Trends in Healthcare Energy Management
January 03, 2003

By Staff
Appeared in Building Operating Management/FacilitiesNet

For healthcare facilities, energy has always been an element that is essential to the delivery of quality services. According to the United States Department of Energy, inpatient facilities spend $5.3 trillion annually on energy and use more energy per square foot than any other commercial building type. In addition to traditional energy requirements, the explosion in the use of technology by healthcare facilities has increased energy demand, and the need for a sufficient and secure energy supply has become even more critical than ever before.

While the demand for energy is rising, so too are costs. This is the result of several factors, including increased demand in all sectors nationwide, aging energy infrastructure and the deregulation of energy markets.

Energy thus accounts for a growing percentage of healthcare operating costs. At the same time, as the dynamics of the healthcare system have changed, there is an ever greater focus on controlling costs. Therefore, healthcare facilities must now treat their energy supply costs, reliability and quality as risks to be managed.

Challenge and Opportunity
Energy management in healthcare today is both a challenge and an opportunity. A healthcare facility must balance its power needs realistically against its operating budget. The best ways to meet this challenge are by combining traditional approaches to energy management with more innovative ones.

New approaches to handling energy requirements include demand side management, which involves ways to reduce the need for energy, as well as supply side management, which seeks the most cost-effective ways to procure and distribute the needed supply.

On the demand side, the key is conservation. Facilities should create system-wide energy conservation programs. This can be done by identifying cost-effective measures to reduce energy consumption and implementing a program of system efficiency improvements.

Facilities should examine how they use energy to determine where it may be possible to cut back, especially in older buildings. As hospitals construct new buildings, the most energy-efficient systems should be considered. Older buildings are prime candidates for reduced energy use. For example, light fixtures can be modified, or heating and cooling systems can be altered from constant volume to variable drive applications. Process instrumentation, equipment changeovers, and new controls improvements may also be considered.

One approach is to contract a conservation performance specialist who can evaluate the systems and recommend cost-saving modifications. The cost of retaining a contractor to ensure efficient performance should be amply offset by the savings that result. An independent expert should be engaged to verify the validity of the recommendations and the most cost-effective way for implementation.

The steps to supply side management may include load profiling—understanding your existing loads; load aggregation—combining the loads of multiple buildings, campuses or companies; on-site generation alternatives such as cogeneration; new procurement strategies such as purchasing energy from suppliers other than the local utility company; electrical system upgrades to remove old, inefficient equipment; and peak shaving opportunities—using alternate energy sources to reduce the maximum amount of electricity used and the demand charges on bills.

Ensuring a Secure Supply
The bottom line is that secure sources of power must be available at all times. By their very nature, healthcare facilities must be built with inherent redundancy in their physical infrastructure. State codes mandate emergency power supplies to ensure that critical facilities will remain safely in operation even if there is an interruption in power. Hospitals are taking varied approaches to meeting this mandate. Diesel-fueled emergency generators have typically been installed on site to start up quickly and maintain the power supply for a period of time after an outage.

These have certain drawbacks in that the diesel fuel creates air quality issues, and furthermore, generators will only keep going for as long as their fuel source lasts (how big is your tank?). Another backup is an electricity distribution system that provides for two separate utility feeds into the facility so that one can automatically take over the power feed if the other goes out of service for any reason. Negotiations are required with the local utility company to determine the availability of a second service and whether it can be isolated to a separate sub-station for enhanced reliability.

Another option is to diversify power sources. This might mean utilizing natural gas to generate electricity on site as well as investigating possibilities for cogeneration—using the waste heat from the generation process to supplement or take over thermal load requirements like building heat, domestic water heating, or even chilled water, through absorption chillers or steam turbine driven centrifugal chillers. This can make good sense economically since the facility does not have to pay for the electricity that would have been required to address these thermal loads and operating costs are thus significantly reduced. The 7 X 24 operating hours of hospitals and the high thermal loads make cogeneration a good fit.

There are operational costs as well as a significant capital investment to consider, but the savings often outweigh those costs and provide quick paybacks. Both approaches also put the facility in greater control of its energy supply and may provide an opportunity for revenue if there is excess power to be sold back to the grid.

Can Deregulation Help?
In today’s deregulated electricity market, healthcare facilities find themselves with a wider range of procurement options for obtaining their energy supplies. Rather than simply depending on the local utility, a hospital can hold competitive bidding for its energy supply contracts, which can cut costs by as much as 5 percent. Another possibility is to negotiate long-term supply contracts with energy service providers (ESPs) who market electricity as a commodity.

The ESPs may control generation by operating power plants on their own and/or have access to a large pool of other generators. As brokers for a large number of customers, they can leverage their position to negotiate for better prices. Power supply contracts with ESPs lock in a certain amount of electricity at fixed rates over a fixed period of time, thus guaranteeing savings. There is evidence that consumers with contracts of this kind did not suffer from the dramatic fluctuations when prices spiked during the volatile electricity market of 2000.

For those with doubts about the reliability of outside providers, a number of steps can be taken. For one, shorter-term arrangements of 12 to 18 months would take advantage of lower prices while keeping options open for the future. Clauses can be included that would allow the buyer to terminate the contract or suspend the business in the event of specified circumstances, such as a drop in its demand.

To protect itself against the failure of an ESP or an energy services company (ESCO), a facility can request the right to approve or to terminate the contract if its supply source is changed. If the provider is only a broker, a consumer may also negotiate an agreement that includes the right to know the actual source of the power so that it may deal directly with that source in case the intermediary runs into difficulty. The risk of electricity being cut off altogether is mitigated by the fact that regulations require the local franchised utility, as the provider of last resort, to supply power to critical facilities in case of need.

Similar arrangements can be made when a facility is using natural gas. The deregulated gas market offers a multitude of wholesale gas marketing companies to choose from, and it is always prudent to have a backup supplier in addition to the regular provider. Since there are no providers of last resort for natural gas, it is also wise to have an outside fuel storage capability (fuel oil or propane) as a hedge against supply disruption. The quantity should be sufficient to cover needs until a replacement is available.

Outsourcing Energy Management
Among the newest strategies is the outsourcing of energy management. Outsourcing various functions is not new to the healthcare industry; in recent years, more and more services, such as food preparation, laundry, waste disposal, bill collection and information technology, have been entrusted to outside parties. Energy management has now joined the list, with an increasing number of hospitals today outsourcing their energy management and electricity procurement. This approach has several advantages, the most obvious of which is that energy issues are handled by those whose primary business is in that field, rather than by an organization whose area of competence is in a different field entirely—healthcare.

There are several ways to take advantage of this arrangement. One potentially appealing approach to those in need of funds is to monetize existing energy while outsourcing operations and supply source assets: a facility can make the most of what it already has by selling its energy infrastructure—including any normal power generating capability, boiler capacity, chilled water capacity, emergency power generating capacity, and so on—to a facilities management company that will take over operations and sell the power back to the facility.

Another innovative step would be to have a qualified firm fund the conservation measures and even new generating capacity needed for expansion. In this case, the hospital could have a plant designed, built and operated by a third-party company and would buy the resulting power directly.

In both cases, the outside company would be in charge of equipment, maintenance and technical upgrades, as well as procuring any supplementary power that might be needed and would take full responsibility for providing a reliable flow of energy. The agreement should include a provision for the healthcare facility to regain or take over title to the asset in specified cases, allowing it to run the plant itself or assign operations to a different party if the need arose.

Deciding whether an outsourcing strategy makes sense requires a full investigation of quantitative and qualitative issues applicable to each individual facility. A detailed life-cycle cost analysis must be done that compares the costs of the hospital performing its own energy management to those of assigning it to an outside party. Furthermore, before electing third-party management, the management capability and technological level of the company, and the type of business arrangement on the table, should be thoroughly evaluated.

The outsourcing analysis should be undertaken with the assistance of an independent consultant, acting in the interests of the facility, with the expertise to analyze and assess the options and to assist in the negotiations. This consultant can be used to establish the baseline costs of the facility, assist in the creation of third-party requests for proposals and interviews, review the design process, the construction process, and perhaps most importantly, the operational process, at appropriate intervals.


Bill Scrantom is a Senior Vice President and Director of Healthcare Services in the Los Angeles office of Syska Hennessy Group, an engineering, technology and construction services firm that provides technical solutions in such areas as building system design, facilities management, energy management, technology consulting/engineering, and turnkey design/build services.