By Hunt Briggs, Erb MBA/MS student, class of 2011.
This Blog entry is cross listed in the Environmental Defense Fund Innovation Exchange Blog.
I’ve worked with Biltmore Farms in Asheville, NC this summer, deciphering energy bills, tracking power demand trends and seeking cost-effective ways for the operations team to boost efficiency in their building portfolio.
Biltmore Farms is a residential and commercial community development company that is motivated to find new ways to keep quality high and costs low. In addition to the additional merits of curbing greenhouse gas emissions, energy management can prove to be a great way to control costs and raise a property’s value.
One of my first meetings at Biltmore Farms was with our regional electricity provider’s customer representative to examine our bills. We looked at a building’s power demand patterns on a daily basis over the last few years and determined how usage variations impacted charges.
I thought electricity costs were fairly straightforward with peak rates being slightly higher than off-peak rates, but as my Climate Corps colleague Ryan Whisnant describes, it turns out that rate structures are a little more involved.
Billing intricacies might include peak demand rates varying by season and seasonal peak time schedules that follow a different seasonal calendar than that of demand rates. Another common component is the ratchet: For example, facilities pay exceedingly high demand charges during peak times, yet must meet minimum billing demands. Even if the billing period demand is drastically reduced, minimum power demand charges might be 75% of a previous season’s maximum monthly demand. So, with complex usage patterns in buildings combined with tricky billing structures, the smartest plan to significantly reducing energy costs will involve some careful analysis and planning.
Mentioned in a recently published article, a study by Johnson Controls Inc and the International Facility Management Association found that 71% of business leaders are paying more attention to energy efficiency than they were a year ago. After discussions with energy management and lighting professionals, utility providers and building managers, it’s clear to me that building owners are starting to take the task more seriously. I’ve discovered many tools that can simplify the task in a building, and I’ve wondered why the broader real estate industry hasn’t been more aggressive in taking advantage of these opportunities for savings.
There seem to be many reasons why efficiency improvements could move faster, but there are clues from the construction process.
For example, at one point in its construction life, the commercial office building was just a shell. Shortly before that, someone had to ante up a hefty sum of equity, leverage the remainder and, since most jobs don’t meet budget, add additional equity to keep pace with ballooning construction and materials costs. Upfront costs can interfere with sophisticated savings implements, or if they were originally included in the proposal, the items are potentially removed from plans at the value engineering stage under competition for funds. Energy management systems, open protocol building controls, ultra-efficient HVAC units, dimmable lighting fixtures, monitoring sensors or other newfangled gadgets that aren’t absolutely essential to the building or future tenants will be first to disappear.
In many instances, modern buildings are outfitted with proprietary control systems that are the industry standard but are increasingly too incompatible to be fully controlled by modern devices. This limits their ability to provide energy fine-tuning, but replacement might be too expensive. It could also be that yesterday’s sophisticated device is simply outdated by today’s standard. New innovations in air conditioning and lighting are continually making it easier to achieve a payback on the investment, but the future savings from these and other devices could be challenging to fit into a cost-benefit discussion at this stage, especially when the financial benefits are difficult to measure.
Split incentives can be tricky too; if a developer is going to invest in these types of instruments, there needs to be some assurance of a return either through realized operational savings if the building will be retained, or through increased net operating income if the building will be sold in the future.
As the business community increasingly seeks to improve energy efficiency in existing buildings, it is important not to overlook opportunities that only exist during the construction phase. In my next post, I’ll consider some often-unrealized opportunities that arise in commercial leased space through leasing arrangements.