Energy efficiency is not enough
Commercial buildings account for a significant portion of total energy usage. The Department of Energy estimates that commercial buildings account for 36 percent of electricity consumption, and 18 percent of all energy consumption.
In 2012, according to the Department of Energy, commercial building owners spent $149 billion on energy, but recent data indicates this now has grown to $190 billion. Putting these numbers in perspective, a recent report estimates thatcommercial real estate contributed $935 billion to US GDP in 2017. Moreover, it’s estimated that 30 percent of energy consumed in commercial buildings is wasted, which equals $57 billion.
Drilling down into the energy consumption of specific building equipment provides even more detail about the significance of energy consumption in buildings. The Whole Building Design Guide, citing research from the State of Washington, estimates that energy costs are 50 percent of the total lifecycle cost of heating, ventilation, and air conditioning (HVAC).
The scale of the market and the clarity of the problem have led hundreds of small and large enterprises to offer building energy management solutions. Even a basic literature review confirms that there are plenty of opportunities to save energy and many mature offerings to do so. Many startups offer software-based solutions to analyze disparate data and identify hard-to-identify anomalies in energy use. That said, most of these companies have had trouble scaling. Those with exits have not provided a significant return to their investors. The problem is big and clear, but it’s been difficult for firms to monetize their solutions. What is the disconnect?
At the core, the efficiency value proposition, which is all about using technology to realize a reduction in energy costs, is not compelling enough to the broad building and real estate market. Energy savings does not convince the majority of real estate owners and corporate leaders to make software and associated operational and equipment investments. While energy spend typically is a big number, it’s not a big share when looking at total expenses and operational costs.
From equipment maintenance to employee wellness, there are other value streams that likely are more compelling to building owners and operators. Some firms are repositioning their offerings from energy efficiency to asset optimization. For example, the complex equipment in many large commercial buildings is costly to maintain and replace. In many cases, building owners save money by skipping some regular maintenance procedures. The short-term savings typically is costly in the long term.
Some well known firms have quantified this value proposition. Siemens recently estimated that every $1 in deferred maintenance will cost $4 in the future. Another report from Jones Lang Lasalle cited that employing preventative maintenance can save as much as $.33 per square foot. Energy typically costs $2.50-3 per square foot in offices, and saving 10 percent with data driven technology solutions is feasible. This would indicate that the payback for equipment maintenance and energy efficiency are similar. That said, faulty equipment has a much bigger impact on occupants and tenants than an overage in energy spend.
Regardless, there may be an even bigger opportunities beyond energy and equipment operations & maintenance. As one building and facility technologist recently wrote, “The [building automation system] industry is not in a good position to persuade buyers of this higher value since questions related to BAS are typically pushed down to the boiler room where it has been for decades. “.
Moreover, the real estate services firm Stok has looked at this very subject in a recent report on the value of high performance buildings. Stok estimated the net present value per employee for high performance buildings at almost $24,000 per employee over 10 years. Of this, just over $10,000 was due to increased employee productivity and nearly that much was for employee retention. The next categories of benefits were improved employee health and wellness ($1,650 per employee), energy and utility savings ($1,650), and maintenance savings ($470). This is one of the most compelling data sets that highlights the benefits of energy savings compared to other value propositions.
Many building owners and operators view the non-energy benefits of smart building technologies, such as improved productivity and employee retention, as very compelling. But the benefits remain hard to quantify, especially for a specific building, a topic I have written about previously. This is likely to change as more technologies are deployed to measure non-energy benefits of building technology and more buildings actively look to measure productivity and retention impacts of their building investments. Additionally, increased standardization will provide a framework to measure benefits and support market adoption. Healthy buildings standards like WELL and Fitwel are good examples.
For the time being, building owners and operators could look at energy savings and non-energy benefits within the same value proposition. If a technology deployment has a 2-3 year payback on energy savings alone, then the additional equipment efficiency, retention and productivity improvements are compelling additional benefits, even if they aren’t (yet) as easy to quantify.
The market for building technologies is vast and is only going to become bigger and more complex in years to come. Real estate owners and operators who can identify pain points they wish to solve and are diligent about their vendor selection process will realize significant financial benefits.
Joseph Aamidor is a senior product and market strategy consultant focused on smart buildings, real estate technology, IOT and energy. He helps startups and established industry players understand the smart buildings market, develop competitive strategy and enhance their product offerings. He previously served in senior product management roles at Lucid and Johnson Controls.
- energy efficiency
- energy management
- smart buildings
- commercial buildings
- equipment maintenance