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Making the Case

15 April 2006

With gas and electricity prices rising and water in short supply, why are public and private sector occupiers not embracing the advantages of energy efficient strategies for their buildings? PFM joins in a debate to find out why energy efficiency is so hard to sell

With about half the energy generated being used in the built environment compared to a quarter each in transport and industry, ensuring energy is used efficiently should be a top priority for every organisation. Now that gas and electricity costs are rising rapidly, there are concerns about security of supply and drought threatens some regions of the UK , building occupiers have an overwhelming case for embracing energy and resource efficiency. However, this is not happening in sufficient numbers, and last month the Government announced that the UK will miss its domestic target to reduce greenhouse gas emissions by 20 per cent by 2010.

Except in a few exemplary cases, relatively few organizations have taken the long-term view that energy efficient strategies for occupying their properties could cost less in the long run. To help find the reasons why, PFM together with Energy in Buildings magazine joined a round table debate held at BP Sunbury last month. Representatives of major energy consumers, an energy supplier, equipment manufacturers, a financial expert and facilities managers gathered to discuss the issues and some of the solutions.

It became clear from the discussion that it is not ignorance of the effects of carbon emissions on global warming that is inhibiting organizations in the UK from taking more interest in energy efficiency, but rather something deeper requiring significant cultural and business changes. The way organisations make decisions is a key component. Investment decisions have to be weighed against a host of other demands and reducing operational costs of buildings is a low priority. Finance and the way organisations invest and account for it is a central issue, the meeting concluded.

”Compared to public sector organisations which have restrictions on the availability of money from Government and lack of capital budget, corporates have the potential to have deeper and more flexible pockets but they won’t justify the expenditure,” contended Guy Ransom, director of IFS Europe, an independenfinancing consultancy that provides financing solutions to industrial clients mostly on energy related issues. “All their actions have to be seen to have a financial benefit to the company. Installations of more energy efficient equipment may have a five-year payback, but this contradicts criteria for other investment that requires a short-term payback. The difficulty is to show how the benefit of energy efficiency measures accrues and that there is no big ‘catch’ in it. It all comes down to shareholder return.”

Long term return
All investment decisions have to be set against a number of other options. Compared to the immediate return in sales and revenue from investment in a new product for example, the installation of energy efficient equipment in buildings is often passed over because the return is too long term. However, the benefits do exist but the meeting felt that all aspects of the industry - the energy generators, the equipment manufacturers and energy managers – were unable to make their case clearly.

Selling energy efficiency should not dwell on the technical benefits of the plant, explained Andrew Bray, Head of Energy Services at Johnson Controls. “The benefits of installing energy equipment should be sold as the ‘outcomes’ in energy efficiency and energy savings, not on the technical merits of the equipment. However, many people are suspicious of salesmen’s claims for ‘guaranteed savings’.”

Colin Warne, Director of Marketing at EDF Energy concurred and described how EDF’s Performance Partnerships offer supply contracts with a ‘guarantee’ of energy savings. “Finance is not a big issue. You would think that local authorities who have no money would bite your hand off for this sort of deal, but still there is difficulty in selling the concept.”

He agreed that much of the problem can be found in the decision making structure of the organisation. He said that normally negotiations for energy contracts are discussed with the engineering and FM team who see the benefits of energy efficiency and savings. However, it is very difficult to bring these people together with the decision makers in the procurement and finance departments for whom energy saving is not an important aspect of their decision. He contended, “Unless the boardroom is interested energy management it is just not on the agenda. This is why the current escalation of prices makes it so different at this time because the lasttime we saw an interest in energy prices in the boardroom was the oil crisis of 1973.”

Ian Lilly, Director of Marketing UK and Ireland at York International, global supplier of HVAC and refrigeration equipment and services, identified another ‘mismatch’ in procurement that affects the ability of the energy efficiency message to get through directly to the occupiers of buildings. He drew attention to the big disconnect between end-users such as developers and letting agents, and end users who own and operate their own building stock. He explained: ”As suppliers of energy efficient building plant, we are normally dealing with the contractors and their consultants. The consultants are usually working for the building contractor and speculative property developer who do not care about energy costs of the building in operation. No one ever wants to pay the extra unless there is support from a corporate sponsor. This was not the case at Terminal 5 where BAA at took a 30-year view of performance of their central chiller plant and bought chillers that cost more initially but were designed to have a better energy performance on part load. That’s where an educated, informed and responsible end-user can drive the whole decision, but 90 per cent the time we are dealing with contractors and consultants who only have a 12 month view.”

Ransome argued that there are two markets to be considered and each requires different approaches. One is the new build market where contractors hold sway, and the other is the legacy estate where existing equipment is installed most of which has a huge potential for energy management. The legacy estate has, he claimed, equipment installed that is at least 15 years old and even up to 30 years old, and is often “horrendously inefficient’. He said the mantra “If it ain’t broke don’t fix it” is a real hinderance to achieving energy efficiency. “Generally equipment failure is rare and with the right care it can be kept going – but often it’s for too long,” he said.

Lilly agreed that equipment failure was frequently prevented by the skills of the engineering operatives, however, it was more often that the reverse was true and badly tuned BMS systems can lead to inefficient energy usage.

Focusing on the low level of importance placed on efficient energy use, Alan Aldridge, executive Director of ESTA, commented that rising prices can make the difference between profit and loss for a manufacturer, but in the commercial sector energy accounts for only a relatively small part of their costs. This, he said, generated attitudes to energy efficiency that are most problematic. The situation was not helped by organisations regarding responsibility for energy as an ‘add-on’ to other related responsibilities such as health & safety and the environment. As a result the level of understanding of complex energy-related decisions is generally low.

As Group Energy Manager at Boots which is facing a 30 per cent rise in his total energy bill –up £12m - Andrew Jones observed that recent prices rises are “Focusing minds on energy issues. Energy price rises do not go unnoticed inthe boardroom and it also hits the supply chain. We are now experiencing people coming to us to justify price rises on the back of energy price rises. We are trying to help them with our knowledge of energy management.”

However, he also criticised energy suppliers and equipment manufacturers for their inability to get the message over to the decision-makers. The reason, he said, was that there were “Too many messages and their claims for energy reductions were not proven.” He also argued that is was necessary for organisations to move from a decision-by-decision approach to one that embraced corporate social responsibility (CSR) throughout the organisation. “Everything we do is driven by CSR,” Jones explained. “We have 21 workstreams across community, workplace, marketplace and environment. Cost and reputation are also drivers but it is now easier to compare long term investments in energy efficiency against the development of new products, for example. By adopting value-based management techniques it has enabled investment in energy efficiency at Boots to be increased by a factor of five this year.”

Energy labeling
Will the addition of energy labeling of nondomestic buildings make a difference, asked Alan Aldridge, “Will it enhance the interest of property developers and investors because an ‘A’ rate building will have a higher asset vale than a ‘G’ rated building. Could it transform the market in same way as energy labeling did for washing machines and refrigerators where purchasing has been influenced by high energy efficiency ratings? Or is it just a red herring?”

He explained that ESTA is a supporter of energy rating of buildings but it was concerned that no one including The Carbon Trust, ODPM, BRE and others, had estimated the difference in energy costs between a ‘D’ rated and a ‘B’ rated building. He said, “We did our own estimate. In mid-2005 if you moved from a ‘D’ rated to a ‘B’ rated building you saved £10/sq m just on energy - but that has now gone up.”

Bray felt that there would have to be a ‘carrot’ such as a reduction in rates or climate change levy for occupying an ‘A’ rated building for energy labeling to have an impact. For those organisations driven by CSR policies it would beimportant to shareholders and other stakeholders to say that they occupy ‘A’ rated buildings, but for everyone else the extra cost of rent could be a barrier to occupancy even though it would be cheaper to run.

This was also the conclusion of the meeting, that the energy premium of an ‘A’ grade building would be outweighed by the rental premium these buildings are likely to attract. This was particularly soas energy consumption represents only one aspect of occupation and in the commercial sector it is only a small proportion of the overall operational costs. A combination of regulation and market forces could influence decisionmakers but it was felt that only in those organisations with strong CSR strategies in place and reputations to protect would decisions to occupy high rental, energy efficient buildings rather than a lower rental, less efficient property be approved of by investors and shareholders.

‘Smart metering’ could, the meeting felt, make a considerable contribution to an improved understanding of actual energy usage and how energy efficiency measures can contribute to cost and carbon savings. This is a view subsequently endorsed the Chancellor of the Exchequer who allocated £5m to a pilot project for domestic users in his Budget last month.

There was some regret at the loss of in-house expertise arising from organisations shedding their energy managers when energy prices were going down. These people had developed a tradition of understanding their buildings, looking at the bills tinkering with the settings to make them operate as effectively as possible. However, it was also observed that when services were outsourced sometimes an ethos of ‘keeping the customer happy’ was more important than ensuring that ensuring energy was managed effectively.

Ray Wilson, Risk and Governance Director at Barclays disagreed saying that oursourced service providers brought a welcome influx of expertise to drive continuous improvement in building performance. “We have had fantastic results and the commitment has been excellent. We should recognise the contribution of contractors and how they make us understand vthe benefits that they can bring.”

“Good data is key,” agreed Simon Patten, Sustainability Programme Manager at BP. “Occupiers need to understand what percentage of operational cost is due to energy use and what they can do about it. One option is to have a recommendation plan. BP has a 9.8million sq ft estate and I know on average how much energy each building uses per sq metre. It is what I need to do my business.

”When I commission an architect for a ‘green’ building we can have a ‘grown up conversation’ in which I can say, ‘don’t build BP a building that uses more than 330 KW of energy per sq m.’ That then feeds down to the contractor and consultant. Organisations must use that data from existing stock to feed back into all their major refits and new property that must be built ‘greener’.”

When it comes to the value of legislation as a motivator to energy efficiency, Patten said he favoured a ‘carrot’ rather than ‘stick’ approach to energy efficiency particularly at sites such as BP Sunbury that had seen its energy bills rise from £2m to £4.2m recently. He would welcome a reduction in rates for occupying energy efficient buildings. However, he pointed out that there is no incentive for occupiers of multi-tenanted buildings to reduce their energy use since they are not supplied with an allocation of energy costs separately from other service charges.

However, the meeting considered that Government legislation had played an effective role in changing behaviour in other areas, most recently in the banning of mobile phones while driving. However, as a member of the EU, legislative consistency across all markets is essential if it is to be fair.

Ransome argued that legislation can be a facilitator particularly where capital investment is made more difficult by current regulations. “For example, is a new boiler system classified as ‘equipment’ or as a ‘fixed asset’ that has different capital allowances making investment more difficult.”

Lilly suggested that applying the SBEM model developed by the BRE would in practice become used as a way for regulating the energy efficiency of equipment installed and help to ‘police’ the regulations.

It was generally recognised by the meeting that that the Government’s record so far on promoting energy efficiency was weak and inconsistent. Bray recognised that getting all experts to agree on legislation took a long time, and as a result some people and organisations were moving ahead regardless. However he felt that one single Energy Ministry to cover all the initiatives that fall under the DTI, DEFRA, ODPM and the Treasury would enable just one Minister to drive a consistent energy policy across all of Government.

Taking a leglislative approach could, it was argued, if it was not applied across Europe and the rest of the world, see more outsourcing of production to places where controls were weaker. However, Aldridge argued that this assumed that the application of energy efficiency to production methods would inevitably make companies less competitive, but research by the Carbon Trust shows that this is not necessarily the case

Leigh Carter, Strategic Account Director, BP Account at Johnson Controls argued that government can play a very effective role in setting standards. In other aspects of business such as Investors in People and the environmental standard, ISO14001, standardshad become the norm, she said, and they are now routinely driven though organisations and their supply chain.

Large organisations that lead the way in CSR and environmental reporting will, it was argued by Jones, always to commit to and comply with regulations even if they are not being effectively enforced elsewhere. “We need to ensure we are what we claim to be,” he said.

There is a danger, however, that organisations take easy options to become ‘greener’ such as reaching energy supply deals that include a large proportion from renewable resources. This makes no environmental sense without combining it with energy efficiency strategies or investing in renewable energy generation from the sun or wind.

Investing in renewable power generation is also subject to the same arguments employed for other business investment decisions, that the return on investment is too long term for solar panels and wind turbines. As Patten explained, “The installation of solar panels on roof spaces and wind turbines has very long paybacks against the initial investment. Local councils such as the London Borough of Merton have developed renewable sources of energy locally, but consistency across all London Boroughs was needed. The GLA target for 10 per cent generation of renewable energy has to be compared to US cities that are aiming to meet 20-30 per cent renewable levels.”

Warne pointed out that the planning system was a major constraint on the development of on local renewable energy resources, as has been shown particularly with many applications rejected for wind farms. He also doubted the benefit to overall global carbon reduction when some schemes to generate energy from non fossil fuels involve the long distance transportation of olive cake, a by-product of the olive farming, from Italy or waste from coconut growing from Malaysia.

.....Shortly after this debate took place, the Government published is much delayed Climaten Change Review and announced a number of new measures to cut the UK’s carbon emissions by 15-18 per cent of 1990 levels by 2020 – less than the 20 per cent target set earlier. Although a renewed focus by Government on its energy and environmental programme may have addressed some of the issues raised by our expert panel, unless energy related decisions become more joined up progress will be limited. Energy related decision are complex but, as our panel found, the options are fairly simple. All organisations have to reduce their energy use, investors need to take a longer view, manufacturers and energy generators need sell the benefits of energy efficiency better, and government needs to encourage, legislate for and police its strategy much more effectively.

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