Reducing the Impact of Energy Costs on Business - Schneider Electric

<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong><strong>Energy</strong> <strong>Costs</strong> on BusinessYour road map to targeting energy efficienciesin a dynamic business environmentDecember 2010 / White Paperby Brandi McManus, Solutions VP, Strategic Communicationsand Melissa O’Mara, Solutions VP, Green Buildings SolutionsMake <strong>the</strong> most <strong>of</strong> your energy SM

SummaryI. Executive Summary.......................................................................................... 3II. <strong>Energy</strong> and <strong>the</strong> Corner Office........................................................................... 4The cost <strong>of</strong> business as usual....................................................................... 4Seizing <strong>the</strong> opportunity: <strong>Energy</strong> efficiency as a manageable investment........ 5Financial benefits and more.......................................................................... 5III. How <strong>Energy</strong> Management Programs Capture <strong>the</strong> Opportunity......................... 7<strong>Energy</strong> efficiency as a managed process...................................................... 7A focus on proactive measures..................................................................... 7A holistic approach....................................................................................... 8IV. Case Studies <strong>of</strong> <strong>Energy</strong> Savings...................................................................... 9V. Conclusion.....................................................................................................11

White PaperI. Executive SummaryRising energy costs are a critical concern for executives, yet few companies havebegun serious energy efficiency programs. The major reason for this oversight isthat executives <strong>of</strong>ten view <strong>the</strong>ir facilities and energy use as a sunk cost, instead<strong>of</strong> an investment.By leveraging energy and facilities as investments, companies can gain control<strong>of</strong> energy use and achieve high rates <strong>of</strong> return in <strong>the</strong> form <strong>of</strong> energy savings. Theinternal rate <strong>of</strong> return (IRR) on <strong>the</strong>se projects can be sizeable. In fact, <strong>the</strong>y canbe even greater than o<strong>the</strong>r corporate investments. When considering <strong>the</strong> cost <strong>of</strong>capital, <strong>the</strong> modified internal rate <strong>of</strong> return (MIRR) can be as high as 29 percent.Companies are also eligible for rebates from utility and government programs.Benefits from this investment approach include double digit energy reductions,as well as improved building performance, worker productivity, andenvironmental responsibility.Effective energy management programs can help companies realize <strong>the</strong> benefits<strong>of</strong> energy efficiency with minimal risk and a large potential payback. A provenprocess, combined with a holistic view <strong>of</strong> facilities and ongoing proactivemeasures, gives companies <strong>the</strong> ability to invest in energy efficiency with apredictable rate <strong>of</strong> return. A comprehensive energy management programaddresses all energy consumption in a facility, from <strong>the</strong> building “envelope” to<strong>the</strong> internal controls and systems, including lighting, heating, air conditioning,electricity, and water.A measurable, verifiable energy management program allows executives to makeinformed decisions about <strong>the</strong>ir facilities and energy use. The result converts sunkenergy costs into competitive agile assets.Effective energy management programs helpcompanies realize <strong>the</strong> benefits <strong>of</strong> energy efficiencywith minimal risk and a large payback.<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 3

White PaperII. <strong>Energy</strong> and <strong>the</strong> Corner OfficeFor CFOs and o<strong>the</strong>r executives, <strong>the</strong> quest tostreamline operations and cut costs has never beenmore urgent. Ironically, a vital source <strong>of</strong> financialsavings is all around <strong>the</strong>m—<strong>the</strong> very buildings where<strong>the</strong>y do business.The biggest issue is <strong>the</strong> surging cost <strong>of</strong> energy, whichnow makes up 30 percent <strong>of</strong> operating costs for <strong>the</strong>average company. 1According to Pike Research, electricity costs haveincreased 20 percent 2 since 1995 in <strong>the</strong> U.S. and areprojected to grow 10 percent 3 in <strong>the</strong> next year. In <strong>the</strong>European Union, energy costs have increased 47percent 4 since 2003 and are expected to grow by 30percent over <strong>the</strong> next five years. 5The impact <strong>of</strong> high energy prices is felt in every corner<strong>of</strong>fice and boardroom. A recent Duke Universitystudy ranked high energy costs as <strong>the</strong> number oneconcern <strong>of</strong> executives, ahead <strong>of</strong> even healthcarecosts and rising interest rates for U.S. corporations.Yet remarkably, <strong>the</strong> same study revealed that onlya minority <strong>of</strong> companies have made any attempt toimprove <strong>the</strong> efficiency <strong>of</strong> <strong>the</strong>ir facilities. 6What explains this apparent contradiction? Why havebusiness executives—who want to squeeze everyounce <strong>of</strong> performance from <strong>the</strong>ir operations—failed totake action when it comes to energy efficiency?<strong>Energy</strong> makes up 30% <strong>of</strong> operatingbudgets for most companiesReasons Why Companies Have Not ActedExecutives can’t spare <strong>the</strong> time, people, or moneyPrefer to invest scarce available dollars on moreimportant issuesMost facilities are managed on a reactive basis,ra<strong>the</strong>r than a proactive oneOwners feel <strong>the</strong>y solved facility issues years agowhen <strong>the</strong>y installed new controls or updated<strong>the</strong>ir systemsOwners view energy issues as costs, notas investmentsThe cost <strong>of</strong>business as usualThere are ample reasons why companies have notacted. First, executives feel <strong>the</strong>y can’t spare <strong>the</strong> time,people, or money to worry about facility overhauls.As long as <strong>the</strong> heating and air conditioning operatesand buildings are secure, companies prefer to investscarce available dollars on more important issues.Second, most facilities are managed on a reactivebasis, ra<strong>the</strong>r than a proactive one. Boilers get fixedwhen <strong>the</strong>y start spewing steam. New controls areinstalled when <strong>the</strong> HVAC system finally breaks down.The typical facility manager is stretched just keepingup with repairs and maintenance within <strong>the</strong> budget—never mind requesting money to fix things thataren’t broken.The majority <strong>of</strong> building owners feel <strong>the</strong>y solvedfacilities issues five or ten years ago when <strong>the</strong>yinstalled new systems or lighting controls. Yet1<strong>Energy</strong> & Power Management, “Connecting <strong>the</strong> Dots,” Mark Jewell, June 1, 20062<strong>Energy</strong> Management Systems for Commercial Buildings, Pike Research, 20093U.S. <strong>Energy</strong> Information Administration4Eurostat, http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home. Includes average <strong>of</strong> EU 275Dr. Stephan Sharma, 2009 Electric Market Forecasting Conference6Duke University/CFO Magazine Business Outlook survey, Dec. 2005<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 4

White Paperbuildings drift out <strong>of</strong> control over time, as occupancyand use change, and technicians override controls t<strong>of</strong>ix day-to-day problems.A key reason for corporate inaction is that executivescontinue to view facilities and energy as costs, not asinvestments. Facilities and energy are part <strong>of</strong> <strong>the</strong> cost<strong>of</strong> doing business, <strong>the</strong>y think. As with any drain on<strong>the</strong> bottom line, <strong>the</strong> goal is to minimize costs.Thus, even with energy prices rising to historic highs,58 percent <strong>of</strong> U.S. facility managers say <strong>the</strong>ir budgethas remained constant or even decreased from yearto year. 7The result is inevitable. Companies face agrowing problem <strong>of</strong> aging equipment, inefficientfacility operations, rising maintenance costs, anduncontrollable energy prices. Trimming facility costshas not solved <strong>the</strong> problem. It has compounded it.Seizing <strong>the</strong> opportunity:<strong>Energy</strong> efficiency as amanageable investmentFor companies willing to take <strong>the</strong> initiative, energyproblems <strong>of</strong>fer a golden opportunity. Managingfacilities and energy as assets that can be investedin—with a predictable return—is <strong>the</strong> solution.“Investments in energy efficient electrical productsafford tremendous economic opportunities,” says Dr.Steven M. Bloom, principal <strong>of</strong> <strong>the</strong> financial consultingfirm Capital Markets International, in an article for<strong>the</strong> ECSC. He says <strong>the</strong> MIRR can be as high as29 percent—significantly higher than most o<strong>the</strong>rThe MIRR can be as high as29 percentinvestments a company is probably making. 8According to <strong>the</strong> ECSC, this opportunity is greatbecause so many building systems are aging andout-<strong>of</strong>-date. With advances in energy efficiency over<strong>the</strong> last ten to twenty years, <strong>the</strong>re is dramatic roomfor savings in almost every area, “from ballasts andlamps to chillers, motorsand drives.” 9“When compared to o<strong>the</strong>r options,” concludesBloom, “energy upgrades should be viewed by CFOsand o<strong>the</strong>r operational executives as investmentopportunities to stand up and cheer about.” 10Financial benefits and moreThe financial benefits <strong>of</strong> facilities investments arewell documented.Most significant <strong>of</strong> all, according to <strong>the</strong> U.S.government program ENERGY STAR, “Organizationsthat improve energy performance outperform <strong>the</strong>ircompetitors by as much as 10 percent.” 11This return on investment (ROI) comes from morethan just energy savings. One study found a twopercent drop in employee productivity for eachdegree above 78°F in a typical environment. Asimilar reduction in productivity occurs when <strong>the</strong>7Survey conducted in 2004 by <strong>the</strong> International Facility Management Association, FMLink, <strong>the</strong> Association for FacilitiesEngineering (AFE), The Association <strong>of</strong> Higher Education Facilities Officers (APPA), The Building Owners & Managers Association(BOMA) and Building Operating Management magazine8<strong>Energy</strong> Cost Savings Council, www.energystar.gov/ia/business/industry/bom.pdf9<strong>Energy</strong> Cost Savings Council, www.energystar.gov/ia/business/industry/bom.pdf10<strong>Energy</strong> Cost Savings Council, www.energystar.gov/ia/business/industry/bom.pdf11ENERGY STAR: http://www.energystar.gov/index.cfm?c=assess_value.bus_financial_value_calculator<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 5

White Papertemperature drops below 72°F. 12 How valuable is thatproductivity difference? Considering <strong>the</strong> cost <strong>of</strong> acompany’s payroll, a 1 to 2 percent increase in staffproductivity could <strong>of</strong>fset a significant portion <strong>of</strong> itsenergy budget.Fur<strong>the</strong>r energy ROI comes from governmenttax incentives. In <strong>the</strong> U.S., <strong>the</strong> <strong>Energy</strong> PolicyAct <strong>of</strong> 2005 provides new tax deductions andcredits for energy-efficient and renewable energyinvestments. According to an article in <strong>Energy</strong> &Power Management, “Pursuing energy efficiencythat exceeds code increases eligibility for <strong>the</strong>se taxbenefits while lowering life cycle costs.” 13 Finally,energy management <strong>of</strong>fers every executive a chanceto deal with environmental issues like energy andwater use within a pr<strong>of</strong>itable initiative, instead <strong>of</strong> as acostly drain on finances.With all <strong>the</strong>se benefits, <strong>the</strong> question is not whe<strong>the</strong>r tomove forward with a corporate approach to energysavings, but how to go about it successfully, with ameasurable program and predictable ROI.For every degreebelow 72 °Forabove 78 °F2 percentdrop in workers’productivityStudies have shown that:• The average building uses 20 percent moreenergy than needed• Proactive maintenance can reduce <strong>the</strong> energycost <strong>of</strong> a system by 5 to 10 percent• Equipment upgrades and tuneups can save 5percent to 15 percent12“Control <strong>of</strong> Temperature for Health and Productivity in Offices,” Helsinki University <strong>of</strong> Technology Institute <strong>of</strong> Heating, Ventilatingand Air Conditioning, and <strong>the</strong> Lawrence Berkeley National Laboratory Environmental <strong>Energy</strong> Technologies Division13<strong>Energy</strong> & Power Management, “Connecting <strong>the</strong> Dots,” Mark Jewell, June 1, 2006<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 6

White PaperIII. How <strong>Energy</strong> ManagementPrograms Capture <strong>the</strong> OpportunityBased on decades <strong>of</strong> experience and engagementswith a wide range <strong>of</strong> companies, Schneider Electricworks with customers on a local or global basisto plan and control energy use through ongoingstrategic energy management programs.<strong>Energy</strong> efficiency as amanaged processEffective energy management programs helpcustomers begin immediate and long-term plansthat reduce energy costs and give <strong>the</strong>m bettercontrol <strong>of</strong> <strong>the</strong>ir facilities. Our energy experts identifyspecific issues, estimate <strong>the</strong> investments required,and project <strong>the</strong> ROI that can be expected. Since we<strong>of</strong>fer programs to sustain energy efficiency over time,savings estimates are likely to be realized.We use a proven, measurable, verifiable process toachieve optimum energy use throughout <strong>the</strong> life cycle<strong>of</strong> a facility:• <strong>Energy</strong> Assessment: We compare a customer’sutility bills to similar facilities in <strong>the</strong> region todetermine energy conservation opportunities.• Preliminary <strong>Energy</strong> Report: A high-level sitesurvey to identify potential energy conservationmeasures to align <strong>the</strong> customer’s energy pr<strong>of</strong>ilewith business objectives.• Comprehensive Analysis: Through a detailedenergy analysis <strong>of</strong> <strong>the</strong> facility by a Certified <strong>Energy</strong>Architect, we create a program and plan toimprove facility operation and meet energy targets.• Program Implementation: We work closely withcustomers throughout <strong>the</strong> implementation processto verify that goals are met, with regular milestonesand reports.• Sustained Performance: We regularly review <strong>the</strong>project and results, make sure performance goalsare met, and fine tune to ensure continued energyefficiency and savings.A focus on proactivemeasuresSchneider Electric has found that companies aremost successful with energy efficiency when <strong>the</strong>yimplement a sustained approach, including proactiveoperations and maintenance.As mentioned earlier, buildings drift out <strong>of</strong> controlwithout a managed energy management program tosustain and care for its systems. Savings from pastsystem upgrades can evaporate quickly.The U.S. Department <strong>of</strong> <strong>Energy</strong>’s Federal <strong>Energy</strong>Management Program (FEMP) reports that energylosses from steam, water and air leaks, uninsulatedlines, maladjusted or inoperable controls, and o<strong>the</strong>rlosses from poor maintenance are considerable.FEMP’s studies show that investing in proactivemaintenance programs can save from 12 to 18percent over reactive maintenance approaches andmany facilities could save more if <strong>the</strong>y arepurely reactive. 14For this reason, Schneider Electric always includesongoing energy efficiency measures as part <strong>of</strong> ourprogram to help sustain <strong>the</strong> desired ROI.A holistic approachThe Schneider Electric review <strong>of</strong> energy efficiencytakes a holistic approach to solving an energyproblem. We find opportunities to leverage eachimprovement and to enhance o<strong>the</strong>rs. This includesevery aspect <strong>of</strong> facility operations to ensure financialand technical balance in an energy managementprogram.An ECSC study found that <strong>the</strong> greatest cost savingsare achieved when a range <strong>of</strong> technologies andapplications are used. The report states:14Federal <strong>Energy</strong> Management Program: http://www.eere.energy.gov/femp/operations_maintenance/strategies/strat_preventive.cfm<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 7

White Paper“In a sense, it works like compound interest. Eachtechnology that is upgraded provides energy savingson its own. But it also provides a base on which o<strong>the</strong>renergy savings can grow.” 15The reverse is also true. Projects that are undertakenas one-<strong>of</strong>f upgrades may look good on paper, butdon’t deliver expected returns. Using a holisticapproach avoids <strong>the</strong> adverse impact <strong>of</strong> a less thanstellar ROI.A simple example <strong>of</strong> this is a retr<strong>of</strong>it <strong>of</strong> lighting thatcan appear to save 50 kilowatts per hour on paper.In <strong>the</strong> real world, when <strong>the</strong> wea<strong>the</strong>r is cold, <strong>the</strong> loss<strong>of</strong> heat, once provided by <strong>the</strong> inefficient lighting, mustbe made up by <strong>the</strong> heating system, thus eroding <strong>the</strong>expected savings.Here’s What We Look At:Building ControlsSimple control adjustments can produce rapid energy savings. Are your building controls optimized forperformance? Are lights and o<strong>the</strong>r systems running at <strong>the</strong> correct settings and at <strong>the</strong> right times? We lookat optimizing controls first, ra<strong>the</strong>r than replacing <strong>the</strong>m, through s<strong>of</strong>tware changes or tuneups, Sometimesa simple adjustment in controls can improve efficiency significantly.MechanicalHow do HVAC systems use energy throughout <strong>the</strong> building? Can <strong>the</strong> performance <strong>of</strong> chill water,distribution, and steam systems be improved? Do air handlers and sequencers need upgrading oradjusting? Are outdated motors wasting energy? Replacing an old motor with a newer, high efficiencymotor can improve energy efficiency by 90 percent.ElectricalHow is electricity used and how efficient is <strong>the</strong> total system—from lighting and controls to <strong>of</strong>ficeequipment, refrigeration, and kitchens? Since facilities use electricity in many ways, <strong>the</strong>re are usuallyopportunities for savings.EnvelopeHow does your building envelope perform and how does it affect o<strong>the</strong>r energy systems? Could simpleimprovements to insulation yield significant savings?WaterWater, like energy, is a resource that can be conserved to save money. Are cooling towers losing too muchwater to evaporation? Are you paying for sewage charges that could be avoided with metering? Can waterheating be planned and managed to reduce costs, based on actual usage times and areas?15<strong>Energy</strong> Cost Savings Council: www.energystar.gov/ia/business/industry/bom.pdf<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 8

White PaperIV. Case Studies <strong>of</strong> <strong>Energy</strong> SavingsCase Study 1For <strong>the</strong> owner <strong>of</strong> various manufacturing buildings anddistribution facilities across <strong>the</strong> U.K., rising energy prices and old,inefficient equipment were factors in enlisting Schneider Electricfor an energy solution.SolutionWorking with this customer to find appropriate solutions,<strong>the</strong> Schneider Electric team introduced <strong>the</strong> latest buildingmanagement system (BMS) and data logging capabilities andreplaced old technology.GainsAs a result, <strong>the</strong> customer gained intelligent control over itsenergy-related equipment and now collects energy consumptiondata to continue evaluating <strong>the</strong> progress <strong>of</strong> this project. Afterfunding this initiative, <strong>the</strong> customer produced a 35 percentsavings in electrical consumption and a 25 percent cost savings.In addition, <strong>the</strong> customer was recognized in its industry and hasreceived awards for <strong>the</strong>se efforts.Case Study 2Struggling with high energy costs, aging HVAC and lightingequipment, and little control <strong>of</strong> its equipment, a U.S.-basedindustrial manufacturer needed to cut those costs while aligningits HVAC controls with its business objectives.SolutionOutdated lighting equipment and HVAC ro<strong>of</strong> top units werereplaced. Schneider Electric also implemented network-basedHVAC controls to serve production times and schedules. Thismanufacturer is now able to track its energy consumptionthrough ongoing monitoring and reporting capabilities.GainsAs required, <strong>the</strong> BMS is aligned with <strong>the</strong> company’s goals. Thisenergy management system has attained an annual savings <strong>of</strong>$241,000 with a payback <strong>of</strong> three years. The company and itsbuilding are positioned for continued efficiencies and financialsuccess with a sustainable energy management solution in place.<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 9

White PaperCase Study 3Although <strong>the</strong>ir structure was new, <strong>the</strong> owners <strong>of</strong> a London, U.K.-based tourist destination also sought ways to make <strong>the</strong>ir buildingmore energy efficient while reducing environmental impacts andenergy costs.SolutionA Schneider Electric energy expert monitored buildingperformance and controls as well as emissions and consumption.From that data, an energy management program was approved.GainsThis initiative surpassed its goal: Within <strong>the</strong> first 18 months, <strong>the</strong>company reported savings <strong>of</strong> more than £55,000. Electricalconsumption was reduced by 9 percent and gas consumption fellby 15 percent. The long term savings realized by <strong>the</strong> customerwill help enable <strong>the</strong> implementation <strong>of</strong> more energy savings.Because it is operating more efficiently, <strong>the</strong> building’s equipmentis earmarked for a longer life span—saving <strong>the</strong> owner substantialmaintenance costs.Case Study 4A London, U.K.-based retailer with 500 retail units sought todecrease utility costs while improving environmental conditionsand plant efficiency. Schneider Electric used data analysis,benchmarking, and <strong>the</strong> compilation <strong>of</strong> a pre-visit report to createa best practice strategy for this retailer.SolutionThe Schneider Electric team <strong>the</strong>n performed a one-day site visitto conduct an energy survey and identify energy savingopportunities. Schneider Electric followed up by implementing<strong>the</strong> recommended strategies. It also created a report outliningpayback. Continued savings are ensured through post-visitenergy performance tracking.GainsAfter investing £131,000, this customer has achieved an annualsavings <strong>of</strong> £750,000 and increased its plant life expectancythrough reduced loading.<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 10

White PaperV. ConclusionViewing facilities and energy use as investments ra<strong>the</strong>r than costs allowscompanies to achieve high rates <strong>of</strong> return from energy savings while loweringlife cycle costs. Studies have shown that successful companies manage <strong>the</strong>irenergy in this asset-focused way. It also enables companies to promote <strong>the</strong>irenvironmental stewardship and enhance worker productivity.Schneider Electric draws on worldwide resources and experience to examineevery phase <strong>of</strong> energy use, helping companies take control <strong>of</strong> <strong>the</strong>ir energyinvestments with a program <strong>of</strong> immediate savings and sustained energy efficiency.The initial steps <strong>of</strong> this holistic approach are low cost and low risk. In <strong>the</strong> longterm, proactive energy savings can easily reach double digits.The result is that Schneider Electric empowers executives to manage <strong>the</strong>ircompany’s energy consumption and achieve true competitive advantage.<strong>Reducing</strong> <strong>the</strong> <strong>Impact</strong> <strong>of</strong> <strong>Energy</strong> <strong>Costs</strong> on Business | 11

Schneider ElectricOne High Street,North Andover, MA 01845 USATelephone: +1 978 975 9600Fax: +1 978 975 9674www.schneider-electric.com/buildings©2010 Schneider Electric. All Rights Reserved. Schneider Electric and Make <strong>the</strong> most <strong>of</strong> your energy are trademarks owned bySchneider Electric Industries SAS or its affiliated companies. All o<strong>the</strong>r trademarks are <strong>the</strong> property <strong>of</strong> <strong>the</strong>ir respective owners.WP-REDUCEIMPACTOFENERGY-US.BU.N.EN.12.2010.0.00.CCDecember 2010 sm