Reprinted from
Energy & Environmental Management
Summer 1999 

Attention CFOs:
How To Be a “Cool” Company

Excerpts from a new book that explains how the best businesses boost profits and productivity—at a minimum risk—but cutting greenhouse gas emissions. 

by Joseph J. Romm, Ph.D.

Suppose you could boost your profits and productivity and significantly cut your greenhouse gas emissions—all while risking very little of your company’s own money.  That’s now possible by combining innovative new financing and technology strategies for making your buildings and offices more energy efficient.  Using the approach discussed here, you may be able to finance some or all of the cost of your upgrade off-balance-sheet. 

A building upgrade was once exceptional if it achieved a 25 to 35% reduction in energy consumption with a three to five year simple payback—a 20 to 35% return on investment.  Now that is the minimum for a whole-building retrofit.  You can achieve a 35 to 50% reduction with a similar or faster payback.  You’ll see even deeper reductions in the energy used by certain building components, such as lighting. 

·        Centerplex, a small Seattle business, cut energy use in its office building 55% with a 1.5-year payback and expects to reduce that further to 65% (for more information about this project see the article, “When Energy Efficiency Pays Off”, by E&EM Advisor Jonathan Pool, on page 24 of the Summer 1998 issue of E&EM). 

·        BlueCross BlueShield of Oregon cut energy use 61% at its Portland headquarters.  BlueCross did not have to put up any money for the project but instead is paying for it entirely from the monthly energy savings. 

·        A number of new buildings have beaten state energy codes by 50 to 65%, including the Way Station in Maryland and a Wal-Mart in California. 

·        Boeing reduced the lighting electricity used in its buildings by up to 90% with a two-year payback—a 53% return on investment.  The new, higher quality lighting cuts down glare and helps workers reduce defects. 

The Energy Cost Savings Council, a partnership of electrotechnology manufacturers and trade associations says that businesses can expect to achieve a savings of $1 per square foot of floor space with the kinds of whole-building upgrades discussed here¹.  Since the U.S. has 4 to 5 million commercial buildings with tens of billions of square feet of floorspace, the potential savings are vast. 

If your building or office has avoided a comprehensive upgrade in the last five years, you are throwing away a great deal of money.  The bottom line is:  You can cut workplace energy use, costs, and greenhouse gas emissions in half with rapid payback by a systematic energy upgrade. 

Xerox, for instance, launched its “Waste-Free Office” program in 1995 which requires offices across Europe and North America (including 45 buildings in New York) to reduce energy consumption 50%.  They have already achieved that goal at their Palo Alto Research Center in California. 

Hundreds of case histories attest to the do-ability of a 50% reduction.  One study examined 1,000 energy-efficient upgrades involving one or more of the following components:  lighting, motors, drives, heating and cooling, and building control systems.  They found an average reduction in energy use of 39% with an average return on investment of 32% - a 3.1-year payback.  

Your company should do better overall than a 39% average energy savings from individual components.  Here are three reasons: 

·        A complete upgrade can achieve super-efficient synergies.  For instance, better lighting, windows, and insulation will allow you to use a smaller, less expensive heating and cooling system. 

·        A “cool” company looks at investments with a payback longer than two or three years, although this systems approach to upgrading a building will often provide more rapid paybacks from large productivity gains. 

·        A computerized energy management control system (EMCS) will allow you to capture large, low-cost operations and maintenance savings.  An EMCS has many other benefits.  It ensures that projected energy savings become actual savings and that savings persist over time.  It helps you obtain lower-cost capital for building upgrades, since efficiency improvements are a lower risk than virtually any other high-return investments your company can make.

Coupling an EMCS with a new financial instrument—the International Performance Measurement and Verification (M & V) Protocol—may allow your company to finance some or all of the cost of your upgrade off-balance-sheet. 

In the Introduction of my book, I proposed this goal for a company that wants to be “cool:” A 50% reduction in greenhouse gas emissions.  If your company is a typical service sector company, you can become cool with a cost-effective building upgrade alone, since most of your energy use is in your buildings. 

If a small business owner like Seattle’s Jonathan Pool (owner of Centerplex) can achieve better than 50% savings, most companies, which have far more resources and in-house expertise, should be able to match him.  Also, your company should consider including in any building upgrade a small natural-gas cogeneration system to meet part of the building’s need for electricity and heating (and possible even cooling).  This system can significantly increase the energy and emissions savings, thereby making the 50% target easier to meet. 

Larger companies will see another advantage of an energy-saving retrofit if they still have a chiller using chlorofluorocarbon (CFC) refrigerants.  Although CFC’s are being phased out, only 30% of CFC-based chillers had been converted or replaced by 2001, according to the Air-Conditioning and Refrigeration Institute (www.ari.org). 

By first reducing the cooling load with lighting retrofits, insulation, and other basic measures, you can upgrade your old chiller to a smaller, more efficient CFC-free system.  The capital savings from downsizing the equipment can offset much of the cost of the whole-building retrofit.  You will achieve even bigger carbon dioxide and dollar savings by installing a cogeneration unit coupled with a replacement chiller that runs on hot water instead of electricity. 

Here’s the general rule: If you are about to replace a major piece of heating and cooling equipment, first do a systematic energy retrofit. That will reduce the heating and cooling load, which then allows you to buy smaller and hence less expensive equipment. 

Retrofits are extremely profitable, but designing buildings right the first time is far more profitable. New buildings with half the energy consumption and under a one-year payback are increasingly common.

Perhaps you doubt that little Centerplex’s fantastic success has any application for your own buildings.  Let’s look at another recent well-documented example of large savings and rapid paybacks.

A Systems Approach:  100 Market Building 

A comprehensive commercial retrofit was done in Portland, OR.  In 1993, BlueCross BlueShield of Oregon upgraded its 106,000 sq. ft corporate headquarters to boost employee productivity while cutting energy costs.  The engineering design and management firm, and the HVAC specialists, systematically upgraded the building envelope, plus its electrical and mechanical systems in the following ways: 

·           Incandescent downlights were placed with compact fluorescents, and standard fluorescents were upgraded to efficient ones.  Daylighting systems were installed in perimeter offices, combined with dimming controls.  Lighting energy was cut in half while computer screen glare was reduced. 

·           Building envelope improvements included extra roof insulation and replacing the existing single-pane windows with high-performance double-glazed windows. 

·           Indoor air quality (IAQ) in the building had been a problem, in part because of an on-site printing shop and minimal intake of outside air.  The upgrade included new outside air intakes to give the building more fresh outside air.  The project team isolated the print shop with its own air intakes and exhaust system. 

·           A new high-efficiency HVAC system with variable speed drives and an advanced digital control system uses real-time information to deliver just the right temperature and amount of air to different zones in the building.  Energy is no longer wasted conditioning unoccupied areas of over-conditioning occupied areas. 

Does all that add up to a lot or a little?  Here’s a number that will astound you:  Fan load was reduced 79% during the daytime. 

Overall energy consumption was reduced a remarkable 61%, saving nearly 4.0 million kWh.  The project team tracked energy use for a year and found that the energy cost savings came to $130,000/yr., 57% lower than pre-retrofit energy costs.  The 1.5 million project was funded by the load utility; the utility’s investment is repaid through an add-on to the monthly utility bill.  Once the load is paid off, using the savings for payment, BlueCross Blue Shield of Oregon will retain all of the savings. 

The project has other benefits.  Maintenance costs are reduced, as the new equipment is easier to maintain and the old equipment was used more optimally, reducing wear and tear.  Finally, according to Paul David who worked on the project,  “We feel very strongly from talking to workers and managers that these changes did improve productivity.” 

How To Make Your Building An Energy Star

The Environmental Protection Agency (EPA) has developed a five-stage process for reducing energy consumption in buildings (some in the industry call this a “five-prong” approach).  As part of their voluntary “Energy Star” program, EPA helps companies reduce energy consumption in their buildings.  This standardized comprehensive approach has been documented in two dozen showcase buildings to save an average of 30% of building energy with an average internal rate of return of 22%. 

Typically, the people in these buildings enjoyed higher quality lighting, improved IAQ, and increased worker comfort—benefits whose value is not added into the overall payback (though in other buildings where these benefits have been valued, these savings can exceed the energy savings).  Here are EPA’s five stages: 

·           Stage One:  Upgrade the lighting through the approach EPA pioneered in its Green Lights program. 

·           Stage Two:  Tune-up the building.  Check, monitor, and adjust building equipment to maximize efficiency and occupant comfort.  This will probably require an EMCS. 

·           Stage Three:  Further reduce the heating and cooling loads on the building through improvements to the facility exterior, such as windows and roofs. 

Once you have optimized the building and reduced loads, you can reduce the size and cost of mechanical equipment upgrades in the last two stages: 

·           Stage Four:  Examine closely the building’s fan systems to see which are oversized and thus good candidates for a motor downsizing or for motor controls (such as variable speed drives that allow efficient operation of the fan motors at reduced speeds). 

·           Stage Five:  Upgrade the heating and cooling plant equipment to a lower capacity, properly sized, energy-efficient system. 

You may want to do Stage Two (especially the control system) before Stage One for a number of reasons.  But in any case, what is most important about these five stages is that you do the first three before the last two.  And you can do all five at nearly the same time if you figure out in advance the reduced loads on the upgrade to the fans and HVAC system. 

While the average Energy Star Building achieved 30% savings, some of the buildings had lower savings because the upgraded buildings had been relatively efficient to begin with.  A number of the buildings realized closer to 40% savings (for more information visit www.epa.gov/appdstar/buildings.html). 

In 1991, the Lausche State Office Building in Cleveland, OH started a comprehensive energy management program.²  The staff upgraded the lighting, retrofitted the HVAC controls, weatherized the building shell, downsized the air handler motors, and added motor controls.  This Energy Star Showcase building has cut energy use and costs by over 40% already, and savings are projected to grow.  This is particularly impressive because the Ohio State Lottery’s computer facility housed in the building has been expanded and two major new tenants moved in during the measurement period. 

The 350,000 sq. ft. Community Towers Complex in downtown San Jose, CA reduced energy consumption by 37% using the Energy Star strategy.³  At the same time, the two office towers ended up with brighter lighting, digital HVAC controls, a CFC-free chiller, and a replacement for troublesome pneumatic temperature controls.  The owners financed the $1.4 million project over a seven-year period with positive cash flow (the project’s annual energy savings exceeded the loan payments). 

Building comfort has improved.  “Hot and cold calls have been cut on average from about ten a day to two or three,” says John Falvey, chief engineer.  Falvey “used to spend three hours a day calibrating and adjusting” the old pneumatic system.  “Now I can monitor and make temperature and airflow adjustments at a PC in my office.  Finally, I have time to handle the important maintenance needs of the buildings.”

The building’s owners saw far-reaching benefits.  “I considered the energy savings as fuel for improvements to our business,” says Taylor Clayton, vice president of Boccardo Properties.  “The new systems, including chillers, comprehensive temperature controls and lighting, have greatly benefited our customers.  In the long and short haul, this investment will help us renew our leases and bring new customers to our buildings.  Would I do it again?  Let me answer briefly:  Absolutely!”

Efficiency:  A Scientifically-Proven, Low-Risk, High-Return Investment

The growing number of buildings taking advantage of these savings has instigated a revolution in the way businesses and lenders think about energy efficiency.  Aspen Systems, an Oak Ridge, TN consulting company, looked at the financial risk and return from “14 whole-building energy-efficiency upgrade projects from firms that chose to become showcase projects of the U.S. EPA Energy Star Buildings program.”   As showcases, the firms provided detailed information about their buildings, pre-upgrade energy use, investment cost, and post-upgrade energy performance.⁴ 

Aspen Systems calculated the internal rate of return (IRR) of the efficiency investment using a 10-year project lifetime.  The investment risk was defined as the “risk that the energy-efficiency upgrade will produce more or less than the expected return on investment.”  In other words, risk was measured as the variability in the expected investment return.  Aspen Systems looked at the distribution of investment returns from the Energy Star projects and calculated the average return (i.e., the mean) and the variability (i.e., the standard deviation).  Risk was calculated as the standard deviation divided by the mean.  Either high variability or low return increase risk.⁵  The results are show in Fig. 1.

So a whole building upgrade is an astonishingly good financial investment—not even counting any productivity gains that might result. 

You might ask, if energy efficiency is such a high return, low risk investment, why hasn’t every company already upgraded all of its buildings?  One answer is that, as I document, many of the best companies, such as Xerox and Interface, as well as countless smaller ones such as Centerplex, are finally beginning to upgrade their buildings.  Even a few years ago, however, most of the case studies in my book did not exist, so it was not possible to do the kind of risk-return analysis Aspen Systems has done.  But there is a more complete answer, one that lies at the heart of the new efficiency revolution. 

The International Measurement and Verification Protocol 

One of the biggest barriers to energy-efficiency upgrades has been the difficulty in financing the upgrades.  We have seen that energy efficiency upgrades can be low risk, but that requires the kind of standard approach developed in the last few years by EPA’s Energy Star program and others, coupled with rigorous monitoring and verification of savings. 

The problem is that until recently, there has been no mechanism to ensure that projected savings are realized and persist over time.  Absent such a mechanism, lenders and a company’s internal decisionmakers would naturally be wary of any promise that an investment today would realize large savings in the future. 

The International Performance Measurement and Verification Protocol (IPMVP) addresses these financial concerns.  Gregory Kats and Arthur Rosenfeld of the Department of Energy (DOE) organized the development of the IPMVP.  Kats, a Stanford MBA who is director of finance at DOE’s Office of Energy Efficiency and Renewable Energy, notes that efficiency investments have traditionally been inconsistently implemented and have lacked substantial savings.  The IPMVP is a voluntary consensus document written for technical, procurement, and financial experts in government, commerce, and industry.  It spells out a standard methodology for upgrading a building and – most importantly – for measuring and verifying the savings (for more information, visit www.ipmvp.org). 

Kats and Rosenfeld have compiled data on well-monitored and verified upgrades, such as the IPMVP requires.  These upgrades achieve a number of desirable benefits: 

·           High initial savings level:  Traditional upgrades often fail to achieve the projected level of savings.  In contrast, upgrades made with a protocol like IPMVP generally come in above the projected level of savings. 

·           Persistence of savings:  Traditional upgrades often experience drops in energy savings, often within a few years.  Upgrades made with a protocol tend to maintain their savings because they have real-time metering of equipment energy use or an EMCS. 

·           Less variability:  If a company performs traditional upgrades at a number of buildings, the results may vary widely.  The protocol ensures consistency through its standardized approach to upgrades.

These three measures of performance reliability help explain why the old-style efficiency upgrades have been viewed with suspicion by finance firms and why these same finance firms so strongly endorse the IPMVP.

At Kats explains, the IPMVP, by ensuring high initial savings and persistence of savings over time, significantly reduces the risk associated with efficiency upgrades.  It allows a company to have confidence that projected savings will be achieved, which in turn means that a lender can have confidence that there will be a continuous stream of energy savings.  Because of the high confidence in the stream of savings, those savings can be used as collateral to finance the upgrade partly or completely off of a company’s balance sheet (thereby not adding to a company’s overall debt).  Such deals are rare today, but they have been considered for government buildings.  Companies are more likely to get this deal from a bank if they have many buildings over which the risk can be spread. 

The key to making the protocol work is the EMCS.  Once an expensive and complicated technology, the EMCS has emerged today as one of the most crucial energy-saving technologies, benefiting from the advances in computers and micro-electronics.  In the right hands, an EMCS can seem to work magic. 

Joseph J. Romm, Ph.D. is director of the nonprofit Center for Energy and Climate Solutions, based in Washington, DC.  In 1997, he served as Assistance Secretary of the U.S. Department of Energy, where he directed the Office of Energy Efficiency and Renewable Energy.  He also served as an inaugural member of the E&EM Editorial Advisory Board.  Romm’s other books include Lean and Clean Management (1994) and The Once and Future Superpower (1992).  For more information about developing a strategy to reduce greenhouse gas emissions, contact Joseph Romm at coolcoompan@aol.com.  

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