Economics of Energy Efficiency for the Commercial HVAC Marketplace

Jan. 1, 2005
By Jean Lupinacci, Director, U.S. EPA Energy Star, Washington, D.C. Trends in todays marketplace, such as tight energy supplies, increasing energy prices,

By Jean Lupinacci, Director, U.S. EPA Energy Star, Washington, D.C.

Trends in today’s marketplace, such as tight energy supplies, increasing energy prices, and air pollution are shining a spotlight on energy. As social responsibility, climate change and green buildings become driving issues, leading businesses and institutions are looking to gain a competitive advantage by taking proactive steps to address these issues through effective energy management.

Energy is necessary to run the buildings we work in and to make the products we use in our everyday lives. The energy used in commercial buildings and manufacturing generates almost 40 percent of U.S. greenhouse gases. But, it is possible to make significant reductions in these emissions cost-effectively. EPA estimates American businesses can reduce, on average, 30 percent of their energy use just by targeting energy that is used unnecessarily or inefficiently.

To demonstrate environmental stewardship and add financial value, energy management shouldn’t be viewed as an optional strategy; it needs to be a cornerstone strategy.

For example, to build and operate green buildings, top energy performance should be a prerequisite. Beyond the environmental benefits, much of the financial benefits from green buildings are directly or indirectly attributed to effective building strategies and technologies that reduce energy. Green buildings need to demonstrate they are cost-competitive and reduce environmental emissions.

Energy management has typically been about technologies, individual projects, or high-profile buildings designed to surpass the energy codes. EPA has found that if typical energy management programs move beyond this, to organization-wide strategic energy management, they can achieve twice the savings. This article describes how such a strategy can be achieved.

Building the Financial Case
Capturing energy savings helps the environment as well as the bottom line. There is a strong business case to be made for investing in energy improvements. EPA estimates that a commercial-building owner can generate $2 to $3 of incremental asset value for every $1 invested in energy performance improvements. According to the USAA Real Estate Co., they recently sold a property in California that garnered $5 million in additional value because it had earned an Energy Star.

A retail grocer can reap the equivalent of increasing sales by $85 by reducing annual energy costs by $1. Food Lion, an Energy Star award winning partner, has demonstrated significant reductions in their energy use even while increasing their square footage. Their energy savings are equivalent to roughly $50 million in sales.

Recent studies conducted by Innovest Strategic Value Advisors have determined that companies with effective energy management plans in place tend to be strong environmental performers and strong performers on Wall Street. Their research shows that leaders in corporate energy management outperform their competitors by 20 to 30 percent on Wall Street.

Making a strong financial case is necessary to elevate energy as a priority. EPA provides financial analysis software to help make these links. At the building level, software can be used to allocate the costs and benefits of energy-efficiency upgrades between owners and tenants and to show how lower operating costs can reduce vacancy and increase net operating income and asset value.

EPA also makes available a financial value calculator that translates portfolio wide energy reductions to increases in net operating income and earnings per share. A cash flow calculator was developed to estimate how much new energy efficiency equipment can be purchased from anticipated energy savings, the implications of different financing options and the cost of delaying investment.
Translating energy savings into financial value can mean the difference between strategies sitting on a shelf and real results.

How Do you Compare?
EPA’s Energy Star program is a good place to start to assess the current strength of an organization’s energy management plan, whether it’s your own plan or that of your clients. The Energy Star Website offers market-tested energy efficiency solutions for building owners and service providers. Think of it as a ready-made, straightforward approach to superior energy management. EPA has distilled the practices of leading organizations into actionable Energy Star guidance. To date, over 13,000 organizations of all sizes have participated in Energy Star. EPA estimates that more than 45.7 billion kwh have been saved through these efforts.

Drawing from their successful practices, EPA has identified key elements of a superior energy management program. These practices stress top-level commitment to address energy waste, routine assessments of organization-wide performance against competitors and across their own portfolio, and an integrated plan for upgrading buildings, focused on smart systems engineering and management practices.

EPA offers the Energy Star Guidelines for Energy Management (see Figure 1) as a roadmap. Each step along the way, EPA provides easy and objective ways to measure building and enterprise energy use, to perform quick assessments of opportunities and to build the financial case. EPA also provides recognition when key milestones are accomplished.

New, Standardized Measurement Tools
Performance metrics are fundamental to successful energy management because, as the saying goes, “you can’t manage what you don’t measure.” To effectively understand building energy use, it is necessary to move beyond predictions and simulations, and focus on actual energy consumption. But using energy bills can be problematic and comparisons are not always valid. Weather, geographic location, and changes in operating parameters, such as hours of operation and the number of people occupying the space, will vary over time. Energy-use analysis needs to be more sophisticated.

To address this important measurement gap, EPA developed a national, objective energy performance rating system to assess the energy use of buildings. Now, a building’s energy performance can be assessed with a rating akin to the miles-per-gallon rating for automobiles. After adjusting for a building’s unique use patterns, such as hours, square footage, and computer use, the building’s energy use is compared to similar buildings and receives a score between 1 and 100. A score of 75 or higher is eligible to earn the Energy Star.

An on-line tool called Portfolio Manager implements the energy-performance rating system. Anyone with access to energy bills can rank a portfolio of properties, target resources to those facilities with the greatest potential for improvement, learn from the high-performing buildings, and track savings over time.

Before the energy-performance rating existed, the most commonly used measurement for energy efficiency was to beat the energy code. The problem with relying solely on a code approach is that not all energy systems or energy improvement strategies are included. Beating code does not mean that the projected energy use will be among the lowest in the nation. An analysis of office buildings that have earned the Energy Star show that they cost $1.20 per sq foot to operate, compared to an average U.S. office building that operate at about $2.00 per sq ft.

About 50 percent of the commercial building market can receive an energy performance rating. By the end of 2003, EPA’s energy-rating system has been used to evaluate almost 19,000 buildings. A significant fraction of buildings by type have been evaluated:

  • 17 percent of office buildings,
  • 11 percent of schools,
  • 17 percent of supermarkets,
  • 28 percent of acute care hospitals, and
  • 6 percent of hotels.

Today, over 1,900 buildings have earned the Energy Star.
Because of the complementary nature between green buildings and energy efficiency, LEED for Existing Buildings incorporates EPA’s energy performance rating as the way to earn points toward LEED certification. EPA recently expanded this rating system to work for new commercial building construction. New building designs can be designated as “Designed to Earn Energy Star”.

Leverage the Market Trends
It is possible to be on the leading edge. Tap into Energy Star to help. Beyond the tools described here, which are freely available for anyone to use, joining in partnership with EPA has additional benefits. Opportunities for partnership extend to organizations looking to adopt a superior energy management program and to service and product providers that have the expertise to help these organizations achieve their goals.

Energy Star partners can earn recognition for demonstrating organization-wide energy savings of 10, 20, and 30 percent. Individual buildings can also earn recognition for achieving top performance. Training, networking and case studies are available to learn about proven energy management techniques from peers as well as finding expert engineers, consultants, and service providers in the market.

The Energy Star program brings to the market a stronger information base for making energy investment decisions and an objective and credible way to assess the results. While the spotlight is on energy, take a look at the ways you can use Energy Star to build financial value and help the environment.

Helpful Links
Energy Star’s software tools for benchmarking and financial analysis can be found in the “Business Improvement” section of the Energy Star Website

For a case study on how Energy Star was adopted by Walt Disney World as a foundation to its energy management plan, read the HPAC Engineering article, “How Disney Saves Energy and Operating Costs” click here.

See how Energy Star factors into Starwood Hotels and Resorts’ energy programs in this HPAC Engineering article: click here.