Commercial, Energy Procurement, Power Prices, Utilities, Commercial, Distributed Generation, Solar, Sourcing Renewables, Wind - November 16, 2016 - By Amy Poszywak
Views from the top: How Whole Foods is navigating an increasingly complex energy market (part 1)
Exclusive to Smart Energy Decisions
An early adopter of rooftop solar at its stores, Whole Foods Market has been considered a leader in corporate energy management for quite some time. And although the company's interest in its impact on the environment is rooted in its brand — "Since we opened our first store in 1980, we've not only been passionate about healthy food, we’ve been passionate about a healthy planet," its website reads — it has also found its efforts in energy efficiency, clean energy and distributed energy resources to be smart financial decisions.
The company's rooftop solar strategy started with a handful of installations at its stores in the early 2000s done by small, local solar developers and slowly grew to reach 40 stores by the end of 2015. In 2016, however, Whole Foods Market announced plans to rapidly increase that number to 100 through partnerships with NRG Energy Inc. and SolarCity Corp. The company has also been actively purchasing renewable energy credits from wind farms since 2006, and has been working as a partner with the Department of Energy's Better Buildings Challenge to reduce the amount of energy used across its portfolio of stores and warehouses.
We recently had a long conservation with Aaron Daly, Whole Foods Market's global director of energy management, about the company's current challenges in energy management — both on the supply and demand sides — and the increasingly complex environment for large commercial and industrial energy managers. The conversation with Daly, who is also a Smart Energy Decisions advisory board member, spans Whole Foods Market's energy management strategy and goals, its activities with distributed energy resources, its relationship with its utilities, a growing desire for more control over the company's energy bills and the overwhelming amount of new technologies and service providers available to today's energy manager.
The following is part one of an edited version of that conversation. Look for part two in the coming days.
Smart Energy Decisions: Do you agree with the narrative that there is a dramatic shift underway in corporate energy management in recent years? How have you seen that play out in your role and throughout your team at Whole Foods?
Aaron Daly: Absolutely I agree, and I agree even on a longer term; over the past couple of decades, there has been plenty of change afoot in our industry and within our role. But more distinctively over the past decade and into the past couple of years, that change is increasing in speed.I think the change is really driven by several trends, and not all of them in the retail industry or in the energy manager industry directly, but trends within the energy industry itself, such as increases in costs to the utilities that they are then passing on to us as customers, associated with changes in environmental regulations or fuel costs, grid infrastructure requirements and things like that. So we're seeing increased costs year on year, pretty much across the board, and that is driving a changed focus on our end from the top down.
I think the change is really driven by several trends, and not all of them in the retail industry or in the energy manager industry directly, but trends within the energy industry itself, such as increases in costs to the utilities that they are then passing on to us as customers, associated with changes in environmental regulations or fuel costs, grid infrastructure requirements and things like that. So we're seeing increased costs year on year, pretty much across the board, and that is driving a changed focus on our end from the top down.
We're also seeing increased complexity, and that looks like the utility industry going through a big shakeup. Whether it's demand response programs, first the advent of demand response programs and more recently the evolution of demand response programs and automatic demand response, or the whole concept of demand responsive load, our relationships with our utility providers are changing to not just be about buying power at fixed rates.
There's also increased expectations on us as energy managers, year-on-year. When I say that, I mean that the energy budget used to, in many respects, be seen as a fixed cost, and our programs were about making sure that we dealt with exceptions, that we maintained our buildings correctly, etc. But increasingly, people are realizing that energy costs are not fixed costs, and that we as energy managers, through energy efficiency, through energy procurement, through other programs, have the ability to drive efficiency in the business and eventually profitability. Based on that, there is increased focus and expectation on us to deliver to the business, economically speaking, but also environmentally speaking and socially speaking. There's a lot of focus on large corporations from the NGO community as well as the public at large, and that's driving increased pressure on the energy manager to not only reduce costs in the business but to reduce emissions and to reduce other associated impacts of the energy infrastructure.
I would say the final trend is that in response to much of the changes, there is an evolving of this new arena of business tools and companies producing new services and products to help us, as energy managers, figure out this increased complexity and an increased pace of change. In some ways, the very presence of all of those tools, and the diversity of them, adds to the complexity.
Given all of those factors, how has Whole Foods changed the way it's approaching energy management?
All of those trends have created an increased focus on this area of the business. We're making commitments, publicly, in line with our core values as a business, and we're making investments in being increasingly more sophisticated about our approach. We're also putting more infrastructure in place to allow us to do that. What that looks like is tools that we're employing, additional headcount that we're putting in place and training and other things like that to increase our capacity to work on energy management issues.
It also looks like just a broader array of goals. As an example, I'd say one goal that has seen increased visibility in the energy management space for Whole Foods Market specifically over the past few years has been reliability and resiliency. And not just that in a trend in and of itself, but one that is bumping up against some of the other goals and objectives that we have. We've got a general goal and objective to increase efficiency in our stores. We've got another goal to reduce the emissions and environmental profile of our stores and procurement efforts, and then on top of that, we're layering in the need for resiliency, so that leads to some different decision making and some challenges that we haven't seen in the past.
So we've been doing a lot of piloting and case studies of various different kinds of approaches. For example, right now we're doing a net zero energy grocery store pilot program in California. We've also been deploying various different types of [combined heat and power] assets at our stores so that we can keep them running in the case that the grid would go down, but at the same time we can see benefits, both environmental as well as economic, 365 days a year through the combined heat and power system. So we try to be innovative and stay ahead of those issues that are in some ways colliding and the need to think about them in an integrated way.
Clearly, there is a lot you have going on all at once. What would you say are the top three challenges that you and your team are faced with as you look at all those goals?
We have been investing in our stores in energy efficiency for years, and in some ways have been ahead of the general industry in terms of deploying technology. As a result, we've found that in some ways we are asking more of our partners than they're ready for, whether it's utilities or program implementers or technology providers and other players, and also we're coming to a place now where in many regions of the country we have completed most of the low hanging fruit in the energy efficiency space. What that means for us is that projects are getting increasingly more complex and integrated, requiring more project management, requiring more strategic thinking, but ultimately, we're looking at projects that are going at deep energy savings, and in many cases trying to layer multiple different kinds of benefits, which as I mentioned earlier could be resiliency, or demand response or storage, combined with energy efficiency or other benefits.
Secondly, one of our strong suits as a company is that we have very distributed decision-making platform and we really empower our stores and the regions in the company to be relevant in those local markets and to make the decisions they need to. And at the same time as an energy manager, I see that that reduces our efficiency and ability in deploying the latest and greatest technology. Likewise, we also have ongoing discussions with various regions or stores or groups within our organization about the relative impacts of energy efficiency on, for example, sales, or maintenance or on the team member experience in the store, or the customer experience and other things like that. So, with the added complexity of these integrated projects we're also seeing an increased need to engage with multiple stakeholders to get stuff done.
And I think it's partly a factor of our company and how we operate, it's partly a factor of how far we've come to date and therefore the need to think about things more deeply as we deploy technology and programs in general. A good example of that would be the implication of putting glass doors on our open refrigerators. Those keep the store warmer, which the customer likes, but they put a barrier between the customer and the product, which the sales folks have concerns about. It’s also another thing that could break in the store that we would then need to fix. But it has a dramatic energy efficiency improvement. So there are various aspects to projects like this that we have to think through.
Additionally, the proliferation of tools and technology that are available are both a blessing and a challenge in the sense that we're bringing all of these into our company in real time and trying to integrate them and get the value out of them. Any one of them in a vacuum would be a great idea, but trying to pull them all in together, and then ensure they make sense within the context of our company, which is already very complex, is difficult to do. There's a fair amount of thinking that needs to go on there and a fair amount of trial and error, and I would say that's one of the biggest challenges we deal with on an ongoing basis: How do we make those decisions about which technology to integrate and then, how do we integrate it. It's an ongoing process and one that I think moves a lot slower than we'd all like.
Do you have ideas for how that specific challenge could be addressed? Does there need to be more standardized testing of those products or is it just one of those things where the market is so rapidly evolving that everyone is really just figuring out as it moves?
I think that the latter point you make there is definitely true. The market is evolving very quickly, and there are a lot of new entrants into the market and there are a lot of existing players that are pivoting their business models to try and stay relevant as things change. And when I say things change, we're seeing dramatic costs reductions in IoT infrastructure, in metering or the ability to control devices at very granular levels. Or the ability to then utilize large amounts of data and make sense of it. Or reductions in energy storage or onsite energy production such as solar or even to a lesser degree wind, electric vehicles, and all of the other components of new business developments that are going on that interact with each other. I think one of the missing links that the industry hasn't yet addressed is thinking about how all of those companies that want to eventually help their customer — us — up-level our energy management programs, each one of them, as I mentioned earlier, taken in a vacuum, would not necessarily be a huge lift to integrate, but taken together they can be very difficult to make sense of, and I think that many of the companies are probably just too small to dedicate the staff and the large ones haven't yet gotten around to it, but there's a need for some conversation on the industry side to come up with common language about how these things operate and how they function together. And in certain segments there are efforts, like the automated demand response alliance has created protocols for communication, for example, but when it comes to integrating various different kinds of platforms, I think there's a fair amount of work to be done and I'm not sure what the consolation of organizations would look like but certainly there's an opportunity to improve things in that area.
You were going over the challenges of the energy management broadly, and we're curious if there are any challenges specifically tied to renewable energy that you're dealing with?
Certainly there are. Our process as a company, in the past, involved buying renewable energy credits to offset our energy consumption. We were doing that at the 100% level, and in some cases, it was an easy win for a big environmental benefit and it had the co-benefit of providing real money to a nascent wind industry at the time. But things have changed, and the wind industry doesn't get a lot of benefit from what is now a small amount of money to them, from wind RECs, and for us, buying RECs is an expense at the end of the day. So we wanted to have a smarter program.
We've spent a number of years experimenting and doing a number of small, onsite solar programs or projects, and we saw trends coming together, like reduced costs or larger national companies surfacing that we could work with, as well as challenges on our side that we were facing with the way we were doing rooftop solar that made us want to do rooftop solar in more of an integrated or national way. So we put together a national rooftop solar program and we've been working on that for about a year and a half now. And I would say the challenges there come from a few different places.
One, the technology, and how to integrate solar on the rooftops is still new to most people. So a lot of people haven't thought through the implications of it, whether it comes to risk or insurance or the impact on existing contractual relationships such as between tenants and landlord or between roof membrane manufacturer and building owner, or other types of existing contracts that are impacted by the fact that this new technology exists and it's on the roof.
And then for us, we have a diverse portfolio of buildings, and some of them are new and we built from the ground up and we don't face a lot of challenges putting solar on those but some of them are old, or we bought them from other retailers and we may not have all the information from when the building was built. Those can be very difficult if not completely impossible to do onsite renewable energy at those sites.
But for our own business reasons of being a public-facing company, being a company where our team members are in the stores, our customers are in the stores, people want to see solar on our rooftops. We have big flat roofs, and in many people's eyes, they don't see the obstacles in doing that. So even though we could, from an economic perspective, build a large solar farm or wind farm somewhere where the resource is good and buy the power at a better price, we see the benefit to our company and to our various stakeholders to first start with the onsite resources. But it is, for the reasons I just mentioned, a difficult program to implement. I think as we go forward, it will become easier as we develop it as part of a new building strategy and as part of the contracts that we enter into going forward, so I expect that some of the pain and heartache and lessons learned that are happening now, that it will become more streamlined going forward; certainly that is my hope.
We have seen a lot of other companies as of late, particularly in the technology space, entering into large offsite deals, and that has been very much a focus of interest for us, but we're challenged a little bit because I think in our industry, there's not the same focus on the 100% renewable energy commitment as there is in the data center industry. There are other issues in the supermarket industry and the retail industry that are taking precedence at this point, like food quality, organics, GMOs, other issues like that that are very relevant to the products that we sell and to the customer experience, and those issues often take precedence over other goals like energy facilities related goals. So we don't have the same robust conversation in the retail industry about the big goals in renewable energy that I've seen in the technology space, but I would like to see us get there. I'd like to see us having more retailer conversations about how to put that together. But I think what that means in terms of it being a challenge for us is that there's not as much mindshare within the organization and we're not yet sophisticated enough, broadly as an organization to deal with these large contracts, long-term time frames, that have significant financial impacts on the business, to get them done. I think it's a challenge, not a road block, so I think we will be able to address them but I think that it's one that has to get in line with various other issues that the company is facing that need significant attention.
There's also the issue of volatility in power prices. We've seen a dramatic decrease in natural gas prices over the past number of years and even though renewable energy prices are still coming down it has made for a bit of fits and starts looking at doing longer-term renewable energy projects because those who might be incentivized when we're experiencing pain from high prices now, will quickly turn their attention to bigger problems of the day when prices are low. So the lower gas prices have tamed interest somewhat, and I wouldn't say this just personally for our company but for the industry at large, because it's sort of like tackling a problem you don't have, at least from a cost perspective.
There's also a different focus on energy at a retail company, I would imagine, compared to say a data center company where energy is such a much larger portion of their expenses, does that play into the decision as well?
Certainly. I think there are a couple of issues surrounding that. Data centers tend to be a single large point load. So a tech company might put a data center into a particular state, because they know the expense of that power is such a huge issue for them, as well as the environmental impact of that power procurement being an issue for them and the public. So that's going to be a big factor in their decision of where to locate that site. Then they're going to be able to make a particular renewables program built around addressing that one site.
In the retail industry, we use a lot of power but in a much more distributed manner. So we're going to have sites in all different kinds of utility territories, in all different kinds of jurisdictions and we're not making our choices based on the power market there or policy or other things related to procuring energy. So we end up doing the best we can given the circumstances that we're in, and a lot of times those are a lot less than ideal. So it's a slightly different decision-making process.
Stay tuned for part two of this conversation, which covers energy storage, the new market for commercial and industrial solutions providers and Daly's thoughts on the sometimes contentious relationship between large energy users and their utilities.