Energy as Driver of Value: Energy Efficiency and Power Generation Increasingly Relevant to Developers

Gregg D. Ander (Architect, Southern California Edison): I want to talk about the state of the country in terms of energy. California’s been in the energy efficiency business since 1978. In my judgment, there are three things that need to be in place for utilities to be in this business. 

The first is cost recovery. If you spend a billion dollars on your repairs, you need to cover that, get that back. 

The second issue is what is referred to as decoupling. We don’t make money by increasing output, so sales and revenue are decoupled in California and have been, in one form or another, since 1978. The reason that’s important is five years ago 3-4% of the country’s utilities were decoupled. Now it’s between 20-25%, so that concept is starting to catch on. It’s been very active on the left and right side of the country but not so much in the middle, and we’re seeing that expand exponentially as people start to understand and work through that via a regulatory structure. 

Third is shareholder earnings. We are investor-owned; and we trade on New York Stock Exchange as most investor-owned utilities do. As a result, we need to make money. If we do a great job delivering energy efficiency, there are shareholder earnings associated with that. If we don’t, there are penalties. The chief financial officer pays close attention to this. 

These policies have been in place for a long time, so California is very engaged energy efficiency. The state has roughly 3.3 billion dollars worth of efficiency activities, 2.8 billion for renewable activities, and roughly 1.5 billion for demand-response. These are all customer-side-of-the-meter issues that we often refer to as IDSM—Integrated Demand Side Management. Does it work? If you look at the energy per capita in California over time, it’s relatively flat, and the trajectory for the rest of the country is upward sloping. 

When we do IDSM projects, we ask “do they work? Are they persistent? Can you rely on them?” If not, you have to build generating capacity. You can invest in efficiency or build peaker plants or merchant plants or whatever you want for generation. 

I mentioned before we’re sort of working in this space for getting new measures adopted, which is not trivial. Here today, we are all in one sense or another involved in the building industry. I’m an architect, so I’ll pick on designers here. We are very risk-averse. If we are not certain something is going to work, we typically delay and wait for other people to do it. We’ve spent a lot of time figuring out ways to accelerate new technologies, new design tools, and new business practices into the market. 

As a result, we now have this endeavor we’re calling Office of the Future. I wanted to look very specifically at this market segment Class A, double Class AB, etc. We started to cook this thing and started to socialize a little bit, and all of a sudden Con Edison jumped on board representing Manhattan, National Grid, NSTAR in the Boston area, Seattle City Light, B.C. Hydro, Sempra, PG&E—there’s about a dozen utilities here as well as Microsoft and some industrial partners. We tried to figure out what this market segment was. How does it work? What’s unique about it? It’s definitely very unique—far different from big box stores or K12 schools. So we put this consortium together. We had a number of different focus groups, and we met in Boston for a couple of days. We’ve been up and down the coast of California, and we put this package together. The federal building on 1100 Wilshire: it’s operated by the federal GSA and occupied by the FBI, but it’s looking very specifically at advanced lighting, lamps, balance control systems, and plug loads. This particular one gained about a 53% savings grade, and the quality was way better. They had asbestos issues and many other things they had to deal with. They like it now: it’s replicable, they have a portfolio across the country, and they’re going to try to adopt some of these policies on the East Coast, in the Bay Area, and so forth. We brought in the New Building Institute to help manage this, and it got real big real fast. The Emerging Technologies Coordinating Council, ETCC-CA, go on that website and you will find there’s a plethora of reports on technologies, control systems, business models, opportunities, and so forth. 

Alan Russo (Bloom Energy): Gregg’s introduction discussing the adoption of new technologies is an excellent segue. Bloom Energy is located in Sunnyvale, CA, and we make fuel cell systems for onsite power generation, appropriate for commercial real estate applications. I don’t think I need to convince anyone here that there is an energy problem to contend with. All of us are here in a country and in a state with access to clean and reliable energy and all the benefits associated with that. We still have to grapple with the fact the world is stampeding forward, and there are socioeconomic challenges that we still have to deal with. Energy and energy procurement pervades these developments.

Bloom’s mission is to make clean renewable energy affordable for everyone in the world. We’ve emphasized the word affordable because back in the day—certainly when I started six years ago with the company—we had this grand desire to see people willing to pay more for green energy. That’s simply not the case today. The practical matter is it’ll initiate the conversations, but people really wanted to see an impact to the bottom line. Therefore, we emphasize that our solutions have to be affordable to everyone that we serve. 

The technology itself began with the Mars program. To make a long story short, the Mars program was cancelled, but its technology, which was supposed to go to Mars to create oxygen while we were up there, still existed. That application had goals that could be met here on earth. KR Sridhar, our founder, brought that concept to Kleiner Perkins, and we were Kleiner’s first cleantech client in 2002. Back then the challenge was really to invent this technology, which Sridhar did successfully. Today, we have 10s of megawatts installed and a very strong backlog of commercial demand. 

So what is it? Very simply, a fuel cell is a device that makes electricity electrochemically. The traditional model for making electricity rests on erecting plant somewhere far away. You take an input fuel, you combust it, and then you use that thermal energy to create steam. Steam drives a turbine, and you’ve then got mechanical energy, which is used to generate and make electricity. The electricity is transmitted over tens of thousands of miles of wire to where it’s actually used. 

We advocate the onsite generation paradigm where you actually take the power you make close where it is used. With our product being an electrochemical device, we go directly from the fuel cell itself to electricity. Because you don’t have all those state changes or all that transmission, we’re able to operate these at dramatically higher levels of efficiency. That high efficiency means lower fuel costs, lower operating costs on the system, and correspondingly lower CO2 emissions. You received more electricity for every unit of fuel that goes into it. We generate electricity and we do so efficiently and cleanly. 

It’s a modular solution, a solution you’d be familiar with in any of the IT architecture you’ve seen. In an eBay installation there are 500 kilowatts supporting the company’s mixed usages, like data centers and office spaces. The Ratkovich Company deployed 500 kilowatts of our systems at the Alhambra facility. J&B Realty has also put in place a 400-kilowatt solution supporting the Constellation facility. We call our box the Swiss Army knife of energy generation. Fundamentally, what drives people to take this seriously is that we can lower energy costs here in California. We can often lower energy costs by 30% on the kilowatt-hour basis for customers. The power is cleaner: California has one of the greenest grids in the country, but we can still be 30% cheaper on a unit CO2 emission basis. We’re running on natural gas, which today is a very inexpensive input fuel and which is, in part, one of the reasons we can offer such low delivery costs of electricity. It is inherent to the systems efficiency. The systems are reliable, so we can, in most cases, increase the reliability of a building’s electrical infrastructure while lowering their unit cost of electricity. 

This is a solution that has achieved, to date, broad market adoption. You know electricity is horizontally applicable across a number of different applications. Southern California Edison is one of our customers. Real estate developers and commercial uses of every nature are adopting and pulling our technology broadly throughout the organization. 

Audience Member: I’m from Irvine, California, and I’m a real estate developer. I’ve developed regionally, close malls or much smaller properties, and the norm in the business is that the landlord wants to make sure that the tenant bears the energy risk. Therefore, you have the net leases, and you shrug off the energy costs as an owner. 

I’m trying—and I’m frustrated—to get into the energy business. I would like to take fuel cells and PV and put them into a center to have onsite energy generation. My question is to Mr. Anders: I have spent the last 30 days talking to different people at Southern California Edison, being told to send emails to different addresses at Southern California Edison, asking them how can I put master metering into a shopping center. I want to just put a fuel cell and solar PV for onsite energy generation; I just want to charge less to my tenants for the energy; and I want to have a master meter and submeters and be able to net meter, so when I can’t produce to 100% of the load I can buy it from you. Can I do that, and how can I find out how to do it?

Gregg Ander: The short answer is it depends. Let me give you my card. It is really complicated in terms of setting up master metering and net metering for tenants. There are companies that are in that space. There are also reliability and safety regulations and requirements, which I can help you navigate through.

Charles B. Leitner: I think what’s great about your question is that it’s directed at the utilities. You are the customer, and the provider is Greg, so that dialogue has to happen. I applaud you for doing it. Also, the one point I’d like to make additionally is you that talked about that tenant landlord flip, which is really important. We hear that as an excuse all the time: the tenant’s the one that’s paying for it. We’re in a business of making occupancy costs competitive. It doesn’t matter if it’s rent or utility costs: if your property is cheaper, they’re going to rent your property. I applaud you for thinking about that, even though the easy thing to say is it’s the tenant’s property.

Audience Member: I did a simple spreadsheet analysis on a center, assuming a certain cost of energy production over the next 10 years. I generated 5-10 million dollar value creation at the end of the day for the owner. It’s worth doing. And what I’m talking about is where the rubber meets the road in a certain industry and actually creating onsite energy generation as mainstream, and nobody is doing it because it’s a hassle.

This gentleman talks about there being a huge market out there, but there are barriers to implementation. And we’ve got to get past that, so I’d like to talk to you later. Please help me.