Mr. Poad

Eco-Friendly Practices

Pool Your Resources: Save Electricity

By Jim Poad, Director of Client Solutions, Advantage IQ

When you consider the number of washers, dryers, vacuums, lighting fixtures, elevators, and other electronic devices needed to run a hotel, it's no wonder electric bills have become a towering expense for operators.

Indeed, the hotel industry uses 69 billion kilowatts of electricity a year, at a cost of $5.3 billion annually, according to the U.S. Energy Information Administration, making it one of the highest expenditures for hotel franchisees.

It's also one of the most overlooked expenses of running a hotel. Hotel operators are most concerned with buying amenities that ensure a pleasant stay for their customers, and increase return business. They excel at purchasing appliances, wall decor, furniture, carpeting, even restaurant equipment. But when tasked with finding the best rate for their electric needs, since it doesn't directly affect the customer experience, the job tends to fall to the wayside.

In fact most operators pay their bill, and don't even think about the price they're charged for electricity. As a result, a franchise might pay much more for electricity than necessary. While that may send shockwaves through the calculators of number-crunching operators, all hope is not lost. With a little creativity and planning, operators still have the power to drive electric costs down-without driving themselves crazy in the process.

However, here's one option that can help trim their electricity costs. One of the most simple and effective ways to cut costs in a deregulated market is aggregation, also known as buying electricity in bulk. In essence, operators in the same region can align with one another, shop around for the best rate from a third-party electricity supplier, and then form an agreement to buy electricity as a group.

Aggregation creates volume purchases, and the discounts are passed on to the entire group-often 10 percent above the savings reaped just by being in the market. A successful aggregation pool includes 10 or more hotel franchisees. Grouping franchises together in such a way makes smaller customers appear more attractive to third-party suppliers.

The more franchisees that participate, the more electricity that can be bought in bulk to further reduce electricity bills. It's a free value-added service for franchisors to offer to their franchisees.

Activating Aggregation

An aggregation works best when operators use an impartial energy-management consultant. Consultants are the best source of information because they understand the nuance of the market and have developed strategic relationships with third-party suppliers that can win the best deals. Also, this takes the-time consuming task off one franchise and allows the consultant to manage each location and operator.

However, aggregation is only available in markets that are deregulated. That means the first step is finding out if the opportunity to aggregate exists in a franchisee's location. Less than half of the markets in the United States are deregulated, and truly deregulated markets exist only in Illinois, Maryland, Massachusetts, New Jersey, New York, and Texas.

Next, conduct preliminary research. Reach out to the franchisees in the same market and explain the benefits of an aggregation program, such as the cost savings and streamlined process. What comes out of this discussion will determine which franchisees are locked into an energy plan and which aren't and are able to aggregate. It will also determine up front if there are enough franchisees to make aggregation worthwhile.

While franchises can aggregate on their own, they rarely have the expertise and third-party supplier contacts to do it successfully. Individual franchises seldom have the ability to conduct the savings analysis and stay on top of market information.

Also, franchises can and shouldn't be afraid to partner with others that are not part of the same corporation. The benefit of a streamlined process and the ability to secure a better rate still remains. But customers from competing chains shouldn't try to aggregate on their own. It raises too many issues, such as which franchise is going to take the lead on the project and to keep the appearance of subdivision out of the pricing process.

An advantage of working with an energy-management company is its impartiality. And aggregating through an energy-management consultant, competing chains can work together because of the neutral nature of an energy-management company.

Once there's ample interest, it's time to prepare marketing materials and enrollment packets-typically a simple e-mail and attachment explaining the program-to send to the franchisees.

Then the procurement phase begins. In this stage the designated group leader or energy-management consultant gathers the electricity data, sets the deadline to join, builds the aggregation group, and starts the process of procuring power for the aggregation pool.

Once a third-party supplier is chosen, the group leader or energy-management consultant presents the contract and savings analysis to the group.

Franchisees will then have an opportunity to review the contracts and sign them individually.

A Helping Hand

Clearly, setting up a successful aggregation program is a lot of work. The entire process takes about a month. And operators rarely have the time or expertise to gather the utility data from all the locations in the group, let alone analyze the group's load profile, compile the data, research the suppliers in the market, review the bids, and implement the program.

It's a major advantage for energy suppliers whose ideal customer is an industrial plant with large usage requirements, and only have to talk to a single energy manager. A similar situation is accomplished when operators are grouped together. The supplier speaks to one individual, the energy-management consultant, and it can charge a lower rate because it costs the supplier less to get the contract in the first place.

As a result, working with a qualified energy-management consultant to handle the process from start to finish benefits both ends of the deal. It saves time and money, and is the most efficient way to lower energy costs without doing the leg work. In fact, a good energy-management consultant will continue to follow up after procurement, with on going market information, customer service, questions about billing, further rate-reducing options, and other support.

Sky-High Savings

If executed properly, aggregation can save franchisees hundreds of thousands of dollars off their bottom line.

For example, a quick-service restaurant chain saved 135 of its franchises in Texas almost $1 million in one year alone by having the locations form an aggregation pool. When the rates dropped even further, they locked the pool in for another year, saving it close to $2 million over two years, or 15 percent off what they were paying.

Likewise, working with an energy management consultant can turn pennies saved into dollars earned for the aggregation pool. Take, for example, a recent electricity auction in Illinois that set the price at 7 cents per kilowatt hour. Another aggregation pool of restaurateurs bought that same electricity at 6 cents per kilowatt hour, saving them 15 percent over a year. The same savings opportunities exist in other deregulated markets as well.

Hotel franchisors are constantly looking for value-add benefits to offer their franchisees. Offering their members an opportunity to pool their energy needs and work with an energy-management consultant to shop for a bulk rate is a crucial benefit that shouldn't be ignored.

Jim Poad, a 30-year energy industry veteran, serves as Director of Client Solutions for expense and energy management firm, Advantage IQ. In this capacity, Mr. Poad is responsible for developing and directing the Company’s energy management programs on behalf of clients. He works with clients to develop and implement a customized strategy to better manage energy usage, reduce overall operational costs, and meet overriding corporate objectives. He has helped clients save millions of dollars through the implementation of supply-side and demand-side initiatives. Mr. Poad can be contacted at 608-755-1650 or jpoad@advantageiq.com. Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.