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3 Best Practices for Justifying Energy Efficiency
OTHER PARTS OF THIS ARTICLEPt. 1: How To Talk About Energy Efficiency in Financial Terms Pt. 2: This PagePt. 3: Continuing the Energy Efficiency Conversation
1. Close the communications gap
Decision-making by commercial portfolio owners and facility managers can best be supported by remote simulation-based analytics that are completed quickly, and can be used to prioritize energy project investments across portfolios using a common language. Fortunately, new tools are doing just that.
For renewable energy, this is not a new concept. In fact, the value of consistent, investable cash flow projections for energy projects is well illustrated by developments in the solar industry: Analysis of project economics associated with solar photovoltaics (PV) was standardized and made transparent in recent years. Tools like the National Renewable Energy Laboratory’s PV Watts and System Advisor Model made remote analysis of solar PV cash flows simple, reliable, and standardized. This, in turn, led to an uptick in portfolio procurement of solar PV by portfolio owners.
Now other categories of energy projects are making their way up this learning curve. While most energy-efficiency-measure analysis has remained unstandardized to date, consistent, reliable, and transparent remote cash flow analysis is now making it possible to evaluate a holistic set of projects. Portfolio Analysis Tool from Rocky Mountain Institute, Helios Exchange, Commercial Building Energy Saver, and Spark are examples of solutions that use this kind of simulation-based approach. Although they vary in the details of their approach to evaluating project economics and in their focus on portfolios versus single buildings, these emerging approaches have significant potential to gain market share.
For that to happen and for energy to increasingly be viewed as an investable asset within portfolios, however, it will be critical for these and other solutions to incorporate a few best practices, introduced below.
2. Focus on overall project economics
Most existing approaches are biased toward maximizing the accuracy of project-level energy savings, but this does not reflect the way that portfolio-level decision makers (e.g., portfolio managers and CFOs) typically prioritize and deploy their investments. Successful portfolio energy optimization requires comprehensive economic analysis linked to an organization’s own decision-making criteria, including its cost of capital and investment return thresholds (e.g., internal rate of return, return on investment, net present value).
• Include asset data with enough detail about existing building conditions to inform investment: Specificity is fundamental to appropriately evaluating project economics, and much of this specificity comes from asset data. Take, for example, an LED-fixture retrofit in a Chicago office building. The details of the fixtures currently installed have a major influence on project economics. Although energy cost savings change little between fixture types, implementation costs fluctuate widely because of variations in fixture and labor costs. In this example, labor costs create the most significant variation, because more 2x2 fixtures than 2x4 fixtures have to be installed for the same light output. This example shows that one must have a good understanding of existing conditions to appropriately assess the viability of energy projects.
• Incorporate local economic factors: Energy project investments across a portfolio can be accurately prioritized only by considering a holistic set of localized economic factors for each project (together with asset data). Typically, expected returns from energy projects are more heavily influenced by regional variations in utility rates, installation costs, and available incentives than by the expected energy savings of the project.
As the industry evolves and refines its offerings for remote simulation-based analysis, many of these economic factors require nuanced information (e.g., time-of-use utility rates) to be baked into the energy simulations themselves in order to be evaluated accurately and simultaneously — because owners typically do not have the time or expertise to post-process this type of detailed economic analysis for hundreds of projects across their portfolios.
3. Use consistent methodology
Many of today’s offerings for portfolio energy optimization fail to consider a truly holistic set of opportunities for evaluation, forcing owners to cobble together disparate analyses for efficiency, flexibility, storage, or renewables that can use conflicting assumptions and methodologies.
• Consider all investment opportunities: Typically, software solutions are developed to focus on just one of these categories or even a subset of one of them (e.g., on-site solar PV). While valuable, this approach creates challenges in understanding interactive effects and how each category can fit within a comprehensive, unified strategy. A single platform capable of synthesizing different analyses is essential to developing an optimized portfolio investment strategy, and avoiding the inconsistent calculation methodologies and assumptions that lead to breakdowns in the decision chain.
• Consider all sources of value: Many analytical platforms fail to consider all of the sources of value that can be generated by energy investments, and to translate these benefits into terms that may matter more to decision makers than volumetric units of energy saved.
A good example is higher net operating income (NOI) and property value. Although improvements in property value can vary, even 1 percent increases across a large portfolio can add up to millions of dollars in added value — often greater than the up-front costs of the upgrades. And where split incentives are more challenging (e.g., with triple-net leases), third-party financing like PACE may make more financial sense than investing equity.
Another example is demand management benefits. Utilities nationwide are trending toward a greater focus on demand charges, seasonal rate tiers, and time-of-use rates. Nevertheless, many energy analysis approaches still rely on oversimplified energy rates that fail to account for the value projects can generate within these complex rate structures. (For example, energy storage technologies yield no value at all when analysis relies on simple blended rates.) Utilizing an hourly energy simulation platform allows modeling detailed utility rate structures for significantly more accurate recommendations and decision-making.
There are also human benefits to consider. High-performance buildings contribute to numerous other value streams, including increased employee productivity and improved health and wellness. A growing body of work (including an ongoing series of studies from Harvard University’s School of Public Health and an analytical tool developed by JLL) has supported a correlation between building retrofits and these values. Leading-edge building owners and investors are beginning to consider these sources of value as part of their decision-making criteria for energy investments.
All sources of value should be tied together using a consistent methodology to generate a unified portfolio investment strategy based on economics. This ensures that all results and investment recommendations are expressed in terms of a least common denominator understood by all stakeholders involved in decision-making and execution: dollars and cents.
3 Best Practices for Justifying Energy Efficiency