The University will save $15 million by 2014 on utilities costs by asking suppliers to compete for an energy contract, according to Christopher Powell, director of sustainable energy and environmental initiatives. Though price fluctuations are common for oil and natural gas, the University avoids paying high energy costs by asking suppliers to participate in a reverse auction every two years to secure a contract.
About 92 percent of the current utilities budget — roughly $19 million for the current fiscal year — is locked into contracts, according to Powell. "The pricing for all that energy that we purchase and use has already been hedged," he said. The University cannot see fluctuations in these cost until contracts are renegotiated.
Already, 84 percent of the utilities budgets for the fiscal year beginning July 1, 2012 and the one beginning July 2013 are locked in to contracts.
The University anticipated the reverse auction system would save $15 million over five years, The Herald reported Feb. 27, 2009.
The University "basically locked up (the utilities budget) for that five-year period," Powell said. "We know we're going to achieve those savings. In essence, we are probably ahead of the $15 million for those five years."
Within this year's $19 million utilities budget, Powell said roughly about $7 million is used for heating, $10 million goes toward electricity and the remainder pays for water, sewage and interest on a $20 million loan from the University to spend on increasing efficiency.
In 2008, the University set a goal of reducing its carbon footprint to 42 percent below 2007 levels by 2020. Prior to the introduction of reverse auctions, the biggest source of emissions came from the University's heating.
The central heating plant used Number 6 fuel oil, which is "a heavy, gooey kind of oil that is low-cost" for its buildings during the winter, Powell said. Number 6 oil has a higher energy content than traditional heating oil because of its density.
"We decided to stop using that Number 6 oil and use natural gas instead," he said. "This helped us drop our emissions in a major way."
Although natural gas is more expensive than the Number 6 oil, the University had negotiated a natural gas contract before oil prices rose in recent years so it did not have to pay such high prices, he said.
‘Everyone starts bidding'
Powell brought the idea of a reverse auction to the University from his previous job with United Technologies Corp, he said. "It just took some time to convince the administration that this was a good methodology for Brown."
Before the use of reverse auctions, the University's electricity and other utilities were supplied by local utility companies, he said.
"That's actually riskier, because those prices can change, as opposed to locking in the prices," he added.
The reverse auctions start online. The University posts its terms and energy consumption profile, telling pre-qualified bidders what it wants to buy "on a daily basis," though "that amount can vary by, say, 20 percent," he said.
The pre-qualification ensures that the bidder can continue its supply in future years and also stay in business. The University's pre-qualification standards specifically limit carbon emissions.
"The guy that has the high carbon footprint wouldn't be able to bid in the system if he didn't meet the requirement," Powell said.
The University holds a reverse auction every two years to negotiate either a heating or electricity contract that will take effect two years after the auction, Powell said. On the selected day, bidding opens for an hour.
"When it gets to that last five minutes, everyone starts bidding," he said. "The companies can't see who is making the bid. They're bidding to get the lowest price and deciding how far to go."
Alternatives to the auction
The University has also evaluated the feasibility of providing its own electricity to reduce its utilities spending.
But Powell said regulatory rules in the state have made that path a difficult one to pursue, adding that the decision comes down to where the University could make its own energy.
"Because we're in a city, we're limited in terms of putting solar panels," he said. "What we can do is make our buildings much more efficient. I have another $20 million to spend on efficiency."
According to Powell, heating and electricity costs are expected to drop by 20 percent when that $20 million is spent.
The University will continue to use the reverse auction process to buy utilities in the future. "It is so efficient and so transparent. It gets you to the point where you have the least possible costs," Powell said.
Powell said he cannot predict how much money the reverse auction buying will save the University in the next five years until auctions for an electricity contract beginning in July 2014 and July 2015 take place in mid- to late April.