March 14, 2014

Manufacturers Interested in but Lack Awareness of Energy Demand Response Programs, Says Survey

NEW YORK–In collaboration with Industrial Maintenance & Plant Operations (IMPO), the leading magazine for industrial maintenance news for manufacturers, Kaye Scholer recently conducted a survey of 200 manufacturers about their awareness of and participation in “energy demand response” programs—which pay manufacturers to reduce their energy consumption upon request by the grid operator.

“Not surprisingly, our survey confirmed that most manufacturers are concerned about energy costs and are taking steps to lower them,” said Kimberly Frank, who conducted the study along with energy litigation colleagues Jeffrey Fuisz and David Cousineau. “What was surprising, however, is just how few of the manufacturers enrolled in demand response programs are aware that these programs are regulated programs and that that failure to comply with rules could potentially expose them to a messy and costly investigation.”

Demand Response Programs Reduce Energy Costs by as Much as Ten Percent

Fifty-three percent of respondents ranked managing energy costs as “very important,” with 15 percent ranking it as their “most important” priority. Among the many steps manufacturers are taking to help reduce energy costs, 58 companies, or roughly 30 percent of those surveyed, currently are enrolled in a demand response program.

While the cost savings realized from demand response programs vary based on a number of factors, including the specific program type, the level and pattern of electric consumption and electricity prices, approximately 50 percent reported reducing costs between one and five percent, while 20 percent realized savings as much as 10 percent.

Despite 85 percent of manufacturers saying lowering energy costs was among their priorities, 43 percent of the manufacturers surveyed reported they were unfamiliar with demand response options and their potential benefits.

“The survey results suggest that there is more opportunity to educate manufacturers about energy demand response programs,” Frank observed, “as well as to broaden and promote program availability.”

Impediments to Participation

For those manufacturers currently not participating in demand response, the majority cited a lack of program availability as their primary reason; while just 12 percent cited a concern about complying with complex and widely varying (from region to region) regulatory rules as a reason. At the same time, only one third of survey participants who do currently participate in a demand response program reported that they were even aware that those programs are regulated at the state or federal level.

More Education and Better Communications Necessary

“This could be problematic because if manufacturers don’t recognize the program is regulated they may be out of compliance without even knowing it,” stated Frank. “Even manufacturers that believe they understand the regulatory requirements could be out of compliance.”

As an example, Frank points to a March 2013 settlement in which FERC levied more than $3 million dollars against the Rumford Paper Company after a five-year investigation of the New England paper mill’s alleged fraudulent participation in a demand response program. FERC’s investigation concluded that the company manipulated its baseline electric energy consumption levels and claimed 20 MW of “phantom” curtailment capability. That the alleged scheme was developed entirely by an independent energy consultant, not by the company itself, didn’t alter FERC’s decision that Rumford was still liable for violating demands response rules. 

“That’s why it is so essential that there be ongoing communications between the manufacturer and the demand response provider,” says Jeff Fuisz.

“Our survey revealed that 29 percent of respondents reported their demand response provider ‘never’ communicates with them about compliance; just under 50 percent hear from their provider only once or twice a year, which makes it very difficult for manufacturers to keep abreast of any new regulatory developments they need to be aware of,” said Fuisz. “Manufacturers should not hesitate to ask for more information about the program in which they participate. Likewise, the burden lies with them to ensure that their procedures comply with regulatory requirements and, in this regard, incorporating written protocols into a compliance program, which most respondents reported not doing, would be extremely wise.”

Kaye Scholer’s Energy & Infrastructure Group represents leading investors, sponsors, developers, lenders, utilities and governments in the purchase and sale, capitalization and financing, planning and structuring, and permitting and regulation of energy and infrastructure assets around the globe. We combine long-standing practice excellence with deep industry knowledge in our approach to energy and infrastructure as an investment asset class.

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