(Sustainable) Power to the People

A smart energy strategy is one of the best moves a cannabis business can make to protect capital.

Cannabis cultivators face a complex environment that involves differing regulations, rebate possibilities, procurement protocols and energy sourcing opportunities, as well as continually changing technologies. Making sound decisions about energy buys can be one of the most difficult parts of running a grow business. It’s also one of the most important parts to get right.

As the legal cannabis industry continues to expand, the energy industry is preparing for the intensive demands of cannabis cultivation. To maximize profits and minimize impact on the environment and the energy grid, growers also need to prepare.

The No. 1 recommendation for marijuana industry associations and entities is to invest in energy management, according to the September 2016 report “A Chronic Problem: Taming Energy Costs and Impacts from Marijuana Cultivation ” by EQ Research, a clean energy intelligence consultant. In most places, cannabis agriculture is restricted to indoor facilities that consume large amounts of electricity, natural gas and water. Regulations for grow operations and utilities differ by geographic location, and different energy sources and pricing schemes further complicate the picture for growers.

Cannabis cultivators who are focused on meeting regulations and capturing market share may overlook the financial value of sustainable energy management planning. Energy is expensive—but many growers are missing opportunities to save. An energy management plan can enhance sustainability and secure financial success for the cannabis cultivator.

Cash-flow improvements for production sites begin with a basic understanding of building systems and an evaluation of the energy consumed by the technology used by the facility. An energy-consumption baseline can be created from a business’s historical energy use data. This baseline data serves as the basis from which to monitor, measure and manage ongoing efficiency efforts. Once a historical record has been established, future energy-conservation objectives can be prioritized. These may include measures such as on-site co-generation (ChP) energy production and renewable technology—such as solar PV, wind turbines, fuel cells, geothermal and biomass—deploying energy-efficient technology and optimizing energy use to minimize the purchase of energy at peak demand pricing. (Peak demand pricing is an additional fee that is paid by each customer during periods of high energy demand and results in higher rates for power used during those times of the day/year.)

Every facility has unique requirements that are influenced by the specific product and growing techniques, the available energy sources and the local regulatory environment. Ultimately, energy planning will help determine which growers will achieve growth and stability in a marketplace that is just beginning to set its roots.

Call in the Experts

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Controlling the energy costs associated with indoor cannabis cultivation should be the responsibility of all stakeholders of an organization, but most entities lack internal sustainability and energy-management expertise. For those businesses, professional expertise can leverage specialized knowledge to help cannabis business owners manage expenses, optimize cash flow and maximize profitability, while minimizing impact on the environment and energy infrastructure. Energy consultants work hand-in-hand with growers to buy, generate and use power more efficiently, as well as reduce costs and impacts to the environment.

In the cannabis cultivation industry, this specialized knowledge should include a thorough understanding of the utility service and rate tariff pricing schedules for electric, natural gas and water. With this information, improvements can be made based on “best-in-class” examples of behavior modification solutions. Cultivators can also achieve cost reductions through rate analysis and energy procurement strategies available in deregulated energy markets of the United States and Canada.

Cultivators may feel as if there is little or no option to control their electric and natural gas energy expenses. However, the Energy Policy Act of 1992 deregulated the U.S. energy market and made it possible for energy procurement negotiation of the commodity portion of electric and natural gas supply. The federal government mandated deregulation on a state-by-state level, allowing “customer choice.” This gives businesses flexibility in how they plan their energy-use programs. However, it would be an understatement to say that these programs are very complicated, and they vary significantly by state. It is not a level playing field for all businesses.

A simple explanation of energy deregulation pricing is best described as the split between energy generation from its transmission and distribution (T&D). Utility invoices combine the unregulated generation costs with the highly regulated fees of the local T&D system responsible for reliable delivery of power to customers. Energy generation is the unregulated portion of the power cost and is considered a commodity that can be sold to the highest bidder.

Energy suppliers are obligated to serve qualified customers. However, they have no obligation to offer the lowest available unit cost of energy to their customers. Many businesses are simply paying too much for their energy. To make it worse, utility billing errors can go undetected for years, as businesses lack the expertise needed to detect problems.

Supply contracting in a deregulated energy market can be intimidating, complex and a costly experience. Energy procurement professionals who understand energy resources, costs and uses can help guide business owners to solutions that best fit their goals, objectives and budgets.

Mike Hyman, managing partner of Century Energy Solutions, an Illinois-based energy procurement consultancy, says, “Customers are wasting money more efficiently,” suggesting that the installation of energy-efficient equipment will reduce kWh used in production; however, additional cost savings per watt are achieved by negotiating the components costs of the actual cost of each kWh. “Yet, many still have a problem minimizing energy costs while the energy suppliers are trying to maximize margins. Unfortunately, the energy suppliers have significant market knowledge … and advantage in comparison to that of an average energy buyer trying to make the correct buying decisions for the organization,” he says.

Cultivators who have negotiated cost reductions through contracting power and natural gas supply for sites in states where “customer choice” is available have realized its financial benefits in weeks and months, rather than in years. States such as California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island and Texas, as well as the province of Alberta and the city of Toronto in Canada, allow companies to negotiate and procure all or portions of their electric or natural gas loads to lower operation expenses. At this stage of the cannabis industry, smart energy strategy is one of the best moves a business can make to protect capital.

Oregon is one state that has both deregulated its energy market and legalized cannabis cultivation operations. In the past, energy suppliers have not been able to significantly reduce the cost of energy for average customer loads. However, the rapidly growing cannabis industry’s energy requirements mean there is now a better than good chance that businesses could see savings through electric power contracting.

Although Oregon has deregulated its electric program, it remains very restrictive and only allows customers to choose and negotiate power contracts from authorized suppliers during a short time period in November each year. At a glance, energy contracts are negotiated to have specific pricing based on a customer’s load profile, contract term and current market conditions. Oregon’s annual energy contracting and pricing event is unique and unlike any other deregulated markets, most of which allow energy contracting all year round.

Regardless of the unique regulatory environment each business faces, early preparation and planning is required by customers months prior to final supplier agreement. Indoor cultivators located in a deregulated energy market should begin to review current and expected future changes to their energy use and consumption patterns, while also preparing for energy supply contracting events.

A qualified consultant may also be able to help operations devise a power-aggregation strategy to combine the energy loads of several growers, providing an economy of scale and rate negotiation clout with suppliers. Power load aggregation is a sophisticated negotiation technique used to obtain power at the lowest possible cost to all customers in a pool. By participating in an energy rate procurement aggregation pool, they can access a rate price structure they would not be able to secure on their own.

Even in states that regulate utilities, energy procurement specialists can help businesses tap into a variety of solutions to reduce energy costs. In parts of Colorado and Minnesota, businesses connect to the electric grid with Xcel Energy, a regulated utility energy supplier. This utility delivers energy to customers, has rate tariff choice, and offers an extended library of prescriptive and custom rebate programs that encourage on-site renewable energy production and energy-efficiency implementation.

Opportunities to capture energy-driven productivity gains are everywhere, and creating a realistic and sustainable energy management plan with the help of a specialist puts businesses of all sizes at a big advantage. Ultimately, the end result will be lower operating expenses, less impact on the environment and lowered energy cost portion of the costs of goods sold of indoor cultivated marijuana.

Kathleen Hokanson co-founded Koan Energy Consultants in 2012 and serves as the company’s president and CEO. Koan Energy Consultants is an outsourced boutique energy services company (ESCO) that offers its clients sustainable energy management expertise in electric and natural gas supply, rate tariff analysis, energy procurement, on-site combined heat and power (ChP), energy storage, LED technologies, rebate processing and financing to the indoor cannabis-agriculture, cold storage, data center, commercial real estate and distribution, food processing, grocery, hospitality, restaurants and retail markets of the United States and Canada.

June 2017
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