The Energy Efficiency Opportunity
According to a 2014 report by the International Energy Agency (IEA), investments in energy efficiency could generate returns in economic output approximating $18 trillion, globally.
This is larger than the economies of the U.S., Canada and Mexico, combined.
The report estimates that two thirds of the economic potential to improve energy efficiency is untapped, and will remain untapped until 2035, unless global policies, and human behavior and activity changes.
Energy efficiency is sometimes referred to as the “invisible fuel” or “first fuel” because the potential impact of harnessing energy efficiency is larger than all supply side fuels combined.
And the benefits of energy efficiency have the potential to generate positive economic, social and environmental impacts across a broad range of stakeholders.
While energy efficiency opportunities exist in transportation, manufacturing, utilities and technology, we will focus on the green building opportunity.
Building Energy Efficiency
Buildings account for approximately 40% of total energy use in North America. However, the U.S. Environmental Protection Agency (EPA) estimates that as much as 30% of this energy is wasted.
Humans spend over 90% of their lives indoors, much of this time at work. However, most employees are working in inefficient offices, poorly designed retail settings or outdated industrial manufacturing plants.
The result is that billions of dollars of operating income and productivity gains are lost each year because of lack of awareness of green building strategies.
Energy Efficiency Benefits
As someone in real estate, you understand that increasing net operating income (NOI), or earnings, is your primary concern.
Fortunately, by investing in energy efficiency, you can not only increase NOI but also improve corporate earnings. Indeed, the most effective green building efficiency strategies will both drive down costs and enhance stakeholder value.
Not surprisingly, a study by the U.S. Department of Energy reports that utility cost savings are the most important factor influencing the business case for energy efficiency retrofits in existing buildings.
However, other factors were found to be important drivers of energy efficiency as well:
- Utility cost savings (energy bills, etc.): 92%
- Market differentiation: 73%
- Employee/occupant satisfaction/productivity: 71%
- Utility incentives: 67%
- Improved asset value: 63%
- Tax incentives: 48%
As buildings are historically massive consumers of energy, it makes sense that utility cost savings are the most visible influencer of energy conservation efforts.
But is energy savings the biggest driver of business ROI?
Certain studies on the effects of energy efficiency on human well-being and productivity highlight the fact that energy costs are only a fraction of the average business’ costs when compared to labor and employees.
Returns from Employee and Occupant Productivity
In 1994, the Rocky Mountain Institute published “Increasing Productivity Through Energy-Efficient Design“, a report on the improvements to employee productivity through the use of green building strategies.
The report provided eight cases in which efficient lighting, heating and cooling have measurably increased worker productivity, decreased absenteeism, and/or improved the quality of work performed.
The report also provided evidence that efficient lighting can measurably increase work quality by reducing errors and manufacturing defects.
Success was measured in both new and existing building projects in industries including insurance, retail, manufacturing, municipal, financial and industrial.
Another report in 2003, by Heschong Mahone Group, Inc., examined office worker performance and the indoor environment (Daylighting and Productivity – CEC Pier). The study evaluated the influences of factors including employee access to windows and daylight and their effects on a range of metrics affecting worker performance at basic tasks.
Overall, the influences on worker productivity and performance were found to have a high statistical significance in the models tested.
The study found that positive characteristics reflecting the improvements to the physical environment, such as having views to the outside, access to ample daylight, and improved ventilation, represented a 2-5% improvement in actual employment conditions for call center workers and other workers conducting computer-based tasks.
Financing Energy Efficiency Measures
Energy efficiency investments must be economically viable to make sense.
Fortunately, most energy efficiency projects will pay for themselves and should not have to compete with other capital projects for funding.
Even if funding is unavailable, private companies and governmental institutions are recognizing the exceptional opportunities for returns in energy efficiency and facilitating creative investment structures to finance energy conservation measures.
Energy Efficiency Calculators
The ENERGY STAR website offers a series of calculators to help energy conservation salespeople, building owners, and commercial or corporate real estate managers calculate the benefits of energy conservation measures (ECMs) and present the findings to decision makers.
These calculators require Microsoft Excel and/or Word, or can be downloaded locally and then uploaded to Google Drive for use with Google Spreadsheets or Docs.
Building Value Upgrade Calculator
The Building Value Upgrade Calculator was developed by the EPA and BOMA specifically for office properties.
This calculator will help you analyze the financial impact of ECMs for your commercial real estate using data you input about your buildings including: square footage, utility bills, projected cost savings from the ECMs, and the financing terms, if any. The outputs from the calculator include:
- Reduction in operating expenses
- Energy savings
- Returns on Investment (ROI)
- Internal Rate of Return (IRR)
- Net Present Value (NPV)
- Net Operating Income (NOI)
- Impact on asset value
- Changes to a building’s ENERGY STAR Rating
The calculator also offers you the ability to produce a custom report to help sell the benefits of the ECMs to decision makers.
Financial Value Calculator
If you work for a public company and manage a large portfolio of real estate assets, the ENERGY STAR Financial Value Calculator will help you quantify the value of energy conservation measures and their impact to shareholders in terms of earnings per share (EPS) and the price to earnings ratio (PE).
The Financial Value Calculator takes into account certain data, such as:
- Industry sector
- Total annual utility bill for buildings
- Commercial building floor space
- Energy cost per square foot
- Term of the investment
- Discount rate
- Depreciation method and period
- Cost of capital
- Corporate tax rate
Cash Flow Opportunity (CFO) Calculator
A common objection to making energy efficiency improvements is a lack of capital. However, as mentioned above, energy efficiency measures should pay for themselves.
The Cash Flow Opportunity Calculator uses simple terms and financial arguments that are familiar to CFOs and financial managers to help conservation advocates sell energy efficiency projects.
The calculator’s output helps to inform decision makers on the financing of strategic energy conservation measures.
The Cash Flow Opportunity Calculator will help you:
- Estimate how much of an investment can be made based on anticipated savings
- Determine whether you should finance the investment or wait for a future budget approval or a lower interest rate
- Calculate whether you will lose money if you choose to wait to implement the measure(s)