A few months ago, we installed a backup generator for a customer in the food distribution business. Their decision to add the generator was ultimately prompted by yet another New England storm that left them without power. In the wake of Hurricane Sandy, many folks are wishing they had made the same decision.
The psychology involved as a company considers adding backup generation is curious. No company’s management disputes that having on-site backup is a valuable addition to their operation. But invariably, there is a rational explanation for why they have yet to make the investment.
Some businesses don’t have facilities in geographic areas where power outages are common, so they really haven’t felt the pain. Some manage their risk by pre-arranging flatbed trucks carrying emergency generators which can be delivered to their sites in advance of a weather event. And, most commonly, facility managers have been unsuccessful at winning their company’s annual capital budgeting war.
Let’s be frank. Other than the week immediately following a loss-of-power event, the “let’s add backup generation” conversation is akin to asking your boss to buy more general liability insurance coverage -- not an upbeat topic. Where energy efficiency projects show a measurable financial payback based on energy savings, the financial return for adding backup generation is harder. It requires putting a valuation on safety, assets at risk and “business continuity.”
Safety is usually easier, as businesses already follow federal and local fire and safety codes for what is required. It’s pretty black and white if an elevator needs to be able to operate in a power outage, so in this case, “valuation” has already been defined.
Assets at risk are also pretty straightforward. In the case of our food distribution customer, the value of all perishable food product housed in their warehouse is a large dollar number. Or, for a metals manufacturer running a test on a very sensitive piece of military equipment, a power loss means the entire production run would be compromised -- another easy valuation.
Business continuity is the hardest one. For a commercial office, where the company has a work-from-home alternative for most employees, what is it really worth? How much business would be lost if a company loses power for an hour? For a day? On the IT front, there are wacky stats such as 93 percent of the companies who lost their data center for ten days filed for bankruptcy within a year. Again, can you imagine how excited a manager is who is heading into corporate budget negotiations to present this case?
However, there are some exceptions. Recently, we performed an assessment for adding backup generation at our customer’s facility in Texas. Here ERCOT pays financial incentives for low-emission generators that can be added to their grid and controlled as a resource instantaneously, called “spinning reserves.” The added generation makes the ERCOT grid more reliable, which has a value that they quantify.
The low-emission backup system costs more than a traditional diesel generator ($400,000 versus $200,000), but ERCOT pays $150,000 per year for the system we designed, whereas a dirty diesel generator gets nothing. So our customer gets a better than three-year payback on their purchase of insurance.
In the post-Sandy era, more Northeast U.S. companies may be reassessing how they value backup generators. It’s not hard to see how incentive programs like ERCOT’s could really spur action -- a win for both customers and the utilities. That could make buying insurance a much more engaging conversation.
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Jon Guerster is the CEO of Groom Energy Solutions. This piece was first published on Groom's blog.