Back-Up Generators Are Now Revenue Generators
Cara Olmsted Feb. 17, 2016, 9:45 a.m.
Not long ago, backup generators were seen as simply another expense item and part of the cost of owning or managing an office building, multi-family property, hospital or university. Yeah, you needed to have them in case of emergency outages, but it was largely viewed as a sunk cost.
But no longer should generators be viewed as a required but mainly idle asset. Many New York City property owners and managers are now realizing something crucially important about backup generators:
They’re seeing that generators aren’t just able to generate power: They can also generate revenue. And they can do it in three big ways.
The first way backup generators spawn revenue is by helping landlords gain the financial benefits of various “demand response” (DR) incentive programs that aim to reduce regional energy demand during “peak load” periods.
Designed to ensure the reliability of statewide and regional electrical delivery systems during periods of highest demand, incentives for DR load reduction are provided by the New York Independent System Operator (NYISO, or commonly referred to as “the statewide grid”) and Consolidated Edison, the regulated utility serving New York City and Westchester.
A properly equipped, 1.4-million-square-foot office building with quality backup generators could earn approximately $300,000 per megawatt (MW) each year in DR incentive payments for agreeing to reduce loads during peak alerts.
The second way backup generators can serve as revenue generators is during periods of “market opportunity.” Here’s how it works:
Let’s say a large commercial property is locked into a one-year, fixed-rate energy supply contract that pegs its electricity cost at eight cents per kilowatt. During the term of the contract, however, the market price rises to nine cents. This favorable price differential presents a “market opportunity” for property owners to sell their pre-purchased electricity back into the market and profit from the price difference.
When power is being sold back to the market in this way, the end-user is likely to rely, to some extent, on backup generation to make up the energy gap to adequately power the building.
This “sell-back” strategy is managed by an energy services company (ESCO), which would share the profits from the price difference with the owner.
Moreover, some elite ESCOs offer sophisticated software that carefully tracks price differentials while interacting seamlessly—and virtually unnoticeably—with a building’s energy management system. Buildings effectively become virtual “power plants,” generating revenue by making often-subtle shifts in usage unnoticed by building occupants.
The third and perhaps most intriguing way that backup generators generate revenue is by helping to increase rents through what we’ll call a “resiliency premium.”
The resiliency premium arose out of Superstorm Sandy in the fall of 2012. Sandy resulted in a highly disruptive crisis that has permanently affected the tenant mindset in our region—and doubtlessly elsewhere, as well—regarding the importance of power reliability during extreme weather events.
The storm triggered multiweek outages in many buildings, and tenants took notice, to be sure.
Accordingly, when looking for new space or contemplating renewals, increasing numbers of businesses understandably today want to occupy a building that’s prepared to continue basic operations when the next potential disaster strikes.
The market now recognizes the risk and, eyes newly open, has begun to price in a “resiliency premium” that protects tenants from the risk—for a price.
This might strike some as a case where the landlord is writing off a big sum. But we have come across Manhattan landlords who have done the math and have decided to actually reduce some of their rental space and replace it with generator space. They know they can make up the difference in lost rental income from reduced rentable square feet by reaping a “resiliency premium” on future rental income. Tenants get it, and they’ll pay for it.
The energy management landscape has changed dramatically and rapidly here in New York City. Just five or six years ago, the familiar but uncelebrated backup generator would never have been able to serve as a de facto profit center, as described above.
It makes sense to contact a reputable ESCO and let them help unleash the potentially untapped profitability residing within backup generators.
Because today, the right generators can be moneymakers.
Cara Olmsted is the director of marketing and business development for ConEdison Solutions.