Making the business case for energy retrofi t projects

By Steve Woods, M.Eng., MBA, P.Eng.

Like most public-sector organizations, school districts are continually faced with budgetary pressures and the consequences of infrastructure “rust out.” Within this operating environment of competing priorities, those overseeing infrastructure maintenance and management must provide compelling business cases for projects intended to reduce energy consumption. School district strategic plans often articulate organizational support for energy retrofi ts as part of an environmental policy. In the context of addressing climate change, organizations benefi t by “doing the right thing” through reductions energy consumption and greenhouse emissions. Educators and parents value innovative, imaginative and environmentally sustainable school designs. Energy conservation projects support educational programs by providing real-life examples of classroom concepts. As a large public-sector organization, community stakeholders expect school districts to take a leadership role by demonstrating environmental responsibility. Voluntary standards or regulatory changes provide roadmaps for sustainable design. In effect, these serve as catalysts for energy retrofi ts because adoption usually requires metrics to determine compliance. A signifi cant distinction between voluntary standards and regulatory change is the planning horizon. Unless self-directed, an organization may choose to adopt a voluntary standard over many years (with inherent implementation advantages and disadvantages). For example, purchasing guidelines may require new appliances meet Energy Star criteria but will not necessarily provide a deadline to replace the existing inventory. Conversely, regulatory changes have established target dates with relatively short planning horizons. British Columbia’s Greenhouse Gas Reduction Targets Act (2007) and federal legislation to phase out T-12 light fi xtures (Natural Resources

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Canada, 2010) are forcing many school districts to re-evaluate the importance given to energy conservation because of cost implications. Cost avoidance is a critical motivation for energy retrofi t projects. Direct cost savings are evident through reduced utility expenses and lower costs to purchase greenhouse gas offsets. Indirect savings are harder to measure but equally (if not more) important. Maintenance savings arise through adoption of new technologies that enable equipment to operate more effi ciently and effectively. In turn, these benefi ts can extend the equipment life cycles and reduce ongoing maintenance effort. A well-designed energy retrofi t can also enhance learning and work environments, resulting in higher productivity and reduced absenteeism. For example, a lighting retrofi t is an opportunity to address health and safety issues attributed to inappropriate illumination. “Selling” the merits of an energy retrofi t project entails some knowledge of fi nancial management and insight into the level of rigour used by decisionmakers. Energy champions may need to address questions about net present value, the cost-benefi t ratio, or even perform sensitivity analysis of key variables and assumptions. “Energy Budget at Risk” (a form of the “Value at Risk” tool used by investment portfolio managers) may be required to address future uncertainties of weather, energy prices, operating conditions and other factors (Jackson, 2008). In the dynamic environment of school districts, the relative ease of payback analysis is very compelling. Defi ned as “investment cost divided by annual savings” (Jackson, 2008, p. 32), payback results are usually used to present the break-even case. The break-even case, or payback period, is then compared with other projects competing for funding. Therefore, proponents of energy retrofi t projects should supplement a payback analysis by identifying other, less-tangible project benefi ts. Savings beyond the payback period are not usually considered in payback analysis (Jackson, 2008). Therefore, project proponents are well advised to address this weakness of payback analysis when competing for scarce funding dollars. Financial risk management is an integral component of business case development. Several implementation strategies are available to mitigate the inherent risks of energy retrofi t projects. Pilot projects demonstrate benefi ts and provide “lessons learned” without risk of a large fi nancial commitment. Multiphased projects provide more fi nancial fl exibility by “breaking” the project into smaller, relatively independent, components. As an alternative to completing a detailed fi nancial analysis of the overall project, a cost-benefi t analysis of one or more of the smaller components may provide more fi nancial certainty. Cost avoidance through reuse of materials is another fi nancial benefi t of

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multi-phased projects. For example, purchasing replacement T-12 lights is avoided by salvaging T-12 lights from an early project phase and reusing them, on an interim basis, in areas scheduled for upgrading in a later phase. A third implementation strategy is the use of “shelf” or “shovel-ready” projects to take advantage of emergent funding opportunities. Organizations typically value balanced budgets and often will fund additional projects to offset fi nancial “slippage” of planned expenditures. Similarly, organizations take advantage of emergent one-time grant opportunities because project payback periods are reduced, making projects more fi nancially attractive. Energy modeling predicts building performance relative to historical trends or energy-effi ciency standards. Government agencies, such as Natural Resources Canada or the British Columbia Ministry of Environment, often require some form of energy modeling as part of a grant application process. This analysis facilitates comparison of projects competing for grants and enables evaluation of design alternatives. In the case of a multi-phased project, energy modeling may lead to scheduling decisions. For example, early implementation of those project phases achieving the highest energy reduction results in greater utility cost savings. Grant conditions typically require documentation of the “as-built” energy saving measures or measure energy savings at the end of specifi ed period following construction. Therefore, measuring success requires knowledge of the project’s key performance indicators. Changes in utility use, utility costs and maintenance costs are common, direct measures relatively easy to benchmark against the facility’s historical performance or comparable facilities having similar occupancies. Satisfaction surveys are another direct measure, particularly where energy retrofi ts are being leveraged to improve classroom environments or address health and safety concerns. Indirect measures include tracking of expenses related to energy performance. For example, the number of table lamps or unit heaters in a building affects energy consumption and provides a visual indicator of occupant satisfaction. Absenteeism rates, staff turnover, changes in student achievement, and frequency of health and safety complaints are other indirect

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1485 Lindsay Place Annacis Island, Delta, BC. CANADA V3M 6V1 Tel +1-604-515-8949 Mobile +1-604-340-2605 Fax +1-604-519-1477 www.te.com measures of occupant satisfaction (Bilec, Geary, Ries, Needy & Cashion, 2010). A signifi cant challenge when measuring success is eliminating “background noise.” Renovation projects delivered to specifi cation may not deliver anticipated energy savings as a result of changing conditions (e.g., weather, operating hours, activity level changes). Normalizing data to account for signifi cant external factors is a common technique to account for changing conditions. Utility management software often uses linear regression modules to normalize data for weather and student population. Given the variability of billing periods, utility management software also normalizes data to facilitate comparisons with benchmarks. Changing occupant behaviours are an important source of “background noise.” For example, greater attention to turning off light switches will contribute to energy savings without any infrastructure investment. Occasionally, energy retrofi t grants include a requirement for awareness campaigns to promote behaviour changes. Three approaches to measuring changing occupant behaviours are real-time metering, occupants’ self-reporting using log books, and using linear regression. Real-time metering has the advantages of the technology “wow factor” and providing instant feedback through the use of displays. Self-reporting requires occupant willingness and ability to collect accurate data. Linear regression predicts energy consumption based on known factors (e.g., weather, student/staff population, square footage in use), and (somewhat arbitrarily) attributes the difference between actual and predicted consumption to behavioural change. Although linear regression is the least expensive of these approaches to measuring occupant behaviours, a signifi cant disadvantage is the diffi culty of providing timely feedback to occupants. Without this timely feedback, occupants tend to lose focus on the importance of energy conservation. Signifi cant barriers to energy conservation exist regardless of organizational willingness to adopt environmentally sustainable practices. Although advances in building technology and maintenance practices have enabled higher levels of sustainability, a common misconception is energy use as a “cost of doing business” rather than a cost-avoidance opportunity. Kennedy (2007) reports a “green” premium of two per cent when constructing sustainable buildings in the United States. Seckel and Grouten (2009, p. 50) cite American studies showing “a sustainable school facility costs only an average of 1.7 per cent more in upfront costs, with a life-cycle payback of 10 to 20 times the additional initial cost.” After payroll, utility budgets are often one of the largest expense categories for school districts. American research indicates “facilities built around sustainable criteria utilize 30 per cent less energy, use 30 per cent to 50 per cent less water, and produce 40 per cent less CO2” (Seckel & Grouten, 2009,

p. 50). Given the availability of research into potential energy savings, decision makers often look at the “track record” of similar projects before lending support to a new energy retrofi t proposal. Cost avoidance analysis should use an appropriate baseline and planning horizon. Identifying the contribution of specifi c energy retrofi t projects completed within the analysis timeframe strengthens the project proponent’s “track record” of achieving energy savings. Organizations can complement this information by identifying cost avoidance achieved since introduction of a formal energy management program. Recognizing organizational culture, the barriers to energy conservation and the possible motivations for environmental sustainability are start points for development of compelling business cases for energy retrofi ts. Risk management, particularly fi nancial risk management, is addressed through implementation strategies and identifying key performance indicators. By measuring success, or gaining lessons learned, a demonstrable “track record” is established to support future proposals and make the business case for energy effi ciency projects.

About the Author: Steve Woods is the manager of operations/district energy manager for School District 72 (Campbell River).

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University, 79(6), 18. Markham, D. (2010). A Holistic Approach to ‘Green’. Metal

Center News, 50(4), 30-33. Natural Resources Canada. (2010). General Service Fluorescent Lamps Bulletin on Developing Standards - May 2010.

Retrieved April 14, 2011, from http://oee.nrcan.gc.ca/regulations/bulletin/gsfl -may-2010.cfm?attr=0. Seckel, J. & Grouten Jr., W. (2009). A New Haven For Sustainable Schools. Engineered Systems, 26(3), 50-54.

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