Energy

Online Auctions Touted as a Way to Reduce Costs, Go Green

By Jan Greene

In an eBay-like environment, energy suppliers compete for hospital business

Hospitals struggling with higher prices for electricity and gas, exacerbated by rising usage from energy-gobbling technology, may have a new option to manage those costs—a reverse energy auction.

The auction requires energy suppliers to offer contracts in a quick, competitive online session similar to eBay, in contrast to the relatively slow process of issuing requests for proposal on paper and waiting for the bids to come in. Proponents say the auction pushes suppliers to offer better prices than they would otherwise.

Energy auctions, which have been used widely by government agencies, are now being offered to health care facilities in the context of going green. The idea is to either buy contracts that include renewable, “green” energy sources, or use the savings from the auction process to support environmentally sustainable policies throughout the facility.

Hospital purchasing alliance Premier Inc. is working with Practice Greenhealth, an organization dedicated to helping health care become more environmentally friendly, to promote energy auctions. Practice Greenhealth, Arlington, Va., runs the Healthcare Clean Energy Exchange, which works with more than 250 suppliers that participate in the auctions.

Covenant Health Systems, Lexington, Mass., in June became the first Premier hospital to conduct an auction, seeking energy for seven facilities in Maine and Massachusetts. Bids were solicited on several different RFPs for each state, with different terms (two-year, three-year and four-year) and some including 5 percent green energy.

In a frenetic two-hour online session, eight different suppliers bid on the RFPs, which could be reviewed ahead of time. “Once the day comes it’s very intense and fast,” says Kenneth Ferron, vice president of administration for Covenant. When the bids came in, Covenant had its own deadline a few hours later to decide which ones to accept.

In the end, Nick DeDominicis, director of HCEE, calculates that Covenant saved about $1.6 million over the paper process. The organization bought four contracts ranging from 42 to 48 months for the annual purchase of 22.2 million kilowatt hours of electricity for a total of $11.4 million over the entire contract period.

Covenant did not buy any of the 5 percent green energy offers because they came in too high. DeDominicis says the auction took place on a volatile day for the energy markets and on another day that same green option might be comparable in cost to traditional “brown” energy.

In retrospect, Ferron says, it can be hard to accept the final price when you watch the markets continue to go up and down after the auction and wonder whether it would have been better to wait a day or two.

“You can’t sit there and magically pick the right day,” he acknowledges. “Recently the price has gone down a bit, but the trend overall is up; we knew this from our own research.”

Ferron says the organization was disappointed not to be able to include green energy in the mix, but hopes to put more effort into energy conservation to compensate. Covenant has already gone to cogeneration with some facilities, and adjusted lighting and wall switches to reduce power consumption.

Ferron says Covenant would do an auction again, but probably not with as many complicated contracts in one day. The auction also helped Covenant consolidate its energy purchasing for several facilities, giving it more bargaining power in the marketplace.

To participate in the auctions, organizations need to be located in a state with deregulated energy markets; most states qualify for natural gas, but only 15 states are deregulated for electricity. This article originally appeared in the September 2008 issue of Health Facilities Management.

This article 1st appeared in the January 2009 issue of HHN Magazine.

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