Project Green District Energy Feasibility Study - Partners in Project ...

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TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012 7.1.3 Marketing Overview of Marketing Risks After completion of a pre-feasibility or feasibility study and after having made a decision to proceed to develop a new DES, marketing is generally the first project development activity. The degree of success in marketing will impact project definition and ultimately the detailed design. There are certain risks that should be recognized and addressed as failure to achieve marketing objectives may bring the development to a halt or if it continues the financial results would be unsatisfactory. Development of a DES is a capital intensive undertaking. The initial capital required for an EC and the associated piping system is extremely high when compared to traditional systems. The intent is to recover the incremental capital costs from energy savings. But if a DES isn’t marketed effectively the lasting benefits to customers, the buildings and the environment may not materialize. This is a risk that is often underestimated by novices in DE. While DE is such a positive initiative from an overall community energy efficiency perspective, it often suffers from being a low priority for a building owner. Provision of energy is usually a relatively small concern during development of a large Class A building, e.g. as compared with selling space, obtaining financing, obtaining development approvals, negotiating construction contracts, meeting deadlines etc, and perhaps even more so in the building operation phase. There are many real or imagined barriers for DE to overcome in order to become accepted as the preferred energy solution by a developer or owner. One of the issues is simply the time required to make a decision and a commitment. Another issue is that it is difficult to guarantee a significant cost saving, which is what building developers and owners are most interested in (they are not so much interested in societal benefits). Some DES finance and construct system capacity only after receipt of signed customer contracts. Other systems move ahead based on letters of intent. Yet other systems build capacity and then market it (this approach may be necessary in a green field situation). The approach taken depends on the financial resources, business philosophy and risk tolerance of the owners. Mitigating marketing risks and the resultant impact on financial performance is the first major risk decision to be made. Reducing Marketing Risks An important first step to reducing marketing risks is to properly target the potential customers who have the greatest likelihood of taking service. This entails an accurate understanding of their avoidable costs relative to the costs of connection including any modifications to the internal building systems. By committing early, new development will avoid the considerable initial capital required for construction of heating and cooling equipment systems. Retrofit situations are more complicated, being related to the age and condition of existing heating or cooling equipment as indicators for future avoidance of capital replacement. An attractive marketing risk mitigation strategy is to undertake an intense “kick-off” campaign to sign up customers. This is most useful where a large number of customers are anticipated. This strategy uses communications, advertising and public relations to build marketing momentum. This strategy has been used successfully by some of the newest downtown DES. 37
TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012 Another strategy is to obtain contracts from one or two anchor customers prior to proceeding with construction. In the case of some retro-fit situations, these anchor contracts may need to have pricing that provides less than target returns. This strategy reduces the overall financial risk by securing some revenue prior to project commencement but may increase the risk of not obtaining target returns. The anchor customers should be carefully chosen for their ability to influence the remaining potential customers. This strategy works best when the incremental cost of serving new customers is less than the cost of serving the anchor customers (which is often the case because additional branch lines and energy transfer stations need relatively minor increments of capital). Many existing DES utilized this strategy initially. In the case of the envisaged DES in the Pearson area there are no outstanding anchor customers that would, by themselves justify commencement of the project. Rather, it is expected that a group of several customers, in fact most of the prospects identified in Phase 1, would need to be committed. Pricing cutting in general, which emphasizes customer “savings” from existing costs, is not recommended as a marketing risk mitigation strategy. It typically uses a feasibility study performed by the DES to identify “savings”. The problems in practice are that customers are skeptical that the savings are real, in truth they are difficult to prove and customers will continually require further savings. This strategy has led to excessive price cutting resulting in poor financial performance and should be avoided. It must be taken into account that stipulating a contract as “confidential” by no means insures that it remains so. Interested parties will find out what they need to know in order to negotiate the lowest price available. Customer Behaviours The following discussion identifies customer behaviours that influence marketing risks and often require responses or decisions by the DE developer. “Wait and see” attitude Some prospects may be reluctant to contract for DE service in the initial stages of system development as this type of service is new to them. Many consumers are reluctant to be “early adopters” of new technologies or services, preferring to wait and see how it works for others. This reluctance does not only apply in retro-fit situations. It has also been seen in the initial phases of new development. Successful marketing to such prospects requires education regarding the use of DE by entities they recognize and presentation of persuasive arguments that the owners and operators have the expertise to reliably operate the DES. Distance to distribution system There may be building owners who desire DE service but who are too far from the pipe network to cost-effectively connect. If the interest of these prospects is urgent due to equipment age or performance issues, there is a high risk that they will be lost as customers. If it is considered likely that the distribution system will be extended to the area within a reasonable period, it may be feasible to install a temporary plant at or near the building site to serve that customer or group of customers in the interim. Alternately, additional costs of advancing the schedule for distribution extension can sometimes be covered by federal funding assistance. Competition from on-site plants Other potential customers may be fixated on installing and operating their own on-site plant. This is often the case when dealing with conventional HVAC engineers, for whom DE is a form 38
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