Readers weigh in on commercial demand response

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One thing I love about writing in this space is that our readers are willing to write in with suggestions, solid insights and advice on getting up to speed.

Most of the time those "suggestions" are constructive and encouraging. Sometimes, not so much. No worries there.

Last week I wrote about energy management and demand response in commercial buildings, likening this opportunity to "low-hanging fruit the size of basketballs." Reader responses were bracing and informative.

"The cost 'pass through' clause in a typical commercial building lease is a pitfall," wrote Amir Yoeli, a program manager in small business commercial DR at Honeywell Utility Solutions. "The system of 'cost plus' leaves dollars in the pockets of management companies. As a result, the management company that runs the building has a disincentive to reduce consumption and to implement conservation measures. They have even less incentive to invest in AutoDR and tie the building to a smart grid. Once we penetrate the 'pass through' and reach the tenant, we will see reduced resistance to investments in automation."

AutoDR? I had barely formulated my next move when Roger Levy, Levy Associates, wrote in and said I really needed to read up on AutoDR. And he forwarded a draft report from the Demand Response Research Center, which was formed by the California Energy Commission's Public Interest Energy Research organization and led by Lawrence Berkeley National Laboratory.

I can only cherry-pick a couple quotes from the executive summary to define AutoDR and explain why it could be highly important.

"Open Automated Demand Response (OpenADR), formerly referred to as AutoDR, is a non-proprietary, standards-based communications data model. It provides a platform for communicating price, reliability and events signals between the utility or independent system operator (ISO) and individual or aggregated groups of electric customers.

"OpenADR has consistently demonstrated that automating customer strategies increases peak load impacts, improves the certainty and reliability of those impacts and expands customer options for participating in the higher value wholesale and retail ancillary service applications. Open ADR's open, non-proprietary standards approach also creates an interoperable environment that lowers customer, utility and vendor equipment and operating costs."

The research was initiated in response to the California energy crisis of 2002. In 2006, the California Public Utilities Commission (CPUC) ordered Southern California Edison, San Diego Gas & Electric and Pacific Gas & Electric to create three-year plans to test OpenADR. According to the draft report, by the following year "utility OpenADR efforts had accomplished and exceeded all implementation and performance objectives. Customer participation, peak load impacts and third-party industry support met or exceeded the original CPUC objectives."

Since then, OpenADR efforts have expanded into industrial, small commercial and residential applications that address summer as well as winter peak load management. OpenADR is under consideration by the National Institute of Standards and Technology as one of 16 first-round standards to support smart grid development. The report goes on to identify remaining issues.

Because I had quoted Mike Ebert, research associate at the Center for Infrastructure Protection, George Mason University, in a January column that suggested that commercial demand response was a simpler way to make inroads than residential homes, I asked Ebert about Amir Yoeli's point that "pass through" clauses in commercial leases posed a significant hurdle to progress there.

"For many small properties/small businesses, the small business renting the property pays the utility bills," Ebert replied. "But for 'Class A' tenants in large commercial facilities, increases in utility costs are paid by the facility owner and often charged to the tenant on a per square foot basis. That said, the market for Class A (and Class B) real estate is so competitive and energy costs are such a large percent of total costs that owners are very much incentivized to invest in green energy efficient that will allow owners to offer lower costs per square foot."

Ebert had asked his colleague, Doug Smarte, executive director, National Association of Power Engineers Educational Foundation, to comment as well. Smarte wrote: 

"The basic concept has to do with triple net lease, whereby the landlord is responsible only for paying any indebtedness on the building and (usually) for major structural repairs. Most leases are of this type. So, the rent payments cover only the owner's debt service and basic profit. The tenant is responsible for paying for property taxes, insurance, minor repairs, housekeeping, utilities and general maintenance. (Usually, the landlords for Class A office properties actually make the payments, do the accounting and pass the costs on to the tenants.)

"It would be easy to conclude that there's no motivation for the landlord to hold down costs. But, in practice there is. Landlords are not able to keep or attract tenants if there are properties where tenants costs are lower. Also, in the Washington, D.C. market, tenants want to be green - this might not be the case in all markets, but it is in a lot of them. Tenants are now demanding efficiency/sustainability - they want to brag about green being part of their corporate culture.

"New lease concepts are being developed to enhance incentives for efficiency," Smarte concluded.

Watching the ping-pong ball get swatted back-and-forth made a great day for my own education. How about yours? Let's keep the conversation rolling.

Phil Carson
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com [3]
303-228-4757