t is a basic tenet of business that the cost of goods and services passed along to consumers, commercial or otherwise, is driven by operating costs and profit margin. As it does in so many other ways, Alaska deviates from this simplistic economic principle. Especially when it comes to energy.

“Alaska has some of the highest costs of living in the country, particularly in rural Alaska. In the SBDC’s [Small Business Development Center’s] annual survey of small businesses, operating costs were one of the top three barriers to business,” Alaska SBDC Executive Director Jon Bittner says. “In smaller communities, that is driven largely by energy and the cost of transporting goods.”

Bittner points out that, when energy costs more than $0.20 per kWh, it has a huge impact on what a business must charge its clients to break even, much less make a profit.

For most of the more than 100 Alaska communities that are not directly connected to the rest of the state via road or rail, the cost of energy is significantly higher than in the state’s “urban” communities, as fuel must be brought in by airplane or barge.

One major exception in Alaska is Anchorage, which primarily relies on natural gas for heat and power.

“They use the Cook Inlet natural gas deposit. Their energy costs—per million BTUs—are actually below the median national cost,” says Nathan Wiltse, policy program manager and building energy economist for the Cold Climate Housing Research Center. “There was an effective subsidy on natural gas for Anchorage with a production tax rate of 1 percent and additional credits. Between 2005 and 2015, their cost per million BTUs was half of the median national cost of energy per million BTUs. During that period the cost of energy in Fairbanks was between three and four times [depending on specific fuel mix] the cost of energy in Anchorage. Rural Alaska was two to three times the cost of Fairbanks.”

Another exemption to a community reliance on fuel for power is in Kodiak, which is powered by renewable energy resources via the nonprofit Kodiak Electric Association (KEA). However, even Anchorage and Kodiak businesses still need to deal with the cost of keeping light and warm during the Last Frontier’s long winters.

“Alaska is located in Climate Zones 6, 7, and 8. We have actually got a state-designated Climate Zone 9 for things north of the Brooks Range—it is just that cold,” Wiltse says. “With the heating season lasting eight months, Fairbanks has about 14,000 heating degree days. Communities north of the Brooks Range have about 20,000. Anchorage averages more than 10,000 heating degree days. Meanwhile, the coldest counties in the coldest states in the Lower 48 rarely get beyond 8,000 heating degree days and have a shorter winter.”

The generally higher costs of energy, mixed with longer heating seasons, add significantly to overhead for businesses operating in Alaska. But such costs can be minimized through energy efficiencies.

“In places where the energy costs are the highest, obviously there is a much larger focus on bringing costs down. The difficulty is in getting the businesses and individuals in those communities the information and resources they need to understand what their options are,” Bittner says.

Such resources include the Renewable Energy Alaska Project, the Division of Community and Regional Affairs, and the Alaska Energy Authority (AEA).

“[They] and many others do a fantastic job of collecting and distributing information and resources across the state,” Bittner says. “That being said, Alaska is a huge area with a wide variety of needs, so it can be a challenge making sure that everyone is taking advantage of all of the opportunities available to them.”

SBDC also provides a variety of support to businesses interested in exploring energy efficiency.

“We can help with the cash flow modeling, provide information about a variety of state and federal programs, help businesses put together application packages for financing, and many other services,” Bittner says.

He notes that the first step toward making energy efficiency gains is for businesses to understand the long term financial benefits of energy efficiency upgrades.

“In some regions of the state, the easiest way to bring costs down is to focus on increasing efficiency. Elsewhere, using renewable energy systems or improving the local power system may make more sense,” Bittner says.

The next step for most businesses is getting an energy audit. The Cold Climate Housing Research Center launched a pilot project with the Denali Commission, Rasmuson Foundation, and Rural Community Assistance Corporation in 2014 with the goal of learning how to implement a self-sustained energy efficiency program that would provide comprehensive energy retrofits for buildings statewide. The project, which ended in 2017, provided energy audits and access to low-interest loan financing to encourage energy efficient retrofitting.

“It went both really well and really poorly depending on how you look at it,” says Vanessa Stevens, a researcher with the Cold Climate Housing Research Center.

The project was unable to establish the self-sustaining element of the pilot program (which would have come from interest on loans), mostly due to financial restrictions faced by the participating nonprofits.

“Funding situations [for nonprofits] tend to be more tenuous than a business. Nonprofits have a lot of additional hurdles to taking out a loan—a lot of their boards turn over every three to five years. So, [often] the current board didn’t want to take on a ten year loan and saddle future boards to pay for that loan,” Stevens says. “It was really a successful project [in other ways]. All the nonprofits either had imminent plans to act on their retrofit or they acted on the retrofit—and that is fairly unheard of Alaska.”

One of the reasons for the high success rate of nonprofits acting on their energy audit—which is fairly technical and thirty to fifty pages long—was that the program provided technical assistance in understanding the audit and guidance on how to proceed once it was finished.

“One huge hurdle that everyone in Alaska is trying to deal with—residential, commercial, and nonprofit buildings—is when you do the energy audit… but then the energy audit sits on the shelf,” Stevens says. “There’s a big hurdle there because you have to find the money to do the retrofit, whether it’s a loan or self-funding. Then you actually have to get the contractors to do the work, schedule them, and get the work done.”

Stevens says that most auditors find time to work with business owners who want to understand the audit, as they don’t want the audit to sit on a shelf.“They’ll sit down with them and walk them through it, but you kind of need to ask,” Stevens says, recommending an in-person meeting or a post-audit walkthrough, if possible.

The output of an energy audit will provide the building owner with actionable recommendations, as well as estimated costs and the payback period based on estimated savings.

“Some can be paid back in less than one year, especially if you’re on really old lighting technology on your building,” Stevens says. “Typically, a really good payback is under five years; five to fifteen years it’s usually worth doing. Past fifteen years, you’re kind of looking at, do you want to do it? Does it have any additional advantages, such as prolonging the life of the building?”

In general, most businesses looking to cut costs and increase energy efficiency focus on lighting and ventilation.

“There are major savings from these areas in electrical loads and possibly demand cost savings. Adding control systems—occupancy, daylight, scheduling—to these systems is also another area of major savings,” Wiltse says. “Lighting and control systems are the two easiest for a business to do, even if they are a tenant in a leased space. Sometimes they can also do ventilation.”

For businesses in standalone buildings, heating is often a large energy load.

“Determining the best mix of shell improvements—[such as] insulation and air tightening—and heating system upgrades [like] scheduling, outdoor offset, higher efficiency, [and] fuel switching can depend on many factors including the location of the business, cost of materials, and access to maintenance personnel,” Wiltse says. “If I owned the space, then I would probably look at lighting, ventilation, and controls, and then look at my heating and envelope options after. I might add air sealing from the envelope improvements options at the time of ventilation changes.”

Wiltse notes that businesses wanting to engage in energy efficiencies need to have a certain amount of disposable income or access to loans at low enough rates that they pencil out based on anticipated savings.

“You also need to be able to either close your business while work is going on or have sufficient space to section off the areas receiving work,” Wiltse says. “This also assumes they own the space and are not leasing. If they are leasing, they have no say in this and often the owner is passing the costs for energy straight on to the lessor, so the owners have no incentive to improve their building until they can no longer find someone willing to be a tenant.”

For building owners who do want to make energy efficiency improvements, the USDA offers grant and loan options for areas outside the Municipality of Anchorage

“For example, AEA has a USDA-funded Commercial Building Energy Audit program for commercially owned buildings located in rural Alaska—outside of the Municipality of Anchorage,” Wiltse says. “Juneau’s Economic Development Corporation has a small business loan for up to $300,000, which I believe is not restricted from being used on energy efficiency.”

Alaska utility companies have also taken it upon themselves in some cases to help businesses cut their energy consumption and costs.

“Chugach is pleased to have an online tool to help both residential and commercial members find ways to reduce their electrical consumption and electric bills,” says Julie Hasquet, senior manager of corporate communications at Chugach Electric Association.

Hasquet explains that a key component to reducing consumption and cost for large commercial businesses is to understand electrical demand, which is the rate at which electricity is used at any one given time, as opposed to energy, which reflects the amount of electricity that is consumed over time.

“The purpose of the demand charge is to recover the cost of having the facilities available to provide the maximum amount of electricity customers may require. It is both the rate and the quantity at which members consume electrical energy that affects how much it costs the utility to produce and deliver power,” Hasquet says. “Given this, it is clear that there is more to managing electricity than just using less of it. While most conservation programs will reduce your energy costs and may affect demand, a deliberate effort to control demand can have a significant impact on reducing bills. These efforts that focus on lowering demand is known as load management.”

Businesses can manage demand costs by running machinery that requires more power during times of the day when their electric usage is lowest.

“The My Account portal allows [our] members to identify when their demand peaks occur, which assists with scheduling and potentially lowering their total bill,” Hasquet says.

In Kodiak, electric costs are lower than most of the state. And while heating costs are higher than along the Railbelt, they are lower than in more remote Alaska communities, explains KEA President and CEO Darron Scott.

“The main way that we have worked to reduce their costs is to reduce ours. We are a not for profit cooperative, so our costs are theirs,” Scott says. “We have been very successful in this as we have not had a rate increase since the ‘90s.”

KEA’s primary focus has been to move to a fully renewable electric system.

“This has allowed us to not have to pass on the cost of diesel to our consumers, so it keeps their costs down,” Scott says. “One other area that we have worked on with the borough and the school district—and we are in talks with others—is to utilize our excess renewable energy. They can use that power at a lower cost for heating than their oil costs for heating. It provides a win-win for our community.”

Though businesses throughout the state face the highest energy costs in the nation—creating a barrier that can put a drag on local economies—they are also the benefactors of a wave of research and development in the energy efficiency, renewable energy, and microgrid industries.

“Alaska isn’t the only place that has these kind of issues: large geographic area, underdeveloped energy infrastructure, high costs, and small populations,” Bittner says. “If we can solve our own energy problems, I believe that we will be creating marketable products and services that we can export outside of the state to our overall economic benefit.”