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Top Site Selection Factors: Energy Availability and Costs - Reconciling Price and Reliability

Energy availability and costs was ranked in ninth place in Area Development's 25th Annual Corporate Survey, with 82.1 percent of the respondents rating this factor as very important or important. Although his factor declined in importance by 5.9 percentage points from its fourth place ranking in 2009, this may reflect that the responding companies were not quite as energy-intensive.

November 2011
The Top Site Selection Factor series outlines the factors that ranked high in importance by the executives responding to Area Development's 25th Annual Corporate Survey. Find out why and how these factors should be evaluated in your next move...

An Industry-Dependent Variable

Greg Elam, president and CEO of STEP Resources, an Oxford, Ohio-based energy management resource company, notes that energy is among his top five issues for site selection, depending upon the industry. For instance, data center projects are very dependent on energy, which accounts for 60 percent of operating costs. These companies, Elam says, strive to locate "near a customer center and a reasonable energy supply."

His company helps firms that are seeking economically feasible sites to understand the costs of energy over the long term. "We look for a full 10-year net present value, which is what it costs to bring primary and redundant power to a site," says Elam, as well as the value of both the infrastructure costs and the operating costs over a 10-year period.

Houston, Texas-headquartered CyrusOne builds and manages data centers on behalf of other companies. Gary Wojtaszek, the company's president and CEO, says, "As a global data center facilities provider, we take into consideration many options when selecting a site. Energy availability and the cost of power are two of the top five considerations we look at before deciding to build a data center." He notes that data centers focus on inexpensive power, quick service, and latency, or how quickly their data can be accessed.

STEP Resources has also worked on behalf of Rubicon Technology, an advanced electronic materials provider that develops and manufactures high-quality monocrystalline sapphire products in large volume for industrial uses enabling multiple, high-growth end-markets, including light-emitting diodes (LEDs), radio frequency integrated circuits (RFICs), and blue laser diodes. Variables such as stable power must be optimally managed to maximize the yield of quality sapphire crystal. Last year, the firm located a new 135,000-square-foot sapphire crystal manufacturing facility in Batavia, Illinois, to increase capacity to support the growing demand for LEDs in the consumer electronics and general lighting industries.

Bill Weissman, CFO of Rubicon Technology, notes, "When selecting a site for a new facility, the price of energy as well as infrastructure costs are key components to our decision-making process. The ability to have access to low-cost energy, as well as the ability to be flexible and manage these costs, has never been more important to maintain our competitive advantage."

Environmental Responsibility
Debates are ongoing about environmental responsibility in power consumption and how this affects costs. While some lawmakers focus on renewable energy standards, controversy continues over the practicality of such projects. Currently, 29 states and D.C. have RPS (renewable portfolio standards) policies; nine states and three power authorities have nonbinding goals, according to the Federal Energy Regulatory Commission (FERC).

The U.S. Environmental Protection Agency (EPA) notes that "an RPS requires electric utilities and other retail electric providers to supply a specified minimum amount of customer load with electricity from eligible renewable energy sources. The goal of an RPS is to stimulate market and technology development so that, ultimately, renewable energy will be economically competitive with conventional forms of electric power."

Elam notes that usually, an RPS adds to the costs of a project, and discussions with company CFOs need to underscore that the energy choice must make financial sense to shareholders.

Mitigating Costs
In cases where a project is highly valued, even states with high utility rates try to mitigate the costs. Elam recalls one Fortune 100 company that sought to locate in an Arizona community, but the cost of the power was $2 million more than the net present value in a neighboring city. When made aware of the burden, the community responded with a $6 million incentive package, of which $2 million was earmarked for energy.

James McGraw, president & CEO of KMK Consulting Company, LLC, notes, "With companies still looking for every avenue to cut and control costs, energy has risen to a top-tier factor in site location." KMK Consulting has worked on projects in just the past year that have involved Kentucky, Tennessee, Georgia, South Carolina, and Indiana.

McGraw continues: "In every instance, energy has been a specific issue with our clients. These states are in the top tier with respect to reliability and price when taken together."

Price is far more of an issue than reliability with his clients, he says, except for data centers, where reliability takes priority. In most cases, the reliability issue is handled through infrastructure, like dual feeds, where the cost of that infrastructure could be negotiated. According to McGraw, "The ability to negotiate on this issue is something we have found quite successful with several utilities. Utilities these days are more inclined to be seen as our client's partner and solution provider. We are believers in the notion of building relationships between our clients and the utility companies. We do not see any diminishing importance or less client focus for the foreseeable future on energy pricing or reliability, especially as base load generation capacity issues become much more serious in the next decade. "

Smart Grid Technology
Looking to the future, GE Energy, a supplier of power generation and energy-delivery technologies, will open its Smart Grid Technology Center of Excellence near the company's existing Marietta headquarters in Cobb County, Georgia. The $15 million GE Energy Smart Grid Technology Center of Excellence will be responsible for developing smart grid technology to markets around the world and is expected to create 400 jobs over the next three years. The center will also manage the research and development of new technology for power plant automation, monitoring electrical grids and full integration of an "energy Internet." The solutions developed at the center will build in efficiencies to optimize the resources of power plants, conserve natural resources, and ultimately reduce electricity rates for industry and consumers.

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