward trend indicates good performance and flat segments indicate periods of consistent performance. For this reason, the continuous monitoring of CUSUM provides a good tool for short-term feedback on unexpected energy use. In the longer term, When the CUSUM technique is integrated with traditional energy reporting, it provides new information and clarifies important events. Energy related decision-making can be simplified and actions taken can become increasingly proactive.
Once operational, an effective M&T program is instrumental to measuring performance of energy efficiency projects and programs. This leads to my next topic of discussion — Measurement and Verification. How do you prove that you didn’t take any mulligans if you’re filling in your own scorecard?
Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.
Categories: Energy Efficiency
Tags: Monitoring & Targeting
February 12th, 2010
By: Tiffany Richmond
In the past several years the creation of new international, federal, and state regulations clearly indicate that government agencies are addressing concerns regarding the effects of greenhouse gas emissions.
Demonstrated by measures, such as, the European Union Emissions Trading System, the U.S. Environmental Protection Agency’s policy for large emitters to collect and report greenhouse gas emissions, the Waxman-Markey Bill, currently pending in Congress, and international efforts to replace the Kyoto Protocol, exhibited by event such as the United Nations Climate Change Conference.
With myriad regulatory actions in effect or pending, many public companies are facing pressure from shareholders to understand and communicate the impact that climate change is having on their organizations. Several petitions have been submitted to the Securities and Exchange Commission requesting detailed explanations of disclosure requirements relating to climate change. The Commission responded to these petitions on January 27th, 2010, voting to provide public companies with interpretive guidance towards existing disclosure rules that may require organizations to disclose their impact on climate change.
Below highlight some of the ways climate change may trigger disclosure, as discussed in the Securities and Exchange Commissions’ interpretive release.
Impact of Legislation and Regulation
When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
A company should evaluate whether these regulations will have an impact on capital expenditures related to the discharge of environment materials. For example, a company may need to improve facilities or equipment to comply with regulations.
An organization should evaluate the overall impact of risks factors (financial, physical, reputational, etc.) resulting from climate change and regulatory rules. A company should also evaluate whether any existing or pending regulations will have a material effect on its financial and/or operational conditions. For example, did or might a regulation effect revenue by increasing or decreasing demand for a product or service?
Impact of International Accords
A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
Indirect Consequences of Regulation or Business Trends
It’s important for a company to consider the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For example, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products.
A company should consider how its position on climate change is perceived by the public, and the potential effects on its business operations or financial conditions.
Physical Impacts of Climate Change
Significant physical effects of climate change, such as severe weather (floods, hurricanes), sea levels, and water available and quality, have the potential to affect a company’s operations. Companies should evaluate the actual and potential material risks of environmental factors on their business.
At minimum, this release should bring awareness to existing climate change issues and motion organizations to monitor legislation and regulations changes regularly. I will continue to watch for further guidance ruling regarding climate change from the Securities and Exchange Commission.
*The Commission’s interpretive releases do not create new legal requirements or modify existing ones, but are intended to clarify and ensure consistency for public companies and their investors.
Tiffany Richmond is an enthusiastic marketing guru and is responsible for online marketing strategies at Energy Advantage Inc.
Categories: Environmental
Tags: Climate Change, Climate Change Regulations, Climate Change Risk, Securities and Exchange Commission
February 10th, 2010
By: Peter Rowles
Demand Response and Demand Side Management are terms used by electric utilities to describe programs developed to influence the electricity usage patterns of customers. Many people get confused by these two terms. However, don’t be concerned. Tom Peters, co-author of the best selling business book “in Search of Excellence” says “If you’re not confused, you’re not paying attention.”
What is Demand Response?
Demand Response (DR) is a term used for programs designed to encourage end-users to make short-term reductions in energy demand in response to a price signal from the electricity hourly market, or a trigger initiated by the electricity grid operator. Typically, DR actions would be in the range of 1 to 4 hours and include turning off or dimming banks of lighting, adjusting HVAC levels, or shutting down a portion of a manufacturing process. Alternatively, onsite generation can be used to displace load drawn from the electricity power grid.
What is Demand Side Management?
Demand Side Management (DSM) programs encourage the end user to be more energy efficient. DSM measures can include lighting retrofits, building automation upgrades, re-commissioning, HVAC improvements, variable frequency drives, etc.
In order to provide an incentive for end-users to develop DR capability, many utilities and power regulators across North America have developed suites of DR programs. These same entities also provide incentives for DSM.
Benefits to Electric System
The ability of customers to shed loads during periods of peak demand through demand response activities is beneficial to the electric system as a whole for two main reasons. First, under tight electricity supply and demand conditions demand response can significantly reduce peak prices and overall price volatility for all users. Second, by reducing system peaks, demand response may reduce the need for very expensive new generation, transmission, and distribution facilities to meet these peaks in demand.
Historically, DR and DSM programs have caused some confusion for electricity users. Broadly speaking, both programs are similar in that they offer benefits to the electricity user and can be part of an effective energy management program. Yet different to the capacity that they are designed to operate under different circumstances with different electricity reduction goals. DR and DSM programs are not interchangeable but, if their respective advantages and limitations are properly understood, they can compliment one another, which will allow a more successful overall energy management program.
Advantages & Limitations
Capital Expenditure and Payback Cycle
DR programs are attractive since they require relatively little capital expenditure and they have a short payback cycle, if automated control systems are already in place. In contrast, energy efficiency measures can be capital intensive and the payback cycle is usually longer, even where generous incentives are offered to organizations that implement energy efficiency programs.
Price Risks
DR programs also offer a minimal price risk: when prices are low, there are no DR opportunities but customers still benefit from a low electricity bill. DSM programs are more risky in this sense because if energy price expectations do not materialize, financial saving will be reduced and the payback cycle is lengthened.
Sustainability
DSM programs are advantageous in that they have a long-term effect on the sustainability of the facility and will reduce total energy use. In addition to long-term financial savings, using less energy will mean reduced greenhouse gas emissions and environmental sustainability. The short-term nature of DR programs, by comparison, means that they have little effect on the total amount of energy used in the building over a longer period of time.
Electricity versus Other Energy Sources
While DR programs are limited to electricity users, DSM programs can be extended to any application in the facility that uses energy, regardless of whether it uses Natural Gas, Propane, Water or another energy source.
Visual Comparison
Figure 1 shows the effect of energy efficiency on a typical facility’s electricity load. The effect is a load reduction for all hours of the day. Although the reduction does not always have the effect described, the philosophy is to establish a net reduction across all hours.
Figure 1 – Effects of Energy Efficiency
Demand Response, as shown in figure 2, is reducing electricity usage when prices are high. In hours 11, 14 and 17 the electricity prices spiked and the facility reacted by reducing its demand in those hours.
Figure 2 – Effects of Demand Response
Building an Energy Management Program with DR and DSM
As mentioned at the beginning of the article, while DR and DSM programs are not the same, the electricity user is not confined to choosing either one program or the other. For example, the quick payback benefits of DR programs can be used to fund longer-term DSM programs while DSM projects such as automation upgrades can become an enabler for DR. Used under the correct circumstances; DR and DSM actions are very effective at achieving energy management goals.
Instrumental to a successful DR or DSM program is real-time monitoring and tracking. This will be the topic of the next article.
Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.
Categories: Energy Efficiency
Tags: Demand Response, Demand Side Management, Energy Demand, energy efficiency, Peak Demand
February 4th, 2010
By: Peter Rowles
To steal a quote from the famous playwright William Shakespeare, “To be (a power generator) or not to be (a power generator) – that is the question.”
In my early career, I had some success with selling and installing advanced energy systems such as industrial heat recovery heat pumps, condensing heat exchangers, thermal storage and geothermal heat pumps. I also completed studies on low head hydro, biomass, cogeneration and district heating systems. Many good applications were found for these technologies and over the years there have been many government and utility incentive programs for them. These systems can create significant energy savings and reductions in greenhouse gas emission. However they are complex to design, build and operate, as well, are very expensive.
In many cases, these systems provide an alternative energy source for the end user. In essence, the end user becomes his own energy supplier or power generator. Before making the decision to move down this path the end user has to decide what business am I in? If my company is an industrial, commercial or institutional enterprise does it really want to become a power generator?
The US Department of Energy describes Distributed Energy Resources (DER) as energy generation and storage systems placed at or near the point of use. If implemented properly, these systems can provide the end user with greater reliability, adequate power quality, lower emissions and in combined heat and power (CHP) applications, improved efficiency. Beyond the direct benefits, DER can allow the end user to participate in competitive electric power markets. From a utility infrastructure perspective, DER has the potential to mitigate transmission congestion, control price fluctuations, strengthen security, and provide greater stability to the grid. This is why many utilities and governments support these projects as a means of resolving larger system problems.
Distributed energy encompasses a range of technologies including fuel cells, micro turbines, reciprocating engines, and energy storage systems. Renewable energy technologies—such as solar electricity, solar buildings, small-scale hydropower, geothermal, biopower, and wind turbines—also play an important role.
The non-renewable on-site generation technologies usually rely on natural gas as a fuel source. The costs to implement these systems range from $300 to $1,100/ kW for conventional engines and turbines up to $10,000/kW for fuel cells, which are still considered developmental. The cost of electricity produced by these systems is dependent on the cost of gas, system efficiency and operating and maintenance costs, but generally runs in the range of $0.10 to $0.15/kWh.
From the end users perspective, these technologies are good for peak shaving, emergency power generation or for offsetting electricity demand when purchased electricity rates exceed these levels. If waste heat can be recovered from these systems and used to produce usable heat for space or process needs, then the overall efficiency of the systems can improve to the point where it is economical to run them on a continuous basis to supply end-user energy demand. In these cases, there can be significant direct and indirect greenhouse gas emission reductions.
For renewable energy technologies, the implementation costs can be significantly higher in the range of $4000 to $10,000 per kW. When the Government of Ontario announced the launch of a Feed-in Tariff Program, renewable energy projects became a desirable subject. The FIT program offers incentives of up to $0.80/kWh and includes renewable energy sources, wind, waterpower, renewable biomass, bio-gas, landfill gas and solar. Implementing renewable energy technologies can displace non-renewable energy consumption and provide significant greenhouse gas emission reductions.
Regardless of which type of distributed energy system the end user selects, he will ultimately become his own energy supplier. Becoming your own energy supplier requires a level of operation knowledge and sophistication, which may be beyond most end users. Granted, many engineers dream about big power projects that will serve as a lasting monument to their technical abilities, however, the decision to embark on these projects has to be taken within the context of the company’s energy management plan.
A good energy management plan, as previously discussed will consider large capital projects only after other operational and retrofit opportunities have been implemented. This will help to avoid over sizing distributed energy system. If at this point, it is found that these systems still provide benefits to the end user, I would suggest partnering with a company that will share in the cost and benefits of designing, building and operating a system that meets the end users objectives. This will allow the end user to reap a portion of the benefits consistent with the energy management plan and not lose focus of what business they are in. As Theodore Roosevelt once said, “Keep your eyes on the stars and your feet on the ground.”
If you already have a distributed energy system in your facility, you may have the opportunity to participate in Demand Response programs. This is a topic, which I will discuss, in the next article.
Peter is entrepreneurial energy engineer with over 20 years of experience in the energy industry. Peter is responsible for new business developments for Energy Advantage Inc. in British Columbia.
Categories: Energy Efficiency
Tags: Alternative Energy Source, building energy efficiency, Distributed Energy, Renewable Energy
February 2nd, 2010
Holistic Carbon Management: Critical Issues for Strategic Finance
Canadian Financial Executive Research Foundation (CFERF) and Energy Advantage have partnered on a research study to examine the strategic issues faced by Canadian organizations emerging from the various North American carbon management regulatory activities underway today. This study is based on gaining feedback from Chief Financial Officers across a wide spectrum of Canadian organizations on the issues they face, and the responding actions their organizations are taking in the management and reporting of carbon use.
Gathering on January 22nd, 2010 in Toronto for an executive research forum, CFERF and Energy Advantage joined with Chief Financial Officers from 16 of Canada’s leading organizations to explore their views on carbon management issues and what actions their organizations have taken (if any) to address them . The result of this insight will be incorporated with the results of a wider survey to form the basis of the research findings.
These opening remarks from Shane Pepin, Executive Director, Sustainability Solutions of Energy Advantage kicked off a vibrant morning session of discussions around carbon management and the critical role that Chief Financial Officers play given their holistic operational perspective.
Following a round table format, the forum focused on four major areas – governance, compliance and reporting, management practices, and business performance measurement. Below summarizes popular themes discussed at the forum.
Governance
Opening with discussions around the current and evolving regulatory environment, we explored the awareness level and respective views on how emerging regulations, such as, Waxman-Markey/American Clean Energy and Security Act, British Columbia Carbon Tax, Ontario Bill, OSC disclosure, Federal Government’s ‘Turning the Corner’ plan, Alberta Carbon Market, Western Climate Initiative, Carbon Disclosure Project, are affecting organizations.
The role of the stakeholder community (investors, regulators, customers, suppliers, employees, shareholders, non-governmental organizations) in carbon planning activities was discussed including the degree of executive and/or board involvement and their prevailing influence. Reporting process, priorities and transparency were included.
Compliance and Reporting
This topic began with a discussion on carbon management compliance and reporting actions being taken by the representative organizations, both voluntary and/or mandated, to gain an understanding of the various approaches and channels being used today. A key area of discussion focused on if and how organizations are planning to integrate carbon reporting into their corporate information infrastructures.
Carbon related competitive, reputational, financial, legal, stakeholder and supplier risks were all discussed with respect to an organization’s overall business strategy. As well, multiple opportunities were offered around carbon management, including capital related activities both from an investor perspective and new revenue streams (selling carbon credits), the benefits of an enhanced reputation, increased market share, etc.
Management Practices
This topic focused on gaining an understanding of specific actions organizations have taken as a result of executive and/or board involvement (if any) on carbon management, such as, accountability, performance tracking, goals and objectives, and key performance indicators. A key focal point of the discussion was related to the role of the Chief Financial Officer in carbon management activities and whether it should be a supportive or leadership position.
Additionally, greenhouse gas emissions reporting targets were discussed in reference to their role in corporate, departmental and individual performance measurements.
Business Performance Measurement
Focusing on the impact that greenhouse gas emissions performance levels have on an organizations overall business valuation, this section discussed diverse strategies (if any) organizations have made to incorporate carbon management into the valuation of their business. Related discussion occurred on how capital markets and/or institutional investors may take into account carbon management factors in their business valuations.
In addition to the executive research forum, a research survey, distributed to Financial Executive International’s 10,000 members, will be conducted and be accompanied by a final report that will highlight insight from both the survey and forum results.
As we conclude the research, Energy Advantage and CFERF will broadly publish the final report on holistic carbon management and present the results to various Financial Executive International chapters across Canada and at the Financial Executive International June, 2010 annual conference in Victoria, British Columbia.
Categories: Energy Management General
Tags: Carbon Management, energy reporting, Energy Sustainability
