EXHIBIT 10.10
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into as of this date
by and between ELGIN TECHNOLOGIES, INC. ("Corporation"), and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ("Employee").
WHEREAS, Employer and Employee desire that the term of this Agreement begin on
February 21, 2000 ("Effective Date").
WHEREAS, Employer desires to employ Employee as its President and Chief
Executive Officer and Employee is willing to accept such employment by Employer,
on the terms and subject to the conditions set forth in this Agreement.
NOW THEREFORE, IT IS AGREED AS FOLLOWS:
Section 1. Duties. During the term of this Agreement, Employee agrees to be
employed by and to serve Employer as its President and Chief Executive Officer,
and Employer agrees to employ and retain Employee in such capacities. Employee
shall devote the substantial portion of his business time, energy, and skill to
the affairs of the Employer as Employee shall report to the Employer's Board of
Directors and at all times during the term of this Agreement shall have powers
and duties at least commensurate with his position as President and Chief
Executive Officer.
Section 2. Term of Employment.
2.1 Definitions. For the purposes of this Agreement the following terms shall
have the following meanings:
A. "Termination For Cause" shall mean termination by Employer of
Employee's employment by Employer by reason of Employee's willful dishonesty
towards, fraud upon, or deliberate injury or attempted injury to, Employer or by
reason of Employee's willful material breach of this Agreement that has resulted
in material injury to Employer.
B. "Termination Other Than For Cause" shall mean termination by Employer
of Employee's employment by Employer (other than in a Termination for Cause) and
shall include constructive termination of Employee's employment by reason of
material breach of this Agreement by Employer, such constructive termination to
be effective upon notice from Employee to Employer of such constructive
termination.
C. "Voluntary Termination" shall mean termination by Employee of
Employee's employment by Employer other than (i) constructive termination as
described in subsection 2.1(b), (ii) "Termination Upon a Change in Control," and
(iii) termination by reason of Employee's death or disability as described in
Sections 2.5 and 2.6.
D. "Termination Upon a Change in Control" shall mean a termination by
Employee of Employee's employment with Employer within 120 days following a
"Change in Control."
E. "Change in Control" shall mean (i) the time that Employer first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or
more of Employer's outstanding securities, unless a majority of the "Continuing
Directors" approves the acquisition not later than ten (10) business days after
Employer makes that determination, or (ii) the first day on which a majority of
the members of the Employer's Board of Directors are not "Continuing Directors."
F. "Continuing Directors" shall mean, as of any date of determination, any
member of the Board of Directors of Employer who (i) was a member of that Board
of Directors on February 21, 2000, (ii) has been a member of that Board of
Directors for the two years immediately preceding such date of determination, or
(iii) was nominated for election or elected to the Board of Directors with the
affirmative vote of the greater of (x) a majority of the Continuing Directors
who were members of the Board at the time of such nomination or election or (y)
at least four Continuing Directors.
2.2 Initial Term. The term of employment of Employee by Employer shall be for a
period of two (2) years beginning on the Effective Date ("Initial Term"), unless
terminated earlier pursuant to this Section. At any time prior to the expiration
of the Initial Term, Employer and Employee may by mutual written agreement
extend Employee's employment under the terms of this Agreement for such
additional periods as they may agree.
2.3 Termination For Cause. Termination For Cause may be effected by Employer at
any time during the term of this Agreement and shall be effected by written
notification to Employee. Upon Termination For Cause, Employee shall promptly be
paid all accrued salary, bonus compensation to the extent earned, vested
deferred compensation (other than pension plan or profit sharing plan benefits
which will be paid in accordance with the applicable plan), any benefits under
any plans of the Employer in which Employee is a participant to the full extent
of Employee's rights under such plans, accrued vacation pay and any appropriate
business expenses incurred by Employee in connection with his duties hereunder,
all to the date of termination, but Employee shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.4 Termination Other Than For Cause. Notwithstanding anything else in this
Agreement, Employer may effect a Termination Other Than For Cause at any time
upon giving written notice to Employee of such termination. Upon any Termination
Other Than For Cause, Employee shall promptly be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Employer in which
Employee is a participant to the full extent of Employee's rights under such
plans (including accelerated vesting, if any, of awards granted to Employee
under the Employer's stock option plan), accrued vacation pay and any
appropriate business expenses incurred by Employee in connection with his duties
hereunder, all to the date of termination, and all severance
2
compensation provided in Section 4.2, but no other compensation or reimbursement
of any kind.
2.5 Termination by Reason of Disability. If, during the term of this Agreement,
Employee, in the reasonable judgment of the Board of Directors of Employer, has
failed to perform his duties under this Agreement on account of illness or
physical or mental incapacity, and such illness or incapacity continues for a
period of more than six (6) consecutive months, Employer shall have the right to
terminate Employee's employment hereunder by written notification to Employee
and payment to Employee of all accrued salary, bonus compensation to the extent
earned, vested deferred compensation (other than pension plan or profit sharing
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Employer in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, with the exception of medical
and dental benefits which shall continue through the expiration of the Initial
Term, but Employee shall not be paid any other compensation or reimbursement of
any kind, including without limitation, severance compensation.
2.6 Death. In the event of Employee's death during the term of this Agreement,
Employee's employment shall be deemed to have terminated as of the last day of
the month during which his death occurs and Employer shall promptly pay to his
estate or such beneficiaries as Employee may from time to time designate all
accrued salary, bonus compensation to the extent earned, vested deferred
compensation (other than pension plan or profit sharing plan benefits which will
be paid in accordance with the applicable plan), any benefits under any plans of
the Employer in which Employee is a participant to the full extent of Employee's
rights under such plans, accrued vacation pay and any appropriate business
expenses incurred by Employee in connection with his duties hereunder, all to
the date of termination, but Employee's estate shall not be paid any other
compensation or reimbursement of any kind, including without limitation,
severance compensation.
2.7 Voluntary Termination. In the event of a Voluntary Termination, Employer
shall promptly pay all accrued salary, bonus compensation to the extent earned,
vested deferred compensation (other than pension plan or profit sharing plan
benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Employer in which Employee is a participant to
the full extent of Employee's rights under such plans, accrued vacation pay and
any appropriate business expenses incurred by Employee in connection with his
duties hereunder, all to the date of termination, but no other compensation or
reimbursement of any kind, including without limitation, severance compensation.
2.8 Termination Upon a Change in Control. In the event of a Termination Upon a
Change in Control, Employee shall immediately be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
pension plan or profit sharing plan benefits which will be paid in accordance
with the applicable plan), any benefits under any plans of the Employer in which
Employee is a participant to the full extent of Employee's rights under such
plans (including accelerated vesting, if any, of any awards granted to Employee
under Employer's Stock Option Plan), accrued vacation pay and any appropriate
business expenses
3
incurred by Employee in connection with his duties hereunder, all to the date of
termination, and all severance compensation provided in Section 4.1, but no
other compensation or reimbursement of any kind.
2.9 Notice of Termination. Employer may effect a termination of this Agreement
pursuant to the provisions of this Section upon giving thirty (30) days' written
notice to Employee of such termination. Employee may effect a termination of
this Agreement pursuant to the provisions of this Section upon giving thirty
(30) days' written notice to Employer of such termination.
Section 3. Salary, Benefits and Bonus Compensation.
3.1 Base Salary. As payment for the services to be rendered by Employee as
provided in Section 1 and subject to the terms and conditions of Section 2,
Employer agrees to pay to Employee a "Base Salary" during the Initial Term and
any extensions thereof in the amount of ONE HUNDRED AND FIFTY THOUSAND DOLLARS
$150,000 per annum payable in equal monthly installments of TWELVE THOUSAND FIVE
HUNDRED DOLLARS ($12,500).
3.2 Bonuses. Employee shall be eligible to receive a bonus for each year (or
portion thereof) during the Initial Term and any extensions thereof this
Agreement and any extensions thereof, based upon the financial performance of
the Employer during such year, as follows:
(a) TWENTY FIVE THOUSAND DOLLARS ($25,000), if the Employer attains annual sales
of at least TWELVE MILLION DOLLARS (($12,000,000), plus
(b) TWENTY FIVE THOUSAND DOLLARS ($25,000) if the Employer attains annual EBITDA
of at least FIVE HUNDRED THOUSAND DOLLARS ($500,000)
3.3 Additional Benefits. During the term of this Agreement, Employee shall be
entitled to the following additional benefits:
A. Employee Benefits. Employee shall be eligible to participate in such of
Employer's benefits and deferred compensation plans as are now generally
available or later made generally available to executive officers of the
Employer, including, without limitation, Employer's Stock Option Plan, profit
sharing plans, annual physical examinations, dental and medical plans, personal
catastrophe and disability insurance, financial planning, retirement plans and
supplementary executive retirement plans, if any. For purposes of establishing
the length of service under any benefit plans or programs of Employer,
Employee's employment with the Employer will be deemed to have commenced on the
Effective Date. Notwithstanding the general availability of the foregoing
benefit plans to the Employers's executive officers, Employer will in any event
provide to Employee during the Initial Term and any extensions therof:
4
(i) Major Medical Insurance coverage for the Employee, his wife and
his children; and
(ii) Non-statutory options to purchase TWO HUNDRED THOUSAND
(200,000) shares of the Employer's common stock for each year that this
agreement is in effect, at an exercise price equal to the average market bid
price for the thirty (30) day period preceding the date of such options, to be
granted by the Employer on or about the forty-fifth day following the end of
each year of the term hereof Each such option will vest over the three (3) year
period commencing on the date that it is granted at the rate of thirty-three and
thirty-three one-hundredths percent (33.33%) per year.
D. Vacation. Employee shall be entitled to four (4) weeks of vacation
during each year during the term of this Agreement and any extensions thereof,
prorated for partial years.
C. Moving and Temporary Housing Costs. The Employer will reimburse
Employee for fifty percent (50%) of his reasonable moving costs associated with
his relocation and one hundred percent (100%) of a temporary furnished executive
residence for a reasonable period of time until he has secured permanent
housing.
D. Automobile Allowance. For the Initial Term and any extensions thereof,
the corporation shall provide Employee with a reasonable annual automobile
allowance.
E. Reimbursement for Expenses. During the Initial Term and any extensions
thereof, Employer shall reimburse Employee for reasonable and properly
documented out-of-pocket business and/or entertainment expenses incurred by
Employee in connection with his duties under this Agreement.
Section 4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon a Change in
Control. In the event Employee's employment is terminated in a Termination Upon
a Change in Control, Employee shall be paid as severance compensation his Base
Salary (at the rate payable at the time of such termination), for a period of
the lesser of the remaining portion of the Initial Term or four (4) months from
the date of such termination provided, however, that if Employee is employed by
a new employer during such period, the severance compensation payable to
Employee during such period will be reduced by the amount of compensation that
Employee actually receives from the new employer. However, Employee is under no
obligation to mitigate the amount owed Employee pursuant to this Section by
seeking other employment or otherwise. Notwithstanding anything in this Section
to the contrary, Employee may in Employee's sole discretion, by delivery of a
notice to Employer within thirty (30) days following a Termination Upon a Change
in Control, elect to receive Compensation in the form of a lump sum severance
payment by bank cashier's check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section.
Employee shall also be entitled
5
to an accelerated vesting of any awards granted to Employee under the Employer's
Stock Option Plan to the extent provided in the stock option agreement entered
into at the time of grant, if any. Employee shall continue to accrue retirement
benefits and shall continue to enjoy any benefits under any plans of the
Employer in which Employee is a participant to the full extent of Employee's
rights under such plans, including any perquisites provided under this
Agreement, though the remaining term of this Agreement; provided, however, that
the benefits under any such plans of the Employer in which Employee is a
participant, including any such perquisites, shall cease upon re-employment by a
new employer.
4.2 Severance Compensation in the Event of a Termination Other Than for Cause.
In the event Employee's employment is terminated in a Termination Other Than for
Cause, Employee shall be paid as severance compensation his Base Salary (at the
rate payable at the time of such termination), for a period of the lesser of the
remaining portion of the Initial Term or four (4) months from the date of such
termination, on the dates specified in Section 3.1; provided, however, that if
Employee is employed by a new employer during such period, the severance
compensation payable to Employee during such period will be reduced by the
amount of compensation that Employee is receiving from the new employer.
Employee is under no obligation to mitigate the amount owed to the Employee
pursuant to this Section by seeking employment or other compensation. Employee
shall be entitled to an accelerated vesting of any awards granted to Employee
under Employer's Stock Option Plan to the extent provided in the stock option
agreement entered into at the time of grant, if any.
4.3 No Severance Compensation Upon Other Termination. In the event of a
Voluntary Termination, Termination For Cause, termination by reason of
Employee's disability pursuant to Section 2.6, Employee or his estate shall not
be paid any severance compensation.
4.4 Limit on Aggregate Compensation Upon a Change in Control. Notwithstanding
anything else in this Agreement, solely in the event of a Termination Upon a
Change in Control pursuant to Section 2.8, the amount of severance compensation
paid to Employee under Section 2 and 4 or otherwise, but exclusive of any
payments to Employee in respect of any stock options then held by Employee (or
any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time) or by virtue of Employee's exercise
of a Limited Right under the Option Plan upon a Change in Control, shall not
include any amount that Employer is prohibited from deducting for federal income
tax purposes by virtue of Section 280G of the Internal Revenue Code or any
successor provision.
Section 5. Payment Obligations. Employer's obligation to pay Employee the
compensation and to make the arrangements provided herein shall be
unconditional, and Employee shall have no obligation whatsoever to mitigate
damages hereunder. If litigation after a Change in Control shall be brought to
enforce or interpret any provision contained herein, Employer, to the extent
permitted by applicable law and the Employers' Articles of Incorporation and
Bylaws, hereby
6
indemnifies Employee for Employee's reasonable attorneys' fees and disbursements
incurred in such litigation.
Section 6. Confidentiality. Employee agrees that all confidential and
proprietary information relating to the business of Employer shall be kept and
treated as confidential both during and after the term of this Agreement, except
as may be permitted in writing by Employer's Board of Directors or as such
information is within the public domain or comes within the public domain
without any breach of this Agreement.
Section 7. Withholdings. All compensation and benefits to Employee hereunder
shall be reduced by all federal, state, local and other withholdings and similar
taxes and payments required by applicable law.
Section 8. Indemnification. In addition to any rights to indemnification to
which Employee is entitled to under the Employer's Articles of Incorporation and
Bylaws, Employer shall indemnify Employee at all times during and after the term
of this Agreement to the maximum extent permitted under any applicable state
law, and shall pay Employee's expenses in defending any civil or criminal
action, suit, or proceeding in advance of the final disposition of such action,
suit or proceeding, to the maximum extent permitted under such applicable state
laws.
Section 9. Notices. Notice under this Agreement shall be in writing, sent by
mail, national overnight delivery service or facsimile and shall be effective
when actually delivered. If mailed, notice shall be deemed effective 48 hours
after mailing as registered or certified mail, postage prepaid, directed to the
other party at the address set forth below or such other address as the party
may indicate by written notice to the other:
To Employer:
Elgin Technologies
▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Chairman of the Board
With a copy to:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
Lev & Berlin, P.C.
▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇. ▇▇▇▇▇
To Employee:
Mr. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
7
Section 10. Waiver. Failure of either party at any time to require performance
of any provision of this Agreement shall not limit the party's right to enforce
the provision, nor shall any waiver of any breach of any provision be a waiver
of any succeeding breach of any provision or a waiver of the provision itself
for any other provision.
Section 11. Assignment. Except as otherwise provided within this Agreement,
neither party hereto may transfer or assign this Agreement without prior written
consent of the other party.
Section 12. Law Governing. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Hampshire.
Section 13. Arbitration. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise upon or in respect of the
Agreement, and the meaning and construction hereof every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall be selected in accordance with the rules of the American
Arbitration Association and such dispute, difference, or disagreement shall be
settled by arbitration in accordance with the then prevailing commercial rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbiter may be entered in any court having jurisdiction thereof.
Section 14. Attorney Fees. In the event an arbitration, suit or action is
brought by any party under this Agreement to enforce any of its terms, or in any
appeal therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
Section 15. Titles and Captions. All article, section and paragraph titles or
captions contained in this Agreement are for convenience only and shall not be
deemed part of the context nor affect the interpretation of this Agreement.
Section 16. Entire Agreement. This Agreement contains the entire understanding
between and among the parties and supersedes any prior understandings and
agreements among them respecting the subject matter of this Agreement.
Section 17. Agreement Binding. This Agreement shall be binding upon the heirs,
executors, administrators, successors and assigns of the parties hereto.
8
Section 18. Further Action. The parties hereto shall execute and deliver all
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of this Agreement.
Section 19. Counterparts. This Agreement may be executed in several counterparts
and all so executed shall constitute one Agreement, binding on all the parties
hereto even though all the parties are not signatories to the original or the
same counterpart.
N WITNESS WHEREOF, the parties have executed this agreement as of the date first
set forth above.
EMPLOYER
ELGIN TECHNOLGIES, INC.
/s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇
-------------------------------------
By: ▇▇▇▇▇▇▇ ▇▇▇▇▇
Its: Interim Chief Executive Officer
EMPLOYEE
▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
/s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
-------------------------------------
9
EXHIBIT A-1
The Elgin Master Light Ballast System
Market Potential and Economic Uncertainty
▇▇▇▇▇ ▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇
June 8, 1998
----------------------------------
THE ECONOMICS RESOURCE GROUP, INC.
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
(▇▇▇) ▇▇▇-▇▇▇▇
Elgin MLBS 2
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I INTRODUCTION
The Elgin Master Light Ballast System (MLBS) is a highly efficient fluorescent
lighting ballast system that delivers considerable operating cost savings and
high quality features when compared against any currently available fluorescent
light ballast. In conjunction with the imminent introduction of the MLBS in the
marketplace, ▇▇▇▇▇ ▇▇▇▇▇ and Elgin Corporation have asked The Economics Resource
Group, Inc. to evaluate three critical questions: i) What is the size of the
market that the MLBS could potentially capture both nationally as well as within
selected states?(1), ii) What is the value of the MLBS in light of the size and
location of the markets?, and iii) What will be the effects of electric industry
restructuring on the MLBS markets?
These questions are of significance to Elgin because the markets in which the
MLBS will be introduced have historically been heavily influenced by both
federal and state government. Heretofore, a substantial portion of the demand
for efficient fluorescent lighting ballasts has been driven by government and
state mandated demand side management (DSM) and energy efficiency programs. The
proliferation of these programs has resulted in the investment of substantial
monies directed toward the replacement of antiquated, inefficient fluorescent
lighting and ballast systems, as well as incandescent lighting systems.
At the same time, electricity industry restructuring is creating an exciting new
opportunity for the MLBS. Although many federal and state programs will
continue, the introduction of competition amongst suppliers of electricity is
establishing a landscape where the savvy electricity marketer or utility
subsidiary is bundling a variety of products in order to offer the lowest costs
to a consumer. An important component of such an "electricity package" will be
simple, easy to install, energy efficient products that allow a marketer to
boast energy savings for the consumer and as a result offer the consumer a lower
energy price.
The following three sections of this report examine respectively the size of the
current and future markets available to the MLBS, the potential MLBS sales
volume and value, and how electricity industry restructuring is changing
electricity
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(1) The states of New Jersey, Pennsylvania, Maryland, Ohio, Wisconsin and
California are studied in detail in this report.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 3
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markets in states and regions. First we analyze the potential market share that
the MLBS could capture in the commercial lighting retrofit and new commercial
building construction markets. We have purposely biased our analysis to err on
the conservative size by focussing only on the commercial lighting sector.
Second we evaluate, from the perspective of a potential purchaser of the MLBS,
the financial performance of the product. Within this framework the potential
sales value of the MLBS to its patent holders is established. Finally we discuss
the current state of electricity industry restructuring, and how it will impact
the introduction of the MLBS, with a particular focus on New Jersey,
Pennsylvania, Maryland, Ohio, Wisconsin and California.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 4
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II MAGNITUDE OF THE MASTER LIGHT BALLAST SYSTEM MARKET
The market potential for the MLBS is enormous. Since 1985, shipments of
electronic ballasts have grown to more than 35 million units or greater than 45%
of the total domestically produced ballasts shipped to the U.S. commercial
sector. Possessed with a finely tuned strategy, the MLBS stands poised to
capture some of this vast market.
Two markets are of most interest to distributors of the MLBS: 1) the fluorescent
lighting retrofit market, and 2) the new construction market. The retrofit
lighting market, driven by state and federal energy conservation programs,
offers substantial distribution potential. Nationally half of the existing
commercial buildings illuminated with fluorescent lights, or some 23 billion
square feet, employ ballasts that are less efficient than the MLBS. Of these 23
billion square feet, more than 40% continue to use the least efficient ballast
systems, sold in the U.S. prior to 1991.
The new commercial building construction market also offers substantial market
opportunity for the MLBS. Each year some 2 billion square feet of new commercial
building space is constructed, and most of this space will be lighted with
fluorescent lamps. The combination of these two markets provide a sales
potential of 150 million MLBS units.(2)
II.A Background
The MLBS is a new technology for providing the power and control required to
properly and efficiently illuminate fluorescent light bulbs. The MLBS replaces
the conventional fixture configuration--where one ballast is necessary for every
two fluorescent bulbs--with an electronic ballast system that combines a 16 or
32 fixture power supply with individual fixture "drivers".(3) Although
electronic ballasts have
----------
(2) Although the MLBS is a "system," in order to simplify our discussion we have
chosen to express sales potential in number of units where a unit corresponds to
a single ballast.
(3) See Logic Laboratories, Inc., June 13, 1997, "Background and Technology
Primer" for a detailed discussion of fluorescent lights, ballast technologies
and the MLBS.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 5
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been manufactured for more than ten years, the MLBS is more efficient than any
other electronic ballast system on the market.
The difference between the high efficiency magnetic and electronic ballasts is
described by their names: Electronic ballasts eliminate the need for a magnet by
using electronic circuitry to control the voltage and electrical current, while
high efficiency magnetic ballasts are optimally designed core-coil type
ballasts. Electronic ballasts reduce electricity consumption 20-25% when
compared with the older core-coil design, and high efficiency magnetic ballasts
reduce electricity consumption 10-15%. The MLBS represents a major improvement
over existing electronic ballasts, using as much as 40% less energy than the
core-coil design (see Table 1).(4)
Table 1:
Modern Ballast Electricity Savings in Comparison to Core-Coil Type
Ballasts
================================================================================
Ballast Type Savings Compared to Core-Coil Type Ballast
--------------------------------------------------------------------------------
High-Efficiency Magnetic 10-15%
Electronic 20-25%
MLBS 35-40%
================================================================================
Source: LBNL Lighting Report; Logic Laboratories, Inc., 6/13/97 "Background and
Technology Primer"
Currently there are three types of fluorescent light ballast technologies
available in the market: 1) high efficiency magnetic, 2) hybrid, and 3)
electronic. Hybrid ballasts account for a very small share of the market, and we
have ignored them in our analysis. Figure 1 shows the quantities and types of
ballasts shipped to the U.S. commercial sector since 1977.(5) Sales of magnetic
core-coil ballasts to the U.S. Commercial sector declined precipitously over the
three year period 1988-1991, primarily as a result of the implementation of
federal and state efficiency standards. Both high efficiency magnetic and
electronic ballast sales skyrocketed during this period, but as Figure 1 shows
electronic ballasts have begun to capture
----------
(4) See Logic Laboratories, Inc., June 13, 1997, "Background and Technology
Primer."
(5) The Bureau of the Census reports the shipments of ballasts to the U.S.
commercial sector. We assume that these shipments represent total sales and that
the majority of ballasts are installed in the year they are shipped.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 6
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an ever increasing larger share of the market. Today electronic ballasts control
over 45% percent of the U.S. commercial market.
Figure 1:
Shipments of Domestically Produced Ballasts to the U.S. Commercial
Sector
[GRAPHIC OMITTED]
Source: Bureau of the Census MQ36C; ▇▇▇▇▇▇▇▇ Berkeley National Laboratory
Lighting Market Sourcebook for the U.S., December 1997.
II.B MLBS Markets
The primary target market considered in this report for the MLBS is the
commercial building sector. More than 77% of existing US commercial floorspace
is lit by fluorescent light fixtures and commercial buildings are the dominant
users of fluorescent lighting (see Figure 2).(6)
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(6) Although industrial facilities rely on fluorescent lamps, the total
floorspace attributed to industrial facilities is approximately 25% of that of
commercial buildings. Further, numerous detailed data sources are available
describing commercial building characteristics, as opposed to industrial
building characteristics. Therefore, this analysis has not incorporated
industrial facilities and as a
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 7
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Figure 2:
Percent of Commercial Floorspace by Lighting Type in 1995
[GRAPHIC OMITTED]
Source: EIA, 1995 Commercial Building Energy Consumption Survey.
With the focus narrowed to commercial buildings two significant potential
outlets for the MLBS emerge; new commercial building construction or
rehabilitation and retrofitting of existing fluorescent lighting systems. Each
of these markets holds substantial potential for the MLBS, but each has unique
characteristics that require separate analysis. In the case of new construction,
the MLBS will be competing against existing electronic ballast technology. In
this situation an investor will apply an up-front cost test that may or may not
adequately take into account long term operational savings. In the case of
retrofits the MLBS will be competing in a market where a significant proportion
of existing buildings have already been retrofitted, narrowing the potential
breadth of this market. These two
--------------------------------------------------------------------------------
result our findings should be viewed as very conservative estimates. We have
also not studied the potential for the MLBS to serve the residential lighting
market.
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Elgin MLBS 8
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market opportunities have different attributes over both the short and long
term. The following sections develop an estimate of the potential magnitude of
each of these markets.
II.B.1 Energy Conservation Retrofits
Lighting retrofits associated with energy conservation projects represent the
largest market opportunity for the MLBS. Energy conservation projects have
driven the adoption of newer, more efficient ballast technologies during the
previous ten years.
Figure 3 shows nationwide trends in investor owned utilities' expenditures for
demand side management and energy conservation programs. This figure
Figure 3:
Demand Side Management/Energy Conservation Program Expenditures
[GRAPHIC OMITTED]
Source: EIA Annual Energy Review and Personal Communication with the EIA.
clearly explains why high efficiency magnetic and electronic ballast sales took
off in the early 90s: Growth in energy conservation program expenditures
coincides exactly with the increase in ballast sales. Prior to these programs,
the majority of
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ballast sales were driven by new building construction and rehabilitation. Once
the DSM programs commenced in ▇▇▇▇▇▇▇, ballast sales boomed as existing
commercial and industrial building stock began to retrofit its lighting.
The prominent role that energy conservation programs have played in driving the
demand for efficient ballasts is of major importance when analyzing the future
retrofit market for the MLBS. Energy conservation programs target existing
inefficient buildings and typically use incentives to persuade building owners
to implement conservation measures. Given that the stock of existing buildings
was finite when these programs were conceived, it is imperative to consider how
many commercial buildings have been retrofitted since the programs' inception in
order to determine the remaining size of the retrofit market.
Figure 4 shows the percentage of commercial floorspace with energy efficient
ballasts by census division as reported in the ETA Commercial Building Energy
Consumption Survey (CBECS).(7) These data show that the Northeast and the
Pacific currently have more floorspace with energy efficient ballasts than other
parts of the country and that 48% of the total floorspace in the United States
is lighted by these ballasts. Figure 4 clearly demonstrates the importance of
recognizing the extent to which existing commercial building floorspace
currently uses energy efficient ballasts. Unfortunately these data reveal
percentages by census division, and we are looking for data at the state level.
To overcome this problem we developed a methodology to estimate the extent to
which energy conservation programs have penetrated the existing stock of
commercial buildings in specific states.(8) This methodology was used to
estimate the square footage of commercial buildings with energy efficient
ballasts in the states of interest.
----------
(7) These percentages are subject to a +/- 10-15% error.
(8) See Appendix A-1 for a detailed description of the methodology.
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Figure 4:
Percent of Commercial Floorspace with Energy Efficient Ballasts by
Census Division
[GRAPHIC OMITTED]
Source: EIA, 1995 Commercial Building Consumption Survey.
The results of the application of the methodology described above are shown in
Tables 2 and 3 for each of the states considered in this study. These tables
present an estimate of the quantity of commercial floorspace in each of the
states, quantities of floorspace that use fluorescent lights, incandescent
lights and other lights (derived from Figure 1), the percentage distributions of
ballasts for the square footage lit with fluorescent lights and estimates of the
potential size of the MLBS market in each of the six states analyzed.
Table 2 shows the extent to which electronic and high efficiency ballasts have
already been installed in existing commercial buildings. This is important when
evaluating the market potential of the MLBS because the largest energy savings
occur when the MLBS replaces a core-coil ballast. Those buildings where
core-coil ballasts still are utilized represent the greatest market potential
for the MLBS in
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Elgin MLBS 11
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the short term, while efficient magnetic ballasts are the next logical target
retrofit market. The potential for the MLBS to supplant recently installed
electronic ballasts is minimal as the resulting energy savings are not large
enough to justify the investment.
Table 2:
Commercial Sector Lighting and Ballast Type by State
===========================================================================================================================
Lighting Type (millions ft(2)) Ballast Type
State Total Incandescent Fluorescent Other Standard Efficient-Magnetic Electronic
---------------------------------------------------------------------------------------------------------------------------
Pennsylvania 2,625 368 2,021 236 44.3% 49.7% 5.9%
New Jersey 2,225 312 1,713 200 44.3% 49.7% 5.9%
Maryland 1,751 245 1,348 158 48.8% 45.3% 5.9%
Ohio 2,955 414 2,275 266 55.9% 38.9% 5.2%
Wisconsin 1,153 161 887 104 55.9% 38.2% 5.9%
California 6,346 888 4,887 571 45.1% 31.3% 23.6%
---------------------------------------------------------------------------------------------------------------------------
Total 17,055 2,388 13,132 1,535 47.8% 39.8% 12.4%
===========================================================================================================================
Note: 1) Commercial floorspace is estimated by multiplying the total
commercial consumption of electricity (EIA, Electric Power Annual,
1997) by the average percentage of electricity consumed by lighting
(28%, commercial Building Energy Consumption Survey", EIA, 1995, see
also LBNL "Lighting Market Sourcebook," p.22) and dividing by 3.6
kwh/sq. ft/yr which is the average lighting density of commercial
buildings weighted by commercial building type. (LBNL at p.25).
2) Ballast type total percentages are weighted by fluorescent lighting
square footage.
Source: EIA, 1995 Commercial Building Energy Consumption Survey: Lighting
Efficiency Technology Report, California Energy Commission, 1997.
Table 3:
Potential MLBS Market Size
==========================================================================================
Commercial Building Square Footage by Potential to Retrofit
Ballast Type (millions ft(2)) Standard, Efficient Magnetic
& Electronic Units
State Standard Efficient Magnetic Electronic (Millions of Units(1))
------------------------------------------------------------------------------------------
Pennsylvania 896 1,005 120 20
New Jersey 759 852 102 17
Maryland 658 610 80 13
Ohio 1,272 886 117 23
Wisconsin 496 339 53 9
California 2,202 1,529 1,155 49
------------------------------------------------------------------------------------------
Total 6,283 5,222 1,628 131
==========================================================================================
Note: 1) One unit is equivalent to a single ballast used to drive one two lamp
fixture.
Source: EIA, 1995 Commercial Building Energy Consumption Survey: Lighting
Efficiency Technology Report, California Energy Commission, 1997.
Table 3 is developed by expanding a subset of the data in Table 2. For example,
in the state of Ohio, it is estimated that 43% of the 1995 quantity of
floorspace or
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1,271 million ft(2), are illuminated with fluorescent lights that use magnetic
core-coil ballasts. Similarly, Table 3 presents the amount of floorspace that
might potentially be upgraded from existing high efficiency ballasts to the
MLBS. Table 3 also shows the potential MLBS sales volumes in terms of single
ballasts. If the MLBS were to replace all the core-coil ballasts in the six
states shown, sales of 62.8 million units would be expected, assuming that 100
square feet can be effectively illuminated by a two lamp fixture.
Although this report provides estimates of the total potential retrofit market
size available for the MLBS, the actual amount of retrofit penetration that
could be achieved by the MLBS is dependent upon numerous factors. A subset of
these factors--electricity industry competition and future energy conservation
programs--are considered in this report. Other factors such as existing
competitor market penetration and name recognition, consumer knowledge of the
product and confidence in the product, marketing technique, most appropriate
production plans, etc. have not been evaluated in this report, but are also
important.
II.B.2 New Commercial Building Construction
The Energy Information Agency (ETA) indicates in its 1998 Annual Energy Outlook
that commercial building construction increased dramatically in the mid-90s,
especially in the southeast part of the country.(9) This growth is forecasted to
decline slightly between 1999-2002 and then level off. On a floorspace basis
these forecasted additions are almost 2 billion square feet in the year 1998 and
correspond to ballast sales of between 20 and 30 million units.(10) Furthermore,
these data do not include those buildings that are rehabilitated each year which
would represent an additional source of new construction. Figure 5 depicts the
EIA forecasts by census region.
----------
(9) To estimate the yearly square footage of new commercial building space
additions requires the collection of data on commercial building additions.
These data are collected and compiled by the Energy Information Administration
(EIA), aggregated by census divisions, and encompass both historically observed
building additions and forecasts of future additions.
(10) The amount of square footage illuminated with one 2 bulb fluorescent light
fixture can vary from 70-100ft(2)/fixture where each fixture requires one
ballast.
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Elgin MLBS 13
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Figure 5:
New Commercial Construction by Census Division
[GRAPHIC OMITTED]
Source: EIA Annual Energy Outlook 1998, National Energy Modeling System.
We have focussed particular attention on the states of Pennsylvania, New Jersey,
Maryland, Ohio, Wisconsin and California. Therefore, estimates of new commercial
building construction by state were developed and are shown in Figure 6.(11)
California clearly projects significant commercial building additions during the
next ten years with a year 2000 market of ▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ feet, or in terms
of potential ballast sales, approximately 2 million new ballasts. Using these
ratios, new construction in Ohio could demand as many as 500,000 new ballasts
per year while Pennsylvania may demand around 750,000 new ballasts. The
approximately
----------
(11) To extend the analysis of new commercial floor space additions to
individual states required an understanding of construction activity in one
state versus another in order to disaggregate the data from the census division
level to individual state level. Because the level of construction activity is a
good measure of building construction, the ratio of state to census division
construction gross domestic product (GDP) was used to infer each state's level
of commercial building additions.
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Elgin MLBS 14
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400 million square feet of building space assumed under construction in these
six states in 1998 translates to potential sales of between 4-6 million
ballasts. New commercial building construction represents an excellent market
opportunity for the MLBS.
Figure 6:
New Commercial Construction By State
[GRAPHIC OMITTED]
Source: EIA Annual Energy Outlook 1998, National Energy Modeling System.
II.C Summary
The magnitude of the potential new construction market and the retrofit markets
for the MLBS is considerable. Clearly in the short term, both markets should be
targeted. The extent to which new construction markets will be penetrated will
depend upon how much value is placed upon attributes of the MLBS that
differentiate it from other available products. The growth in the retrofit
market is presently very large and will remain so for most of the next decade,
but the growth in this market will decrease over tine.
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In the following sections of the report, we provide an economic analysis, which
in turn allows us to value the MLBS based on the perspective of an investor
considering whether or not to install it. We also explore the potential
volatility of both the retrofit and new construction markets in conjunction with
electric industry restructuring.
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III MLBS NEW CONSTRUCTION AND RETROFIT PROJECT ECONOMIC ANALYSIS AND PRODUCT
VALUE
Our analysis finds that installation of the MLBS is desirable for either a
retrofit or new construction application. Standard project financial performance
indicators are favorable for each of the states examined. For example, project
internal rates of return are consistently 20-30 percent, even when sensitized to
incorporate pessimistic assumptions. In states such as California and New
Jersey, where commercial electricity rates are among the highest in the nation,
internal rates of return are between 30-60 percent. In all cases,
straightforward project financial analysis clearly shows that an investment in
the MLBS will pay for itself by virtue of the energy savings it provides.
At the same time it is important to recognize that competing electronic ballasts
will also produce favorable project financial results. The MLBS must be
differentiable by more than just energy savings in order to capture a
significant market share. Since the current first cost estimates of the MLBS are
higher than standard electronic ballasts manufactured by companies such as
Motorola or Advance, the MLBS features such as dimming and energy harvesting
must be exploited. The electronic ballast industry is fiercely competitive, and
the MLBS will have to overcome several barriers to gain market acceptance,
including the possibility of pricing the MLBS to match its competitors in order
to stimulate initial sales.
The MLBS offers its consumers a near term potential value of more than $250
million with the retrofit market providing the source of greatest value. The
value is simply the calculated net present value that the MLBS provides if it
were ultimately to penetrate the new construction and retrofit markets 10%. If
the penetration reached 25 percent, the value would be greater than $600
million. When marketing the MLBS, these value estimates can be used to validate
the potential worth of the product to an organization purchasing the right to
distribute the MLBS.
A simple spreadsheet economic analysis was created to evaluate the MLBS project
economics for new construction and retrofit projects as well as to estimate
product value. The primary emphasis of the analysis is to examine the economic
performance of the MLBS compared against; a probable competitor in the case of
new construction and an inefficient magnetic core-coil ballast in the case of a
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retrofit. The economics of both of these cases are sensitized for assumed
variations in the commercial price of electricity, the number of hours that
lights are assumed illuminated per year and the discount rate.(12) In each of
these sensitivity analyzes the internal rates of return (IRR), the net present
value (NPV), and the simple payback period are calculated for each type of
project and for each of our states. The results are then presented visually
through the use of tornado diagrams.(13)
The following sections describe our economic model, present the results of the
sensitivity analysis performed for each of the cases and finally show the
potential value of the MLBS.
III.A MLBS Project Economic Spreadsheet
Our simple spreadsheet employs conventional net cash flow analysis to evaluate a
proposed installation of the MLBS for a 20,000 square foot commercial building.
It can be used to study the economics of both new construction and retrofit.
The spreadsheet calculates the cost to operate a lighting system which employs
the MLBS and similarly calculates the cost to operate a competing lighting
system and then determines the operational savings achieved by installing the
MLBS. The costs are subtracted from the savings, and the resultant cash flows
are used to determine the financial indices. Using the net cash flow analysis
technique allows the later year savings realized through the installation of the
MLBS to be incorporated into a financial indicator.
As with any analysis of this type a base case must be defined and reasonable
starting assumptions must be established. The base case and primary assumptions
for our project analyses are shown in Table 4. The two most critical assumptions
in this analysis are the electricity price forecast and the number of hours that
the
----------
(12) In the retrofit project additional sensitivities are explored to quantify
the extent to which MLBS electricity savings over an existing, installed ballast
affect the results, while in the new construction case additional sensitivities
are explored to quantify the extent to which higher MLBS initial installation
costs affect the results.
(13) A tornado diagram is used to capture the effects of changes in assumptions
on the attributes of interest. (in this case the attributes are IRR, NPV and
simple payback period) The diagram received its name as a result of how it is
constructed. Attribute variations resulting from changes in input assumptions
are depicted graphically as horizontal bars. The attribute value that varies the
greatest is plotted as the top horizontal bar while other horizontal bars that
depict smaller changes in the attributes are plotted beneath it to form the
shape of a tornado. See, for example, Figure 9.
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Elgin MLBS 18
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lights are illuminated. The number of hours the lights are on drives the
quantity of kilowatt hours that are saved by installing the MLBS while the
electricity price forecast defines the monetary value of the realized savings.
The number of "burn" hours for the lights was assumed to be 3400 hours in the
base case. This value is obtained from the ▇▇▇▇▇▇▇▇ Berkeley National Laboratory
(LBNL) Lighting Market Sourcebook for the U.S. and represents the average
lighting hours weighted by types of commercial building floorspace. Electricity
price forecasts shown in Table 5 were developed by taking EIA Electric Power
Annual 1997 reported average state commercial electricity prices and then
decreasing them 1% per annum to account for potential price reductions
attributable to electricity industry competition.
Table 4:
Elgin MLBS Project Economic Analysis Base Case Assumptions
====================================================
New Construction
----------------------------------------------------
State: (CA, PA, NJ, OH, MD, WI) OH
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Discount Rate (%) 10%
Installation Cost Premium ($/1000 ft(2)) $ 16
MLBS Cost Premium ($/1000 ft(2)) $ 59
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (W/ft(2)) 0.86
Hours of Operation 3400
====================================================
====================================================
Retrofit
----------------------------------------------------
State: (CA, PA, NJ, OH, MD, WI) OH
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Discount Rate (%) 10%
Installation Cost ($/1000 ft(2)) $158
MLBS Cost ($/1000 ft(2)) $259
MLBS Electricity Demand (W/ft(2)) 0.73
Existing Ballast Electricity Demand (W/ft(2)) 1.24
Hours of Operation 3400
====================================================
Source: Elgin System Comparison and ▇▇▇▇▇▇▇▇ Berkeley National Laboratory
The remaining critical assumptions are the MLBS equipment and installation
costs, electricity demanded by the lighting fixtures, quantity of fixtures
required per square foot and the discount rate. The discount rate in all cases
has been assumed to be 10%. This value is a reasonable estimate of the weighted
average cost of capital that would be faced by an organization considering
investing in a lighting system upgrade. MLBS equipment and installation costs,
square footage illuminated per fixture (100 ft(2)/fixture), and electricity
demand were obtained from ▇▇▇▇▇ ▇▇▇▇▇▇ Power Systems.(14)
----------
(14) ▇▇▇▇ ▇▇▇▇▇▇, April 7, 1998, "System Comparison" Spreadsheet, ▇▇▇▇▇ ▇▇▇▇▇▇
Power Systems.
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Table 5:
Various State Commercial Sector Average Electricity Price Forecasts
(cents/kWh)
=================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-----------------------------------------------------------------
CA 9.7 9.6 9.5 9.4 9.3 9.2 9.1 9.0 9 0 8.9
PA 8.1 8.1 8.0 7.9 7.8 7.7 7.7 7.6 7.5 7.4
NJ 10.2 10.1 10.0 9.9 9.8 9.7 9.6 9.5 9.4 9.3
MD 6.8 6.7 6.6 6.6 6.5 6.4 6.4 6.3 6.2 6.2
OH 7.4 7.4 7.3 7.2 7.2 7.1 7.0 6.9 6.9 6.8
WI 5.5 5.4 5.4 5.3 5.3 5.2 5.2 5.1 5.1 5.0
=================================================================
Note: 1) Prices calculated by taking the ratio of average commercial sector
utility revenues to kilowatt hours sold.
2) Starting values Based on EIA Electric Power Annual 1997
The assumed electricity demand for the fixtures against which the MLBS is
compared is critical as this value drives the electricity savings. In the case
of new construction, the competitive fixture is assumed to be 18% less efficient
than the MLBS and thus demands .86 W/ft(2) where the MLBS fixture demands .73
W/ft(2). In the retrofit base case the MLBS is assumed to be 59% more efficient
than an existing, antiquated inefficient magnetic core-coil ballast and in this
instance the older ballast is assumed to demand 1.24 W/ft(2).(15)
Considerable difficulty is encountered when defining the electricity demand
associated with the different fluorescent lighting systems currently in
operation. Therefore we varied the demand, using a range between 1.1 W/ft(2) and
1.35 W/ft(2). This recognizes that the MLBS will not only target the most
inefficient systems that remain in operation, but also lighting systems
installed in buildings built after the widespread availability of high
efficiency magnetic ballasts, although before electronic ballasts were widely
available. As was discussed earlier in this report, numerous older inefficient
ballast systems have already been replaced, and the MLBS will eventually be
considered as a cost effective retrofit for a building built during the 1970s or
1980s.
The new construction and retrofit case spreadsheets described above are shown in
Figures 7 and 8. The upper two bordered boxes on the spreadsheets contain the
input assumptions and the financial indices. The input assumptions are used to
calculate the electricity consumption and the lighting system costs and savings
----------
(15) Given that the average weighted commercial building lighting electricity
demand calculated by the LBNL is 1.1 W/ft(2), our retrofit base case demand of
1.24 W/ft(2) assumes that the initial target market for the MLBS will be the
most inefficient lighting systems currently in operation.
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Figure 7
Project Economics for the Installation of the Elgin Master
Light Ballast System -- Retrofit California
------------------------------------------------------------------------------------------------------
Input Assumptions
State CA, OH, PA, CA, WI, NJ, MD
-- Selects Proper Electricity Price Forecast
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Inflation Rate (%) 3%
Discount Rate (%) 10%
Installation Cost ($/1,000 ft(2)) $ 158
MLBS Cost ($/1,000 ft(2)) $ 259
Bulb Costs ($/20,000 ft(2)) $ 680
Type of Building C "C" for Commercial or "I" for Industrial
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (w/ft(2)) 1.28 Note: Weighted average commercial building ballast
electricity demand is 1.1 W/ft(2) -- LBL
Hours of Operation 3400
------------------------------------------------------------------------------------------------------
--------------------------------------------------
Financial Performance Indices
IRR 38%
Net Present Value 12,462
Simple Payback Period 2.51
--------------------------------------------------
===================================================================================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007
-----------------------------------------------------------------------------------------------------------------------------------
Average Annual Electricity Price (cents/kwh) 9.70 9.61 9.51 9.41 9.32 9.23 9.14 9.04 8.95
MLBS Annual Electricity Consumption (kwh) 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640
Competitor Annual Electricity Consumption 87,040 87,040 87,040 87,040 87,040 87,040 87,040 87,040 87,040
Annual Electricity Saved (kwh) 37,400 37,400 37,400 37,400 37,400 37,400 37,400 37,400 37,400
-----------------------------------------------------------------------------------------------------------------------------------
Costs($)
-----------------------------------------------
Installation Cost 3,165
MLBS Cost 5,180
Bulb Cost 680
Electricity Cost 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
-----------------------------------------------------------------------------------------------------------------------------------
Total 9,025 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
Benefits ($)
-----------------------------------------------
Electricity Savings 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
-----------------------------------------------------------------------------------------------------------------------------------
Total 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
Net Cash Flows (9,025) 3,629 3,593 3,557 3,521 3,486 3,451 3,417 3,382 3,349
===================================================================================================================================
================================================================
Year 2008
----------------------------------------------------------------
Average Annual Electricity Price (cents/kwh) 8.86
MLBS Annual Electricity Consumption (kwh) 49,640
Competitor Annual Electricity Consumption 87,040
Annual Electricity Saved (kwh) 37,400
----------------------------------------------------------------
Costs($)
-----------------------------------------------
Installation Cost 3,165
MLBS Cost 5,180
Bulb Cost 680
Electricity Cost 4,400
----------------------------------------------------------------
Total 9,025 4,400
Benefits ($)
-----------------------------------------------
Electricity Savings 3,315
----------------------------------------------------------------
Total 3,315
Net Cash Flows (9,025) 3,315
================================================================
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Figure 8
Project Economics for the Installation of the Elgin Master
Light Ballast System--New Construction California
------------------------------------------------------------------------------------------------------
Input Assumptions
State CA, OH, PA, CA, WI, NJ, MD
-- Selects Proper Electricity Price Forecast
Project Life (yrs) 10
Project Size (ft(2)) 20,000
Inflation Rate (%) 3%
Discount Rate (%) 10%
Installation Cost ($/1,000 ft(2)) $ 16 Premium over currently available electronic
ballast; no harvesting.
MLBS Cost ($/1,000 ft(2)) $ 59 Premium over currently available electronic
ballast.
Type of Building C "C" for Commercial or "I" for Industrial
MLBS Electricity Demand (W/ft(2)) 0.73
Competitors Electricity Demand (w/ft(2)) 0.86 Note: Electronic ballast with ballast factor
equal to 1.28.
Hours of Operation 3400
------------------------------------------------------------------------------------------------------
--------------------------------------------------
Financial Performance Indices
IRR 56%
Net Present Value $3,585
Simple Payback Period 1.75
--------------------------------------------------
===================================================================================================================================
Year 1999 2000 2001 2002 2003 2004 2005 2006 2007
-----------------------------------------------------------------------------------------------------------------------------------
Average Annual Commercial Electricity Price (cents/kwh) 9.70 9.61 9.51 9.41 9.32 9.23 9.14 9.04 8.95
MLBS Annual Electricity Consumption (kwh) 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640 49,640
Competitor Annual Electricity Consumption (kwh) 58,480 58,480 58,480 58,480 58,480 58,480 58,480 58,480 58,480
Annual Electricity Saved (kwh) 8,840 8,840 8,840 8,840 8,840 8,840 8,840 8,840 8,840
-----------------------------------------------------------------------------------------------------------------------------------
Costs($)
-----------------------------------------------
Installation Cost 314
MLBS Cost 1,180
Electricity Cost 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
-----------------------------------------------------------------------------------------------------------------------------------
Total 1,494 4,817 4,768 4,721 4,674 4,627 4,581 4,535 4,489 4,444
Benefits ($)
-----------------------------------------------
Electricity Savings 858 849 841 832 824 816 808 799 791
-----------------------------------------------------------------------------------------------------------------------------------
Total 858 849 841 832 824 816 808 799 791
Net Cash Flows (1,494) 858 849 841 832 824 816 808 799 791
===================================================================================================================================
================================================================
Year 2008
----------------------------------------------------------------
Average Annual Commercial Electricity Price (cents/kwh) 8.86
MLBS Annual Electricity Consumption (kwh) 49,640
Competitor Annual Electricity Consumption (kwh) 58,480
Annual Electricity Saved (kwh) 6,340
----------------------------------------------------------------
Costs($)
-----------------------------------------------
Installation Cost 314
MLBS Cost 1,180
Electricity Cost 4,400
----------------------------------------------------------------
Total 1,494 4,400
Benefits ($)
-----------------------------------------------
Electricity Savings 784
----------------------------------------------------------------
Total 784
Net Cash Flows (1,494) 784
================================================================
Note: 1) The costs shown as premiums represent the additional initial costs
associated with the installation of the MLBS when compared with a competing
electronic ballast supplier. See ▇▇▇▇▇▇ Power Systems 4/7/98 Memorandum.
Elgin MLBS 22
--------------------------------------------------------------------------------
shown in the lower portion of the spreadsheet. The net cash flows are then
utilized to calculate the financial indices used to evaluate the attractiveness
of an investment in the MLBS.
There are two significant differences between Figures 7 and 8 related to whether
or not new construction or retrofit projects are being analyzed. First, the
competitor's electricity demand is different in order to account for the fact
that in a retrofit analysis the existing fixture electricity demand is large.
(see above) Second, the equipment and installation costs are different because
in the case of new construction an initial expenditure for a complete system is
required whether the investor installs the MLBS or a competitor's system. In
this instance we use the additional cost of the MLBS when compared with a
competitor and compare it with the additional electricity savings the MLBS
offers over a competing electronic ballast manufacturer. Otherwise the basic
construction of the two spreadsheets is identical. These two spreadsheets were
used to generate the results and valuation presented in the following sections.
III.B Results
The project economic analysis for both the retrofit and new construction cases
was run numerous times for each of states specifically examined in this report.
In all the cases analyzed the IRRs, NPVs and simple payback periods were
calculated. For each of the analyses the results were sensitized to potential
variations in the electricity price forecasts, the number of lamp burn hours,
and the discount rate. Additionally, when analyzing the retrofit case, the
sensitivity of the economic analysis to variations in existing ballasts'
electricity demand was investigated and when analyzing the new construction
cases, the sensitivity of the economic analysis to MLBS initial costs was
investigated. The economic indices calculated in all of the cases analyzed
indicate that the MLBS is an excellent investment. The base case results, and
the results for all the sensitivities analyses defined previously, are presented
in Figures 9-14 (tornado diagrams), where each figure shows all the results for
a single state.(16)
----------
(16) The tabular results used to construct the tornado diagrams are compiled in
Appendix A-2.
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Elgin MLBS 23
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The interpretation of a tornado diagram may seem somewhat difficult at first,
but is in fact quite simple. The objective is to convey in a compact format how
the MLBS project financial indices change when input assumptions are varied. In
both of the cases analyzed--new construction and retrofit--four different input
assumptions were varied in order to quantify the variations' impact on project
financial performance. In both cases, electricity price forecast, discount rate,
and number of hours lights are energized were varied. In the case of new
construction we looked at different initial MLBS cost estimates and in the
retrofit case different demand projections for electricity ballasts. In total
four assumptions are varied for both new construction projects and retrofit
projects.
Figure 9 shows the results of these analyses for the state of Pennsylvania in
six tornado diagrams; the three diagrams on the left are for the retrofit case
and the three diagrams on the right are for the new construction case. In each
case we have examined how IRRs, NPVs and simple payback periods vary when input
assumptions are modified. For example, the top left diagram depicts how net
present value changes for the retrofit case when input assumptions are varied.
The center point of the diagram represents the results obtained for the base
case while the variations are presented through the use of horizontal bars. The
Case C horizontal bar shows how a +/-10% change in the number of hours the
lights in a building are energized affects the NPV. The left hand side of the
bar shows the reduction in NPV that occurs when burn hours are decreased by 10%,
while the right hand side of the bar shows how the NPV increases as the number
of burn hours is increased 10%. Each of the remaining three bars is interpreted
in exactly the same fashion where the left hand bars represent decreases in
financial performance and right hand bars represent improvements in financial
performance.
The tornado diagram not only presents the effects of variations in single
assumptions, but also permits the display of the effects of changes in several
assumptions. For example, referring once again to Figure 9, it is possible to
ascertain how much net present value will decrease if burn hours decrease and
electricity prices fall. The compounded effect of variations in each of these
two assumptions is represented by the addition of the two bars shown on the
diagram. Therefore, the NPV in this instance decreases to approximately $4,000
from an
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 24
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Pennsylvania Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $8,990 Internal Rate of Return = 31% Simple Payback Period = 3
New Construction: Net Present Value = $2,764 Internal Rate of Return = 46% Simple Payback Period = 2.09
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 25
--------------------------------------------------------------------------------
Maryland Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $5,951 Internal Rate of Return = 24% Simple Payback Period = 3.62
New Construction: Net Present Value = $2,046 Internal Rate of Return = 38% Simple Payback Period = 2.52
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 26
--------------------------------------------------------------------------------
New Jersey Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $13,547 Internal Rate of Return = 40% Simple Payback Period = 2.39
New Construction: Net Present Value = $ 3,841 Internal Rate of Return = 59% Simple Payback Period = 1.66
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 27
--------------------------------------------------------------------------------
Ohio Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $7,470 Internal Rate of Return = 27% Simple Payback Period = 3.28
New Construction: Net Present Value = $2,405 Internal Rate of Return = 42% Simple Payback Period = 2.28
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 28
--------------------------------------------------------------------------------
California Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $12,462 Internal Rate of Return = 38% Simple Payback Period = 2.51
New Construction: Net Present Value = $ 3,585 Internal Rate of Return = 56% Simple Payback Period = 1.75
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 29
--------------------------------------------------------------------------------
Wisconsin Tornado Diagrams
Four Sensitivity Cases
--------------------------------------------------------------------------------
Case A: Variation in Existing Ballasts' Electricity Demand (Retrofit).
Variation in New Construction Installation Premium (New Construction).
Case B: Variation in Discount Rate (from 6% to 20%, base case 10%).
Case C: +/- 10% Variation in Number of Hours of Building Light Operation.
Case D: +/- 10% Variation in State's Electricity Price Forecast.
--------------------------------------------------------------------------------
Base Case
----------------------------------------------------------------------------------------------------------
Retrofit: Net Present Value = $3,129 Internal Rate of Return = 18% Simple Payback Period = 4.47
New Construction: Net Present Value = $1,379 Internal Rate of Return = 29% Simple Payback Period = 3.11
----------------------------------------------------------------------------------------------------------
Retrofits New Construction
Variation in Net Present Value
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Internal Rate of Return
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Variation in Payback Period
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
Note: For new construction, Case A only affects the calculation of net present
value and simple payback period. For both new construction and retrofits, Case B
only affects the net present value.
Elgin MLBS 30
--------------------------------------------------------------------------------
initial value of $8,990 when the effects of variations in both assumptions are
evaluated.
For both the new construction and retrofit cases there are three tornado
diagrams for each state (total of six per state) that show the effects of
assumption variations on the NPV, IRR and simple payback period. In all cases,
even when one considers assumptions that reduce the financial performance of the
MLBS, the financial indicators are favorable.
The most significant difference that emerges when one examines the six states
together is the fact that the effect of the prevailing average commercial
electricity price on the financial performance is substantial. For example, NPVs
and IRRs are much higher for the states of California and New Jersey as opposed
to Ohio and Wisconsin. This difference in financial performance is critical as
it ultimately impacts the value of the MLBS to potential owners of distribution
rights.
III.C Potential MLBS Market Share and Product Value
We have estimated the potential value of the MLBS based upon the estimated size
of the new construction and retrofit markets presented in Section II, and the
simple financial model presented in Section III.A. In both cases we have assumed
that the MLBS will achieve a market penetration of 10 percent.(17) In both cases
the financial spreadsheets shown in Figures 7 and 8 are used to calculate the
net present value of the MLBS.
The results are shown in Tables 6 and 7. The potential value of the MLBS if
adopted for use in the retrofit market is astounding. In California alone, if 10
percent of the existing commercial floorspace can be captured, the value of the
MLBS is 113 million dollars. Similar results, showing a product value of tens of
millions of dollars, are obtained for other states as well. The new construction
market also promises significant value, although the values are lower due to the
fact that the analysis compares the MLBS against a competing high efficiency
----------
(17) In the case of new construction a five year period is examined, while in
the case of retrofits we assume that by 2001 the MLBS will supplant inefficient
existing ballasts currently in service in 20 percent of the floorspace that
relies on fluorescent lighting.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 31
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electronic ballast. In total, the potential value of the MLBS given our
assumptions is as high as 281 million dollars for [ILLEGIBLE] states examined.
These product valuations can be used to estimate what the value of the MLBS is
to a purchaser. In simple terms, an entity evaluating the purchase of rights to
the MLBS will make an estimate of how many MLBS units it can sell. The
distributor will then assess how the energy savings will be distributed between
the entity installing the MLBS and itself. For example, in the case of new
construction projects in California the MLBS has a net present value of
approximately 14 million dollars over a five year period, if it is installed in
ten percent of the floorspace constructed. In the early years a distributor
might provide an installation incentive by offering a building owner a reduced
cost or by negotiating some type of shared savings arrangement. By using MLBS
value estimates the distributor can determine what types of contractual
arrangements are most sensible.
Table 6
New Construction Market Size and MLBS Value Over a Five Year Period
==================================================
Market Size NPV
State (Millions ft^2) (1999 $000)
--------------------------------------------------
California 77.54 13,916
Maryland 23.84 2,439
New Jersey 25.38 4,875
Ohio 31.72 3,814
Pennsylvania 32.78 4,530
Wisconsin 16.55 1,141
==================================================
Notes: 1) Market size estimates are developed assuming a 10%
penetration rate.
2) MLBS value is NPV calculated using new construction
base case assumptions.
DRAFT
THE ECONOMICS RESOURCE GROUP. INC.
Elgin MLBS 32
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Table 7
Retrofit Market Size and MLBS Value
==================================================
Market Size NPV
State (Millions ft^2) (1999 $000)
--------------------------------------------------
California 220.20 113,396
Maryland 65.78 16,176
New Jersey 75.92 42,501
Ohio 127.19 39,262
Pennsylvania 89.57 33,273
Wisconsin 49.61 6,415
==================================================
Notes: 1) 10% penetration rate assumed and inefficient
ballasts are targeted.
2) MLBS value is NPV calculated using retrofit base
case assumptions.
Distributors of the MLBS can use these and other marketing strategies. For
example, they could set a higher up-front cost for the ballast and then
guarantee the savings over a period of time. That is the seller assumes the
operating risk. Marketers who are utility subsidiaries might have to adopt
whatever arrangement is required by their state public utility commission under
a mandated demand side management program. It may be that significant
expenditures will be required in order to gain a foothold in the market prior to
having an opportunity to realize significant profits. Therefore, the potential
product values calculated in this report should be considered as upper bounds.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 33
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IV. ELECTRICITY INDUSTRY RESTRUCTURING AND MLBS MARKET POTENTIAL
Electricity industry restructuring can both positively and negatively impact the
potential sales of the MLBS. On the one hand, competition should lead to lower
prices and lower prices will erode the electricity savings benefits associated
with the installation of the MLBS. On the other hand, power marketers and
utilities will see the MLBS as an element of a total energy supply package that
can be used to capture customers. Furthermore, there is no indication that state
demand side management and energy conservation programs are going to be
eliminated. While they may receive less emphasis, some type of government
mandated program will continue in most states for the next 5-7 years. Given
these facts, we predict that electricity industry restructuring will have a net
positive impact on the marketability of the MLBS in the near term, but will
require a marketing strategy that can adapt and adjust as state and federal
regulation continue to change.
The electric industry transition from a completely regulated vertically
integrated industry, to a structure where electricity is supplied competitively,
is turning out to be slower than anticipated and somewhat disjointed. While in
48 states regulators have or are currently considering moving to retail
competition, only 12 have formerly enacted competition, and of these, nine have
built in delay mechanisms that provide significant advantages to the existing
utilities. In fact only California will have a truly competitive retail market
by the close of this year, but others are likely to emerge.(18) The pace though
is uncertain.
The profits from the retail sale of electricity to the residential and small
commercial markets are likely to be small and there is no barrier-to-entry.
Anyone with two or three computers can be a marketer. In many states, the
existing utility distribution company will still be the dominant retail marketer
three years hence. Competition is more likely to emerge in the large commercial
and industrial sectors, but the profit margins for retailing electrons is not
large. Where the money will be made is in the delivery of ancillary services,
such as energy efficiency equipment, micro-turbines, and advanced cable and
communication technologies. Some experts are
----------
(18) Massachusetts and Rhode Island have retail markets, but incumbent utilities
are favored in the early years. Pennsylvania currently permits retail choice for
some customers, although full retail choice will not be available until the year
2000.
DRAFT
THE ECONOMICS RESOURCE GROUP, [NC.
Elgin MLBS 34
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predicting that the profit margins in these ancillary areas may be 4-5 times
greater than the sale of the electricity.
Government intervention in energy conservation programs is continuing in two
guises: i) Mandated utility DSM--these mandates can stem from regulation or they
can stem from restructuring legislation or ii) Federal environmental programs
such as EPA's Green Lights. Mandated DSM dropped precipitously between 1994-1996
and will continue to fall, albeit at a slower rate. (see Figure 3) However,
overall, state and federal government mandated DSM is still a $2 billion per
year program and plays an important role in about one-third of the states. Most
states that have restructured have included provisions in their legislation
establishing a fee on the distribution wires. The proceeds from this fee are to
be used to support DSM investments.
In the next three-four years, the electric distribution companies will still be
the dominate deliverer of energy-efficient equipment, either through mandated
DSM or through marketing strategies driven by competitive pressures--with the
latter likely to get stronger over time. Even in the states which are proceeding
with retail competition, new utility subsidiaries will retain a significant
proportion of the new market. Utility subsidiaries that are, or will be
marketing electrons, will respond to the threat and onset of competition in
order to retain existing market share. However, these utility subsidiaries will
face competition for customers, and this competition will raise the value of
ancillary technologies, such as the MLBS.
The reason why is simple. Initially marketers will try to offer the lowest
priced electrons by doing a better job of buying low, but everyone is
subscribing to the same data services and will have the same electricity
purchasing options. In the next stage--which is what we see now--marketers will
try to differentiate themselves by offering more complex pricing packages. Some
will offer to take less money now and more later, others will offer different
prices at different times of the day and still others will guarantee certain
prices. But since all the players will become aware of each other's strategy,
this too will result in margins being bid down and differences eliminated.
Therefore, the only remaining source of profits is to sell ancillary
services--such as energy-savings. That is compete not on price, but on the
ability to lower bills. Hence a growing market for the MLBS.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 35
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Important conclusions that should be drawn from the current electricity industry
restructuring are first that markets are in transition, but are transitioning to
a world that should be more favorable, as opposed co less favorable, for the
MLBS. Second, the value of the MLBS system to a retail electricity company is
positive except in those states that have limited growth, low electricity
prices, no state mandated DSM and no likelihood of retail competition in the
next five years. We believe that the subset of states that may fit this
definition is very small. Finally, there is likely to be a stronger market in
those states that adopt competition and thus ELGIN can demand more profitable
contracts in those areas than in states without competition. (while electricity
prices will go down faster in those states. this trend will be offset by the
added value of having exclusive rights to technologies, such as the MLBS)
IV.A Energy Conservation and Demand Side Management (DSM)(19)
DSM became popular as a component of state regulatory board mandated Integrated
Resource Planning (IRP) undertaken by utilities during the most recent 20 years.
As a function of this process. DSM expenditures that resulted in the reduction
of future demand faced by an electric utility, would be weighed against
investments in expensive new electricity plant capacity. In many cases it was
relatively easy to identify numerous ways in which electricity demand and
consumption could be reduced by making modest invests in energy conservation
measures and load management strategies. Table 8 provides examples of the
numerous programs available in a subset of U.S. states and identifies the
mechanisms used to encourage customers to take advantage of these programs. As
can be seen in Table 8, rebates and loans have been the primary incentive
devices employed to induce customers to make an effort to save energy. These
programs became ubiquitous during the late 1980s and continued receiving strong
support through the early 1990s.
DSM programs continue to play a role in shaping the demand for electricity, but
in recent years significant declines in program expenditures have occurred that
some attribute to the move toward electricity industry competition.(20) The EIA
has
----------
(19) In this report energy conservation pro grams and load management are
collectively referred to as DSM.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 36
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Table 8:
Examples of State Energy Conservation and Demand Side Management Programs
=====================================================================================================
Demand Side Management Programs
-----------------------------------------------------------------------------------
State Load Management Fuel Switching Other
-----------------------------------------------------------------------------------------------------
California A, E, T A, C, P Off peak cooling
Maryland A, T, X, U, Z Curtailable rates, cool storage, custom rebates
New Jersey A, T A Cool storage
Ohio T
Pennsylvania A, T
Wisconsin W, A, R, T, Z, U W, A, C, P, G Statewide motor discounts
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Demand Side Management Programs
-----------------------------------------------------------------------------------
State Rebates Loans Shared Savings Grants or Giveaways
-----------------------------------------------------------------------------------------------------
California H, W, L, C, P, M
Maryland H, W, L, C, P, M, X H, L, P, M X
New Jersey H, W, L, P, M
Ohio H, W, L, M L, P, M
Pennsylvania
Wisconsin H, W, L, C, P, M, Y, X H, W, L, C, P, M H, W, L, C, P, M X
-----------------------------------------------------------------------------------------------------
Key:
A Air Conditioning R Irrigation
C Cooking T Interruptible rates
E EMS U Time of use rates
C Gas Engines W Water heating
H HVAC X Energy audits
L Lighting Y Energy-efficient appliances
M Motors Z Energy efficient new construction/design
P Industrial Process
-----------------------------------------------------------------------------------------------------
Source: Utility Regulatory Policy in the United States and Canada, NARUC, 1996.
recently reported that: "In the search of cost savings, utilities are
reassessing approaches to energy conservation and peak load reduction. In many
cases, they are opting to discontinue or reduce the emphasis on these
programs."(21) Given that the peak demand for ballasts occurred just after the
peak spending on DSM programs was recorded, it is clear that DSM program
spending played a significant role in establishing the demand for new, high
efficiency lighting ballasts. Although
----------
(20) This finding is investigated in detail in an April 10, 1998 "Report on
Electronic Ballast DSM Rebate Research," ▇▇▇▇▇▇▇▇ Berkeley National Laboratory.
(21) EIA Press Release, January 7, 1998, "Demand-Side Management Programs:
Utilities Shift Focus, Reduce Spending."
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 37
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recently spending has decreased, it is likely that these reductions will level
off and we may see this trend reversed in the next decade.
For example, in the states of California, Pennsylvania and Massachusetts the new
legislation that paved the road to electricity industry restructuring includes a
non-bypassable "wires" charge that will be collected and used to establish a
fund for continued DSM. In Massachusetts and California either existing agencies
or newly formed entities will be granted the authority to administer these funds
in order to preserve the benefits associated with DSM. In most states, the
proposed restructuring legislation has many references to collecting funds to
continue DSM programs. The delivery or decision institutions will change, and
the role of government may change still further, but utility DSM programs will
still play a major role for the next 5-7 years.
Even if DSM programs continued to be scaled back this would not reduce many
utilities' interest in DSM. As mentioned earlier, utilities that continue to
distribute electricity can use DSM as a marketing tool to differentiate
themselves as a more comprehensive provider of services. At the same time, power
marketers will see DSM as an equally attractive means of luring customers away
from incumbent utilities by similarly offering comprehensive supply packages
that capitalize on DSM as a means of reducing customer load and creating
electricity savings that can be to some extent "shared" with the customer. DSM
will become part of a total energy offering where the most savvy supplier will
recognize that the name of the game will be lowering energy costs as opposed to
offering the lowest price for electrons.
IV.A.1 Other Energy Conservation Programs
The U.S. EPA launched its Green Lights Program in 1991 with the goal of
establishing a voluntary energy-efficiency program that identified opportunities
where an organization could save money while simultaneously improving the
environment. During the past 6 years the program has grown considerably, and as
of 1996, 1.3 billion square feet of building space had undergone lighting
upgrades. (retrofits) In addition more than 6 billion additional building square
footage has been dedicated to the program. Table 9 shows the impact of Green
Lights in the states considered in this report and clearly shows California has
been a leader of the Green Lights program. Given that the majority of Green
Lights participants own commercial buildings, the total quantity committed to
the program represents
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 38
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more than 10% of the CBECS recorded 1995 commercial building stock of 53.7
billion square feet. Green Lights brochures indicate that more than 10 million
energy efficient ballasts have been installed as a result of the program or more
than 12% of the yearly quantity of ballasts shipped in recent years.
Table 9
Selected State Building Square Footage Committed and Upgraded for the
EPA Green Lights Program
==================================================
Building Square Footage (millions)
State Recruited Upgraded
--------------------------------------------------
Maryland 187 42
New Jersey 186 48
Ohio 205 60
Pennsylvania 384 56
Wisconsin 122 77
California 570 166
==================================================
Also at the federal level Executive Order #12902, Energy Efficiency and Water
Conservation at Federal Facilities, has led to increased efforts at federal
facilities to reduce energy consumption by 30%.(22) The Department of Energy has
led the implementation of this program through the Federal Energy Management
Program This program is implemented by using a performance shared savings
contract where energy service companies contract with the government to reduce
energy use at federal facilities. The companies are then permitted to recover
their capital costs through the energy savings and share with the government
additional savings. This pro gram is less specific than the Green Lights
program, and there is little detailed data on its impacts to date.
IV.B Electricity Industry Restructuring
Retail electricity competition is slowly becoming a reality in the United
States. Although federal efforts to introduce an acceptable ▇▇▇▇ mandating
competition have been lethargic, many states are taking action independent of
the federal
----------
(22) The Energy Policy Act of 1992 established an required energy use reduction
at federal facilities of 20%, Executive Order #12902 increased the value to 30%.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 39
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government.(23) Of the states considered for this report, Pennsylvania,
California and Maryland have taken significant action. California is now using a
market based system for the buying and selling of electricity for all customers,
while Pennsylvania began phasing in retail choice this year. Maryland has
written regulations, but awaits the passage of enabling legislation. The other
states have been evaluating competition, but have yet to put in place the
legislation or regulations required to begin the transition process. A brief
synopsis of the electricity industry restructuring activities underway for each
of our six states is presented below.
IV.B.1 Ohio
Retail electricity competition is not coming quickly to Ohio and in the near
term markets for the MLBS are limited to existing energy conservation product
distribution channels such as energy service companies or utilities. DSM has
been declining in recent years in Ohio and an existing formal state run program
is no longer being actively implemented. Although Ohio offers a sizable retrofit
market for the MLBS, the current lack of emphasis on these programs, coupled
with the slow move toward retail competition, may hamper the rate of penetration
by the MLBS. Off-setting this trend is a recognition by some utilities that it
makes good business sense to tie up their customers before restructuring becomes
a reality and energy efficiency investment is one way to develop more robust
ties to their customers. The threat of future competition is driving utilities
to carefully evaluate how to maintain their customer base.
As of this date comprehensive restructuring legislation has been introduced, but
its prospects for approval in 1998 are limited. The primary basis for the ▇▇▇▇
that has currently been introduced is a draft study produced by a Ohio
legislative study committee late in 1997. The co-chairs of the Joint Select
Committee on Electric Utility Deregulation, Senator ▇▇▇▇▇▇▇ and Representative
▇▇▇▇, formally presented the report to committee members on January 6, 1998 and
subsequently introduced companion bills based on the findings of the report. It
is expected that the legislature will hold hearings on the ▇▇▇▇ during this
year's legislative session.
----------
(23) During May of 1998 the White House Administration released comprehensive
draft legislation that includes a not to exceed one mil per kwh charge to be
collected from generators and partly utilized to fund energy efficiency and
conservation. Although, there continues to be no expectation that legislation
will be passed in 1998.
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 40
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but because 1998 is an election year, other issues are expected to come to the
forefront preventing action on restructuring this year. If the legislature does
not act this year, retail competition will be delayed beyond the January 1, 2000
date.
The proposed measures set a five year transition period that would close on
December 31, 2004 and during which utilities would recover any stranded costs.
During the transition period generation prices would be capped and be precluded
from rising above the current price level for firm power. There has been no
indication that a mandated rate reduction will be prescribed. New electricity
marketers will thus be able to capture market share if they can supply electrons
at a lower cost than the current firm power price. This should stimulate
marketer and utility subsidiary interest in the MLBS.
There have been no concrete indications that restructuring legislation will
mandate DSM. It appears that an organization wishing to take advantage of energy
conservation opportunities will have to independently identify potential
retrofits and approach building owners and industrial businesses outside the
purview of a state run program. Although there is significant MLBS retrofit
potential in Ohio, in the near term capturing market share will be arduous.
IV.B.2 Wisconsin
Although Wisconsin is not moving rapidly to restructure its electricity
industry, the state Public Service Commission historically has aggressively
implemented DSM programs. Given that currently there is an electricity supply
shortage in Wisconsin, DSM programs continue to figure prominently in the state
and as a result the retrofit market will be an attractive outlet for the MLBS.
Wisconsin has most recently been pre-occupied with electricity supply shortages
leading to electric system reliability concerns. The Wisconsin Public Service
Commission, as well as the state legislature, have been focussing on increasing
a generation capacity and easing transmission constraints in order to solve the
current crisis. Against this backdrop, electricity industry restructuring
legislation has been shelved and the Wisconsin Governor subsequently signed a
reliability law on April 28, 1998.
Of interest is the fact that bills restricting utility and utility affiliate
activities were debated and died in committee, although it is thought that
similar measures will be
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introduced when the next legislative session commences in 1999. These bills
would have narrowed the restricitions placed upon public utilities who engage in
activities related to the sale and service of appliances. Additionally, these
bills would have only permitted utilities to carry-out energy conservation
services on property owned by the utility or its affiliates. Ensuring that any
entity, including utility subsidiaries, that desires to deliver these services
can do so is important for the MLBS.
At the same time Wisconsin Public Service Commission staff have issued an
Enunciation of Policy and Principles focussed on maintaining or enhancing
existing levels of energy efficiency. This policy enunciation identifies an
overall initial need of $100 million per year for energy efficiency market
development efforts. This level of funding is commensurate with current levels
of expenditures made by Wisconsin utilities. This policy reaffirms the
Commission's emphasis on energy efficiency, but many of the suggestions outlined
in the enunciation will require legislative approval. The extent to which the
proposed policies are adopted has yet to be determined although we believe that
Wisconsin will continue to push DSM investments
IV.B.3 California
California is a very promising market for the MLBS. The state has completely
implemented retail competition and at the same time has preserved energy
efficiency programs. Electricity marketers have been competing for the state's
largest retail loads and a new energy conservation fund has been in place since
the beginning of 1998. In short the MLBS can be distributed through existing
energy service companies as well as become an ancillary offering that marketers
(including utility subsidiaries) can package to provide a lower cost supply. Of
the six states considered in this report, California holds the largest market
potential for the MLBS.
The California competitive electricity market began operation on April 1, 1998.
The propensity for existing residential customers to switch electricity
suppliers has been minimal at this early stage. As of March 31, 1998, utilities
had processed more than 60,000 direct service access requests filed by customers
wishing to change their electricity supplier. The exact quantity that have
switched is unknown, although various sources have indicated that only around
25,000 customers opted for a new supplier when the retail market began
operation. California Public
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Utility Commissioner ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ has been quoted saying that on a revenue
basis customers responsible for about 13% of the total market revenues have
switched suppliers. Large commercial and industrial customers have been targeted
initially by marketers because large volumes of sales are required to ensure
reasonable profits.
In these early stages, Enron, New Energy Ventures and PG&E Energy Services have
been the most active energy service providers in California. The California
Public Utility Commission (PUC) has issued hundreds of licenses that allow
energy service providers to operate in the state, but the PUC has estimated that
currently only around 40 alternative suppliers are able to actually supply
retail electricity service. Given that under the California restructuring law
existing customers have received a 10% reduction in their electricity bills
effective January 1, 1998, and that additional reductions are envisioned once
stranded costs have been collected, it may be several years before large numbers
of smaller consumers consider switching supplier. It is likely that the numbers
of marketers and distributors that remain after 3-5 years will be on the order
of 10-12 entities, not 40-50.
In spite of the fact that customers may only sluggishly start to change
suppliers, California has put in place a system that will allow energy service
companies to provide metering, billing and information services. Creating
competition in the delivery of these services is important for an alternative
provider that wants to offer a bundle of services. Allowing energy marketers to
offer metering services will be beneficial to a marketer that hopes to package
energy conservation with electricity supply; it permits the marketer to make
savings guarantees that can be verified using the marketer's own metering
equipment. The more flexibility that exists to demonstrate the impact of
installing an energy conservation measure like the MLBS, the more easily the
product can be marketed.
Even though marketers will be free to offer any variety of energy supply,
California will continue to gather funds to support energy efficiency and
conservation efforts. The California restructuring law established a schedule of
mandatory Investor Owned Utility (IOU) contributions in order to collect a
pre-specified sum that will go to an energy conversation fund. This fund will
be administered by the California Energy Resources Commission in accordance
with legal regulations established by the state legislature. As of January 1,
1998, IOUs began collecting monies from
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customers to supply this fund. It is expected that energy conservation programs
similar to those that have existed previously will continue in the future.
IV.B.4 Pennsylvania
Pennsylvania offers the MLBS considerable market potential, DSM programs are
continuing and hearty retail electricity competition is currently unfolding.
Electricity marketers are actively vying for existing utilities' loads, as
retail pilot programs begin in ▇▇▇▇▇▇▇. DSM programs will continue and in the
future electric distribution companies (existing local utilities that retain
ownership of transmission and distribution) will design and implement programs
funding them with monies collected pursuant to the statutorily mandated
non-bypassable charge. Therefore, Pennsylvania is a desirable state in which to
focus MLBS marketing efforts.
Pennsylvania has fully embraced electricity industry restructuring and continues
to actively review IOU transition plans and determine stranded cost recovery
levels. Prior to opening up the retail market to all customers, Pennsylvania has
chosen to use extensive retail pilot programs in the early transition years.
These programs initially allow limited amounts of customers to choose an
alternative supplier. Initial response to the pilot programs has been robust and
the programs established by the IOUs have been oversubscribed. By January 1,
2000, all customers will have the Option to switch electricity supplier.
Of particular interest in Pennsylvania is the so called "shopping credit." As
part of approving individual IOU restructuring plans, the Pennsylvania Public
Utility Commission has been establishing credits that are meant to ensure that
the electricity supply market will be competitive from day one. The credit is
essentially an amount, expressed in cents/kWh that is used as a benchmark
against which alternative suppliers can base their supply offerings. If the
supplier can provide electricity at a price below the shopping credit amount,
the customer is ensured savings. The shopping credit is set high enough so that
new electricity marketers can enter the market and profit. This mechanism
benefits new entrants at the expense of existing IOUs, although it will hasten
the advent of real competition.
Pennsylvania will continue to assess a non-bypassable renewable energy
development and energy conservation program charge of 0.23 cents/kwh for the
five years starting January 1, 1998. Electric distribution companies will
collect this
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charge. Each individual Pennsylvania is required to submit a plan outlining
the types of future programs that will be implemented using the funds. After the
first five years the PUC will evaluate whether or not to continue assessing the
charge as many believe that the demand for energy efficient products will
develop without incentive programs.
IV.B.5 New Jersey
New Jersey is moving to implement electricity restructuring, but has yet to pass
legislation. Historically the state has emphasized DSM programs, and in the
short term the MLBS could target these existing programs. Once restructuring is
completed, the existing high electricity prices will create an incentive for
marketers to attempt to cut consumer prices and offer innovative services.
Comprehensive restructuring legislation has been drafted, but has yet to be
introduced as of this date. It is expected that this legislation will be debated
during the current legislative session. The New Jersey Board of Public Utilities
(BPL) has been actively reviewing restructuring issues and issued a report in
early 1997 with specific recommendations. Since that time the BPU put in place
working groups to continue evaluating restructuring issues and to review utility
filings. Initial timetables called for complete customer choice by the year
2000. Much of the groundwork to establish competition has been laid in New
Jersey, and legislative action would finalize the implementation timetable.
The BPU has proposed to continue existing incentives for and funding of
conservation, efficiency and load management programs via a non-bypassable
distribution charge placed on all customers during the transition period. The
BPU hopes to rely more on market forces to provide energy conservation services,
but in the interim will continue to monitor developments and consider
intervention as needed to ensure continuation of these programs. Continuation of
these programs ensures an outlet for the MLBS.
IV.B.6 Maryland
Maryland has been actively pursuing electricity industry restructuring, but has
yet to put in place the legislation necessary to make it reality. Maryland has
an extensive history of supporting DSM programs and plans to continue support
for these programs as part of its electricity industry restructuring. As with
the
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majority of states examined in this report, the MLBS will find that existing and
future DSM programs offer an excellent distribution outlet while impending
electricity industry restructuring will ultimately strengthen marketing
opportunities.
In late 1997, the Maryland Public Service Commission (PSC) ordered the
introduction of retail competition beginning on July 1, 2000. As part of its
order the PSC outlined a comprehensive list of restructuring issues and
proposals directed at addressing these issues. The PSC also requested that the
legislature provide guidance on legal technicalities and provide any additional
authority the PSC may require to facilitate the transition to retail
competition. Although the PSC has actively supported competition, the Maryland
legislature adjourned in April 1998 without passing any electricity reform
legislation. Thus, the actual implementation schedule is currently uncertain,
but it is expected that restructuring legislation will pass in the next
legislative session. The PSC requires additional authorization to carry out any
program of electric industry restructuring.
As is the case with the other states examined in this report, initial PSC
restructuring proposals call for continued energy conservation programs funded
through non-bypassable charges assessed upon customers by electricity
distribution companies. The collection of these monies and their subsequent
dissemination ensure a short and long term distribution opportunity for the
MLBS.
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V. CONCLUSIONS
The MLBS is poised to enter and capture a significant share of the U.S.
commercial sector ballast market throughout the United States. Existing DSM
progams continue to emphasize the replacement of old, inefficient fluorescent
lighting systems while electricity industry restructuring is only beginning to
open-up new supply outlets for energy conservation technologies. In this report
we have established that: 1) the potential MLBS market size is very large, 2)
the MLBS represents an excellent investment under most conceivable sets of
circumstances, and 3) future uncertainties associated with electricity industry
restructuring should serve to strengthen the MLBS marketing potential,not
lessen it.
We have considered the two specific markets that will be of most interest to
distributors of the MLBS: 1) the commercial fluorescent lighting retrofit
market, and 2) the commercial building new construction market. The combination
of these two markets represent sales opportunities of more than 150 million MLBS
units. We have shown that the retrofit lighting market, driven by state and
federal energy conservation programs, offers substantial distribution potential.
Nationally half of the existing commercial buildings illuminated with
fluorescent lights, or some 23 billion square feet, employ ballasts that are
considerably less efficient than the MLBS. Of these 23 billion square feet, more
than 40% continue to use the least efficient ballast systems that were
commercially available in the U.S. prior to 1991. At the same time, the new
commercial building construction market also owners substantial market
opportunity for the MLBS. Each year some 2 billion square feet of new commercial
building space is constructed, and most of this space will be lighted with
fluorescent lights.
Through the use of economic analyses, we have established the attractiveness of
an investment in the MLBS. In each of the states examined, base case internal
rates of return are in all cases higher than 18%, and in the majority of cases
are between 20 and 50%. These results demonstrate conclusively that the MLBS is
a cost effective investment. Furthermore, when these analyses are sensitized,
the MLBS continues to be an excellent investment. We have also shown that the
potential value of the MLBS to consumers, based on its energy savings potential,
is on the order of hundreds of millions of dollars nationwide with only modest
market penetration. These types of economic results will help drive the demand
for the MLBS.
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Electricity industry restructuring is leading to shifts in who will demand
energy conserving products and how business arrangements to purchase these
products will be defined. The entrenched investor owned utility DSM program
offerings have declined recently as utilities sought to trim their costs and the
shifts in the electricity supply marketplace resulting from state restructuring
legislation take root. In the short term, these trends are reducing the demand
for energy efficient ballasts, but in the longer term there are clearly
significant quantities of fluorescent lamps that use inefficient magnetic
core-coil ballasts that are desirable retrofit targets for the MLBS. Once the
new state level energy conservation programs associated with electricity
industry restructuring take hold, demand for products like the MLBS will
increase.
The new energy supply packages that marketers, including distribution utilities
are beginning to offer will serve to enhance MLBS distribution opportunities.
The ease in which electricity marketers can enter the market will place downward
pressure on the prices of electricity and will push creative marketers to
develop energy supply packages that focus on lowering costs by combining energy
efficiency services with low cost electrons. These new developments will lead to
greater demand for the MLBS. Given that the ultimate number of electricity
marketers will decrease as the restructured electricity industry matures, Elgin
should attempt to form partnerships with those marketers who are likely to
survive, thus securing a long term outlet for its product.
Therefore we conclude that the optimal way to bring the MLBS to market is to
focus simultaneously on two outlets: In states that retain some form of
government mandated DSM--the existing electric utilities, and in those that have
committed to retail competition--electriciry marketers (we include utility
subsidiaries as well as new competitors in this category). The combination of
these two distribution outlets will maximize the visibility of the MLBS. In
other words, Elgin should develop a portfolio of customers as opposed to selling
distribution rights to one or two utilities. In all likelihood, the most
effective marketers may turn out to be utility subsidiaries, but Elgin should
attempt to stimulate competition for the right to distribute the MLBS and not
award such rights on a first come-first serve basis.
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Bibliography
▇▇▇▇▇▇, ▇▇▇▇, April 7, 1998, System Comparison Spreadsheet, ▇▇▇▇▇ ▇▇▇▇▇▇
Power Systems
California Energy Commission, May 30, 1997. Lighting Efficiency Technology
Report.
California Energy Resources Conservation and Development Commission, Proposed
Strategic Plan for Implementing the Research, Development and Demonstration
Provisions of AB1890. 96-RDD-1890, California Energy Resources Conservation and
Development Commission, May 16, 1997.
California Legislature, Assembly ▇▇▇▇ 1890, signed into law on September 23,
1996.
EEI Online, 1998. Retail Wheeling and Restructuring Report. Available
▇▇▇.▇▇▇.▇▇▇.
Electric Power Research Institute, January 1993. 1991 Survey of
Commercial-Sector Demand-Side Management Programs.
Electric Power Research Institute, November 1995. 1994 Survey of Utility
Demand-Side Management Programs and Services.
Energy Information Administration 1995, 1995 Commercial Building Energy
Consumption Survey.
Energy Information Administration; 1998, Electric Power Annual 1997.
Energy Information Administration March 1992. Energy Consumption Series:
Lighting in Commercial Buildings.
Environmental Protection Agency, July 1992. Survey and Forecast of Marketplace
Supply and Demand for Energy-Efficient Lighting Products.
Environmental Protection Agency, May 1997. Building on Our Success: Green Lights
and Energy Star Buildings, 1996 Year in Review.
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▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Berkeley National Laboratory, April 10, 1998. Report on
Electronic Ballast DSM Rebate Research.
▇▇▇▇▇▇, ▇.▇., ▇. ▇. ▇▇▇▇▇▇▇, and ▇.▇. Shown, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Berkeley
National Laboratory, December 1995. Magnetic Fluorescent Ballasts: Market Data,
Market Imperfections, and Policy Success.
▇▇▇, H. and N. Darani, December 1995. Electricity Restructuring and the
Environment, Belfer Center for Science and International Affairs, ▇▇▇▇ ▇.
▇▇▇▇▇▇▇ School of Government, Harvard University.
Logic Laboratories, Inc., June 13, 1997, Background and Technology Primer.
National Association of Regulatory Utility Commissioners, 1996. Utility
Regulatory Policy in the United States and Canada: Compilation 1995-1996.
National Association of Regulatory Utility Commissioners, October 1993.
Incentives for Demand-Side Management.
Pennsylvania Public Utility Commission. 1994-1995 Conservation Activities.
Pennsylvania Legislature H.B. 1509, The Electric Generation Customer Choice and
Competition Act, signed into law on December 3, 1996.
Pennsylvania Public Utility Commission, Order Re: Electric Utility
Restructuring, PPUC, February 13, 1997.
U. S. Code of Federal Regulations, 59 F.R. 11471, March 8, 1994. Executive Order
#12902, Energy Efficiency and Water Conservation at Federal Facilities.
Vorsatz D., L. Shown, ▇. ▇▇▇▇▇▇, ▇. ▇▇▇▇▇▇, A. Denver and ▇. ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ Berkeley National Laboratory, December 1997. Lighting Market
Sourcebook for the US.
Wisconsin Center for Demand-Side Research, 1995. Wisconsin's Statewide
Technical & Economic Potential.
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APPENDIX
A-1
Methodology Used to Estimate the Impact of Energy Conservation
Programs on the Fluorescent Lighting Retrofit Market
A methodology was developed to estimate the extent to which energy conservation
programs have penetrated the existing stock of commercial buildings. There are
four steps that were carried out to establish a reasonable estimate of the
extent to which existing energy conservation programs have penetrated the
existing stock of commercial buildings during the past 20 years: i) total square
footage of existing commercial buildings is determined, ii) the percentage of
square footage that currently have energy efficient ballasts is determined, iii)
an estimate of the distribution of energy efficient ballasts in existing
buildings--both electronic and high efficiency magnetic--is made, and iv) square
footage remaining to be retrofitted is estimated. In order to insure that the
results were reasonable this analysis relied on several data sources and, where
possible, the calculations were executed two different ways in order to ensure
accuracy of the results.
The primary data source for this analysis is the EIA's 1995 Commercial Buildings
Energy Consumption Survey (CBECS). This survey collects information on the
physical characteristics of commercial buildings, equipment use, conservation
features and practices, building use and occupancy patterns, and types and uses
of energy in buildings. This survey specifically asks building owners if energy
efficient ballasts are used in their building and compiles the responses in
order to create an extensive data base. Additional critical data sources are: i)
commercial building lighting use statistics compiled by the ▇▇▇▇▇▇▇▇ Berkeley
National Laboratory (LBNL), ii) commercial building energy use by state compiled
by the EJA, iii) EIA's Electric Power Annual for 1997 iv) the Environmental
Protection Agency's (EPA) Green Light Program data, and v) specific energy
conservation program data compiled by individual state public utility
commissions and national organizations such as the Electric Power Research
Institute (EPRI) and the National Association of Regulatory Utility
Commissioners.
The ultimate goal of this analysis was to estimate the square footage of
commercial buildings in the states of interest that have yet to be retrofitted.
The CBECS does
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not collect data at the state Level, but instead evaluates by census division.
Figure 4 (see Section II) shows the percentage of commercial floorspace with
energy efficient ballasts by census division. In order to evaluate square
footage available in each state, additional analysis was required.
In the case of each state, commercial building square footage data was not
readily available. To surmount this problem the analysis used electricity
consumption in the commercial sector for the state as a starting point for
determining commercial building square footage in a particular state. The amount
of electricity consumed for lighting purposes is estimated by the CBECS to be
28%. This percentage multiplied by the total commercial building sector
electricity uses yields an estimate of electricity consumed for lighting only.
The LBL has calculated an average weighted energy intensity (KWh/ft^2/yr) for
lighting in commercial buildings that accounts for the different types of
commercial buildings in existence. This value of 3.6 KWh/ft^2/yr is divided into
the electricity consumption attributable to lighting to arrive at an estimate of
commercial building square footage in a particular state as of 1995. This
methodology works quite well; in the cases of California and Wisconsin
independent estimates of commercial building square footage were obtained and
differed from the calculated value by only a few percentage points.
Once the building square footage is determined it is straightforward to apply
the CBECS energy efficient ballast percentages to the square footage figures to
determine square footage yet to be retrofitted. Although this technique is
simple it does not provide any information about what the distribution of
energy efficient ballasts is in existing facilities. To estimate the percentage
of energy efficient ballasts that is electronic and the percentage that is high
efficiency magnetic required using data presented in Figure 1 which depicts how
the types of ballasts sold has varied over the last 20 years. Using these data,
and CBECS data on what percentage of existing building square footage has been
built since 1977, an estimate of percentages of magnetic core-coil, high
efficiency magnetic and electronic ballasts currently installed was developed.
In addition to this methodology, actual data on state energy conservation
programs in Wisconsin and California and EPA Green Lights data were used to both
check and attenuate the results.
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A-2
Project Financial Analyses: Tabular Results
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Project Sensitivity to Variation in Electricity Price Forecast
Price Forecast Variation
----------------------------------------------------------------------------------------------
New Construction 90% 95% 98% 99% 100% 101% 102% 105% 110%
----------------------------------------------------------------------------------------------
Internal Rate California 50% 53% 55% 55% 56% 56% 57% 59% 62%
of Return Maryland 33% 35% 37% 37% 38% 38% 38% 40% 42%
New Jersey 53% 56% 58% 58% 59% 59% 60% 62% 55%
Ohio 37% 40% 41% 41% 42% 42% 43% 44% 47%
Pennsylvania 41% 44% 45% 46% 46% 47% 47% 49% 51%
Wisconsin 26% 27% 28% 29% 29% 30% 30% 31% 33%
Net Present Value California $ 3,077 $ 3,331 $ 3,483 $ 3,534 $ 3,585 $ 3,636 $ 3,686 $ 3,839 $ 4,093
Maryland $ 1,692 $ 1,869 $ 1,975 $ 2,010 $ 2,046 $ 2,081 $ 2,117 $ 2,223 $ 2,400
New Jersey $ 3,308 $ 3,575 $ 3,735 $ 3,788 $ 3,841 $ 3,895 $ 3,948 $ 4,108 $ 4,375
Ohio $ 2,015 $ 2,210 $ 2,327 $ 2,366 $ 2,405 $ 2,444 $ 2,483 $ 2,600 $ 2,795
Pennsylvania $ 2,338 $ 2,551 $ 2,679 $ 2,721 $ 2,764 $ 2,807 $ 2,849 $ 2,977 $ 3,190
Wisconsin $ 1,092 $ 1,235 $ 1,321 $ 1,350 $ 1,379 $ 1,408 $ 1,436 $ 1,522 $ 1,666
Payback Period California 1.94 1.84 1.79 1.77 1.75 1.73 1.71 1.37 1.59
Maryland 2.80 2.65 2.57 2.55 2.52 2.49 2.47 2.40 2.29
New Jersey 1.85 1.75 1.70 1.68 1.66 1.65 1.63 1.58 1.51
Ohio 2.54 2.41 2.33 2.31 2.28 2.26 2.24 2.17 2.07
Pennsylvania 2.32 2.20 2.13 2.11 2.09 2.07 2.05 1.99 1.90
Wisconsin 3.47 3.28 3.18 3.14 3.11 3.08 3.05 2.96 2.83
Retrofits
Inernal Rate of Return California 33% 36% 37% 37% 30% 38% 39% 40% 42%
Maryland 21% 22% 23% 24% 24% 24% 25% 26% 27%
New Jersey 35% 38% 39% 39% 40% 40% 41% 42% 44%
Ohio 24% 26% 27% 27% 27% 28% 28% 29% 31%
Pennsylvania 27% 29% 30% 30% 31% 31% 31% 32% 34%
Wisconsin 15% 16% 17% 17% 18% 18% 18% 19% 21%
Net Present Value California $10,313 $11,388 $12,032 $12,247 $12,462 $12,577 $12,892 $13,537 $14,611
Maryland $ 4,453 $ 5,202 $ 5,651 $ 5,801 $ 5,951 $ 6,101 $ 6,250 $ 6,700 $ 7,449
New Jersey $11,290 $12,419 $13,096 $13,322 $13,547 $13,773 $13,999 $14,676 $15,805
Ohio $ 5,821 $ 6,645 $ 7,140 $ 7,305 $ 7,470 $ 7,635 $ 7,800 $ 8,295 $ 9,120
Pennsylvania $ 7,188 $ 8,089 $ 8,629 $ 8,809 $ 8,990 $ 9,170 $ 9,350 $ 9,890 $10,791
Wisconsin $ 1,914 $ 2,522 $ 2,886 $ 3,008 $ 3,129 $ 3,251 $ 3,372 $ 3,737 $ 4,345
Payback Period California 2.79 2.64 2.56 2.53 2.51 2.48 2.45 2.39 2.28
Maryland 4.03 3.81 3.69 3.65 3.62 3.58 3.54 3.44 3.28
New Jersey 2.65 2.51 2.43 2.41 2.39 2.36 2.34 2.27 2.17
Ohio 3.65 3.45 3.35 3.31 3.28 3.24 3.21 3.12 2.97
Pennsylvania 3.34 3.16 3.06 3.03 3.00 2.97 2.94 2.85 2.72
Wisconsin 4.98 4.72 4.57 4.52 4.47 4.43 4.39 4.26 4.06
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Project Sensitivity to Variation in Building Hours of Operation
Hours of Operation
----------------------------------------------------------------------------------------------
New Construction 3060 3230 3332 3366 3400 3434 3468 3570 3740
----------------------------------------------------------------------------------------------
Internal Rate California 50% 53% 55% 55% 56% 56% 57% 59% 62%
of Return Maryland 33% 35% 37% 37% 38% 38% 38% 40% 42%
New Jersey 53% 56% 58% 58% 59% 59% 60% 62% 65%
Ohio 37% 40% 41% 41% 42% 42% 43% 44% 47%
Pennsylvania 41% 44% 45% 46% 46% 47% 47% 49% 51%
Wisconsin 26% 27% 28% 29% 29% 30% 30% 31% 33%
Net Present Value California $ 3,077 $ 3,331 $ 3,483 $ 3,534 $ 3,585 $ 3,636 $ 3,686 $ 3,839 $ 4,093
Maryland $ 1,692 $ 1,869 $ 1,975 $ 2,010 $ 2,046 $ 2,081 $ 2,117 $ 2,223 $ 2,400
New Jersey $ 3,308 $ 3,575 $ 3,735 $ 3,788 $ 3,841 $ 3,895 $ 3,948 $ 4,108 $ 4,375
Ohio $ 2,015 $ 2,210 $ 2,327 $ 2,366 $ 2,405 $ 2,444 $ 2,483 $ 2,600 $ 2,795
Pennsylvania $ 2,338 $ 2,551 $ 2,679 $ 2,721 $ 2,764 $ 2,807 $ 2,849 $ 2,977 $ 3,190
Wisconsin $ 1,092 $ 1,235 $ 1,321 $ 1,350 $ 1,379 $ 1,408 $ 1,436 $ 1,522 $ 1,666
Payback Period California 1.94 1.84 1.79 1.77 1.75 1.73 1.71 1.67 1.59
Maryland 2.80 2.65 2.57 2.55 2.52 2.49 2.47 2.40 2.29
New Jersey 1.85 1.75 1.70 1.68 1.66 1.65 1.63 1.58 1.51
Ohio 2.54 2.41 2.33 2.31 2.28 2.26 2.24 2.17 2.07
Pennsylvania 2.32 2.20 2.13 2.11 2.09 2.07 2.05 1.99 1.90
Wisconsin 3.47 3.28 3.18 3.14 3.11 3.08 3.05 2.96 2.83
Retrofits
Internal Rate California 33% 36% 37% 37% 38% 38% 39% 40% 42%
of Return Maryland 21% 22% 23% 24% 24% 24% 25% 26% 27%
New Jersey 35% 38% 39% 39% 40% 40% 41% 42% 44%
Ohio 24% 26% 27% 27% 27% 28% 28% 29% 31%
Pennsylvania 27% 29% 30% 30% 31% 31% 31% 32% 34%
Wisconsin 15% 16% 17% 17% 18% 18% 18% 19% 21%
Net Present Value California $10,313 $11,388 $12,032 $12,247 $12,462 $12,677 $12,892 $13,537 $ 4,611
Maryland $ 4,453 $ 5,202 $ 5,651 $ 5,801 $ 5,951 $ 6,101 $ 6,250 $ 6,700 $ 7,449
New Jersey $11,290 $12,419 $13,096 $13,322 $13,547 $13,773 $13,999 $14,676 $15,805
Ohio $ 5,821 $ 6,645 $ 7,140 $ 7,305 $ 7,470 $ 7,635 $ 7,800 $ 8,295 $ 9,120
Pennsylvania $ 7,188 $ 8,089 $ 8,629 $ 8,809 $ 8,990 $ 9,170 $ 9,350 $ 9,890 $10,791
Wisconsin $ 1,914 $ 2,522 $ 2,886 $ 3,008 $ 3,129 $ 3,251 $ 3,372 $ 3,737 $ 4,345
Payback Period California 2.79 2.64 2.56 2.53 2.51 2.48 2.46 2.39 2.28
Maryland 4.03 3.81 3.69 3.65 3.62 3.58 3.54 3.44 3.28
New Jersey 2.65 2.51 2.43 2.41 2.39 2.36 2.34 2.27 2.17
Ohio 3.65 3.45 3.35 3.31 3.28 3.24 3.21 3.12 2.97
Pennsylvania 3.34 3.16 3.06 3.03 3.00 2.97 2.94 2.85 2.72
Wisconsin 4.98 4.72 4.57 4.52 4.47 4.43 4.39 4.26 4.06
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 55
--------------------------------------------------------------------------------
Project Sensitivity to Variation in Discount Rate
Discount Rate Variation
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New Construction 20% 15% 10% 6%
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Internal Rate of Return California 56% 55% 56% 56%
Maryland 38% 38% 38% 38%
New Jersey 59% 59% 59% 59%
Ohio 42% 42% 42% 42%
Pennsylvania 46% 46% 46% 46%
Wisconsin 29% 29% 29% 29%
Net Present Value California $ 1,994 $2,668 $ 3,585 $ 4,571
Maryland $ 937 $1,407 $ 2,046 $ 2,733
New Jersey $ 2,170 $2,379 $ 3,841 $ 4,878
Ohio $ 1,184 $1,701 $ 2,405 $ 3,162
Pennsylvania $ 1,430 $1,996 $ 2,764 $ 3,591
Wisconsin $ 479 $ 861 $ 1,379 $ 1,937
Payback Period California 1.75 1.75 1.75 1.75
Maryland 2.52 2.52 2.52 2.52
New Jersey 1.66 1.66 1.66 1.66
Ohio 2.28 2.28 2.28 2.28
Pennsylvania 2.09 2.09 2.09 2.09
Wisconsin 3.11 3.11 3.11 3.11
Retrofits
Internal Rate of Return California 38% 38% 38% 38%
Maryland 24% 24% 24% 24%
New Jersey 40% 40% 40% 40%
Ohio 27% 27% 27% 27%
Pennsylvania 31% 31% 31% 31%
Wisconsin 18% 18% 18% 18%
Net Present Value California $ 5,732 $8,585 $12,462 $16,637
Maryland $ 1,260 $3,249 $ 5,951 $ 8,860
New Jersey $ 6,477 $9,475 $13,547 $17,933
Ohio $ 2,303 $4,494 $ 7,470 $10,675
Pennsylvania $ 3,347 $5,739 $ 8,990 $12,489
Wisconsin $ 678 $ 936 $ 3,129 $ 5,491
Payback Period California 2.51 2.51 2.51 2.51
Maryland 3.52 3.62 3.62 3.62
New Jersey 2.39 2.39 2.39 2.39
Ohio 3.28 3.28 3.28 3.28
Pennsylvania 3.00 3.00 3.00 3.00
Wisconsin 4.47 4.47 4.47 4.47
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.
Elgin MLBS 56
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Project Sensitivity to Variation in Existing Ballasts' Electricity Demand
Variation in Existing Ballasts' Electricity Demand
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Retrofits 1.15 1.22 1.25 1.27 1.28 1.29 1.31 1.34 1.41
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Internal Rate of Reform California 27% 33% 36% 37% 38% 39% 40% 43% 48%
Maryland 16% 20% 23% 23% 24% 25% 26% 28% 32%
New Jersey 29% 25% 38% 39% 40% 41% 42% 45% 53%
Ohio 19% 23% 26% 27% 27% 28% 29% 31% 35%
Pennsylvania 22% 26% 29% 30% 31% 31% 32% 35% 39%
Wisconsin 11% 14% 16% 17% 18% 18% 19% 21% 24%
Net Present Value California $7,462 $ 9,962 $11,462 $11,962 $12,462 $12,962 $13,462 $14,963 $17,463
Maryland $2,466 $ 4,208 $ 5,254 $ 5,602 $ 5,951 $ 6,299 $ 6,648 $ 7,694 $ 9,436
New Jersey $8,294 $10,921 $12,497 $13,022 $13,547 $14,073 $14,598 $16,174 $18,801
Ohio $3,631 $ 5,551 $ 6,702 $ 7,086 $ 7,470 $ 7,854 $ 8,238 $ 9,390 $11,309
Pennsylvania $4,797 $ 6,893 $ 8,151 $ 8,570 $ 8,990 $ 9,409 $ 9,828 $11,086 $13,182
Wisconsin $ 301 $ 1,715 $ 2,564 $ 2,847 $ 3,129 $ 3,412 $ 3,695 $ 4,544 $ 5,958
Payback Period California 3.28 2.84 2.63 2.57 2.51 2.45 2.39 2.24 2.03
Maryland 4.74 4.10 3.80 3.70 3.62 3.53 3.45 3.23 2.92
New Jersey 3.12 2.70 2.50 2.44 2.39 2.33 2.28 2.13 1.93
Ohio 4.29 3.72 3.44 3.36 3.28 3.20 3.13 2.93 2.55
Pennsylvania 3.92 3.40 3.15 3.07 3.00 2.93 2.86 2.68 2.42
Wisconsin 5.87 5.08 4.70 4.58 4.47 4.37 4.27 4.00 3.61
DRAFT
THE ECONOMICS RESOURCE GROUP, INC.