By Loren Snyder
Energy Efficiency Article Use Policy
Report prepared in conjunction with Energy Star
Statistics can be impressive, whether it’s last season’s batting average or a facility’s savings generated from energy efficiency upgrades. But there’s at least one problem with relying on energy statistics: Without a reference point, the value of the information quickly erodes.
But value and relevance in statistics are precisely what top management looks for when considering a large capital investment in an energy efficiency project. Facility executives who have gone through the process of trying to justify an investment in energy efficiency have found that talking about energy saved is not enough. In fact, even reporting how much money an organization will save from upgrades doesn’t always do the trick.
“Without any reference points or benchmarks, these accomplishments can be out of context and not attract much interest,” says Jean Lupinacci, director, commercial and industrial branch, U.S. Environmental Protection Agency. “It is also common to report savings as a percentage, but even that is a relative accomplishment. Without knowing anything about the baseline, reporting percentage savings can mask the potential to do even more.”
The challenge is to give the numbers value in the eyes of top management.
Instead of dollars saved, for example, a facility executive might report how the savings relate to new business efforts — a strategy that is particularly effective for hospitals and retail space. A facility executive might also tell management how increased efficiency affects the net present value of a current project or explain how the savings can buy a capital investment project that’s been earmarked for several years but has never received funding. Giving the savings relevance and value to decision-makers will make getting funding for energy management projects much easier.
When it comes to securing senior management’s support, facility executives must consider the corporate mission.
The EPA has found that successful facility executives can sell the benefits of saving energy to senior executives by understanding the driving forces of their organizations. ”In the commercial market, energy savings can increase asset value and lead to tenant retention,” Lupinacci says. “In retail, reducing energy costs can be easier than increasing product sales. And linking energy to the environment can set organizations apart and motivate employees to pitch in and help.”
Being successful in gaining corporate support means being well-versed in financial terminology, says Richard Beam, corporate energy manager for Providence Health System.
“Energy managers must be conversant in the technical details, but it’s more important to be conversant in financial terms if you want to get the attention of top management,” says Beam.
Part of being able to speak the language of finance is understanding which type of financial analysis will carry the most weight in a given organization. The business context can make it easier or harder to justify the case for energy efficiency.
Bill Verge, associate director of plant operations for the University of Michigan, says that the context of the campus makes his work comparatively easier than it is for his counterparts in the corporate sector.
“Universities tend to plan very long term,” he says. “Facilities are built with the expectation of serving the community for 50 years or more.”
As a result, Verge says, life-cycle analysis, including the benefits of energy-efficient design, is a standard practice. Verge benefits from financial officers who are capable of considering long-range efficiency gains.
Savvy facility executives must know what savings will mean for an organization’s financial officers.
“Much of health care is not-for-profit,” says Beam. “Charitable giving is the bottom line, and a 5 percent margin is net, but most hospitals are at about a 1 percent margin.”
Hospitals that operate with a 5 percent margin need to bring in $20 of business to make $1 of profit. Therefore, when considering the true value of energy efficiency projects, Beam has to provide context for savings in his industry and his health care organization.
“Saving $100,000 with efficiency gains at a hospital operating with a 5 percent margin is equivalent to bringing in $2 million in new business,” says Beam. “In your own sector, you need to know the true value of every savings.”
Long-term savings may not carry the same weight in the retail and commercial sectors as it does in educational organizations, but in those industries other arguments can be used. Once again, context is king.
Profit margins for supermarkets are usually below 2 percent. Because of equipment such as open refrigeration and freezer units, energy costs can be high, sometimes exceeding $5 per square foot. That means saving $1 in energy costs at 2 percent profit margin has the same bottom-line impact as $50 worth of sales.
According to the EPA’s Energy Star program, reducing energy costs by 10 percent in a supermarket can boost margins up to 9 percent. This is equivalent to increasing the per-square-foot sales by $42.
“We benchmarked 78 percent of our stores,” says Cliff Timko, energy manager for food retailer Giant Eagle, an Energy Star Partner of the Year. “We saw a $700,000 savings and a 46 percent internal rate of return.”
By providing a context for savings, Timko sealed the support of senior management at the grocery chain.
Context can also be important for management of ongoing efforts.
“Successful energy management programs track and report total energy use and expenditures organization wide, and rank their entire portfolio of buildings,” Lupinacci says. “This helps target resources to where they can make the most difference.”
Kodak’s motivations also included the bottom line. Several years ago, the corporation initiated a company-wide environmental policy. Separate efforts were designed to cut waste, conserve water, become more energy efficient, increase worker safety and more.
“We wanted to be good environmental stewards,” says Hays Bell, Kodak’s health safety and environmental management director. “But we’re also motivated by business concerns. Our efforts are designed to reduce unit manufacturing costs.”
Bill Verge and his team did not earn the 2004 Energy Star Partner of the Year designation by delivering unusable information to the University of Michigan’s senior management. Instead, they considered multiple options for savings, then went to university management.
“Back in 1997, our energy management team sold management on this commitment using a detailed proposal that outlined the financial, labor and material resources required, a schedule of activities for 120 major buildings, and estimates of projected savings in several areas based on past practices and engineering analysis,” Verge says.
He kept top management updated, too. Verge provided annual reports that showed progress on each building, a summary of all energy conservation measures funded during the current year with projected savings, and a new report on measured energy consumption.
“In addition, a new estimate of total savings due to the program upon completion is presented based on the updated current rate of success,” Verge says. “Monthly financial reports are also available for review upon request at any time.”
Bell said that Kodak’s aim was to reduce energy use by 15 percent globally during the five-year period from 1999 to 2003. Kodak easily met that goal, reducing energy use 19 percent. The success led senior management to call for still more cuts in energy use during the company’s next five-year plan.
“We’re calling for energy use reduction by an additional 10 percent — on top of current savings — by 2008,” Bell says.
Similar efforts are under way at the University of Michigan. Because of Verge’s success with the Energy Star program, his team returned to management earlier this year with a new plan for a five-year energy conservation effort. This proposal, called the Energy Conservation and Outreach (ECO) program, keeps in place the efficiency requirements of the Energy Star program, but broadly intensifies the university’s efforts.
“This program will launch a new effort to involve building occupants in energy conservation activities and practices,” Verge says. “Management was sold on the program once again.”
As important as it is to win funding for energy efficiency programs, getting backing from management for energy efficiency projects helps in myriad other ways as well.
“Support needs to come in the form of real dollars and in the cultural tone,” says Beam. “To be successful at this, CEOs must set the tone; make this part of the culture by stating clearly and often what are the good standards of behavior.”
Kodak’s support grew out of the corporation’s commitment to the Japanese practice of Kaizen, a strategy that seeks continuous improvement in all aspects of doing business.
“Our efforts to reduce energy came from the very top,” says Bell. “And having that kind of encouragement from the CEO makes our efforts, whether to save energy or reduce the waste stream, a bit easier.”
Winning top management support amounts to passing the ultimate business test, says Lupinacci.
“The EPA has seen that when senior executives are on board, it is easier to secure resources — whether in staff or capital — because the benefits are understood, and the energy savings are linked to the organization’s business goals.”
Loren Snyder is a freelance writer and former managing editor of Building Operating Management.
1. It’s the boardroom, not the boiler room. Remember that bottom-line performance is what matters to management. Technical expertise is required to improve profitability, but engineering-speak will fall on deaf ears with financial officers. For example, Richard Beam, corporate energy manager, Providence Health System, substitutes the phrase “total cost of ownership” for the familiar “life-cycle cost” because the former is better understood by financial officers.
2. Focus on what’s important to the CFO. Some will want to know about the net present value of a project. Others will be interested in the life cycle cost savings that energy management projects generate. Tailor the financial presentation to the audience for maximum success. Bill Verge, associate director of plant operations, the University of Michigan, gave top management a spectrum of information, including a proposal that outlined the financial, labor and material resources required, a schedule of activities for 120 major buildings on campus, and detailed estimates of projected savings in several areas based on past practices and engineering analyses.
3. There’s success in spreadsheets. Let spreadsheets do much of the explanatory work because financial officers are used to reading them. Put cost-savings information in a familiar format for CFOs and let the numbers help tell the story.
4. Hedge bets. For example, forecast a 20 percent savings for the CFO, even when expecting a 25 or 28 percent jump in savings. Doing so creates a bit of cushion, but it shouldn’t be portrayed that way for top management. Instead, tell the CFO that the conservative forecast allows for unexpected changes in the use of a building.
5. Make energy savings cultural. Indoctrinating an entire organization in the value of energy efficiency can multiply savings. “Stewardship has to be a core value for success,” says Beam. Verge agrees: “It is the buy-in and involvement of building occupants that ensures the long-term success of an energy-management program.”
6. After a meeting, follow up. Even after a project is approved, keep the financial officers abreast of its progress. And if its progress isn’t going as planned, let top management know how you’ll get things back on track. Following up and being honest about project progress keeps facility management in front of the CFO — and will be important the next time facility executives need to make big capital purchase requests.
One important way to provide context for any aspect of organizational performance is benchmarking. With benchmarking, a common challenge is finding a source of credible, comparable information. When it comes to energy performance, however, facility executives have a resource readily at hand: the U.S. Environmental Protection Agency’s Energy Star Buildings program.
The Energy Star Buildings program has developed benchmark performance standards of facilities throughout the United States. To qualify for an Energy Star Label for Buildings, a facility must score in the 75th percentile or higher on a 100-point national energy rating scale. By voluntarily partnering with the Energy Star Buildings program, facility executives can gauge energy use of their organization’s buildings against similar buildings, which can make it easier to improve efficiency.
In addition to serving as a resource for benchmarking, the Energy Star Buildings program provides tools that can ease the burden for facility executives who want to approach top management with energy efficiency project proposals. For example, the Energy Star Buildings program makes available to program partners the Financial Value and Cash Flow Opportunity calculators, weather normalization tools, communication and public relations kits, engineering guides and more.
Those tools can help facility executives generate statistics that make senior management take notice of facility operations.