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Energy Price Volatility Now A Major Factor In Corporate Efficiency Drive

Trevor Curwin, |Special to CNBC.com
Tuesday, 23 Aug 2011 | 1:58 PM ET

Recent volatility in energy prices could unleash a bigger tide of investments in energy efficiency than any concerns about climate change has in recent years.

According to recent surveys, energy supply concerns are forcing corporate offices to implement energy-reduction ideas, from lighting retrofits and HVAC system upgrades, to building redesign and rooftop solar panels.

“Energy reliability is a higher concern than energy cost (alone)” says Jon Naimon, managing director of investment firm Light Green Advisors, adding that “GHG emissions are an even lower concern, even in Europe,” where stringent carbon emissions reductions schemes are in place.

Johnson Controls’ fifth annual Energy Efficiency Indicator survey of over 4,000 property managers shows just how energy-sensitive global property owners have become in this past year.

While their survey showed that “bottom-line energy costs savings” remains the biggest single reason for property managers to consider spending on energy efficiency projects, “energy security” jumped into the top-five list of concerns from out of nowhere, tied with “carbon emissions reduction goals” for 4th place.

“In the five years since the index made its debut, this is the first time energy security issues made the top five,” says Clay Nesler, Johnson Controls’ VP of global energy and sustainability in their building efficiency group.

Carbon emissions targets as a driver dropped from 2nd place last year.

Since JCI survey respondents come from around the world, Nesler points out that “energy security means different things in different countries” with the developed world worried about stable pricing, while the developing world more concerned with stable supply with no blackouts.

Energy price volatility in recent months is on property managers’ minds, with 80 percent of respondents expecting double-digit energy price increases — the average target was an 11 percent jump over the next year.

But Light Green Advisors’ Naimon says number two on JCI’s list of energy efficiency drivers — “government and utility incentives” — points out the “Achilles heel” of these projects: the financing of their implementation.

Reliance on regulatory incentives — now under threat in today’s focus on austerity — means financing these projects on their own merit can still be tough without a “sweetener.”

Naimon says the usual approach is to find a way to move capital expenditures around to make room for efficiency, but only as long as it doesn’t get in the way of the firm’s “main goal.”

“Most (managers) follow Jack Welch’s doctrine of ‘focus on your core',” he says. “If you make paper, focus on making paper, not energy efficiency, even if it has a better return.”

He says what’s needed are more innovative vehicles to get these projects off of corporate balance sheets.

He points to chip-maker MEMC’s subsidiary SunEdison, which allows property owners to install rooftop solar panels with no capital expenditure and a reliable on-going energy cost by stepping in as a third party between the utility and the user.

The firm uses the panels’ energy revenues from selling solar power into the grid to smooth out big upfront costs over time.

“The key to SunEdison’s success was shifting capital cost burden from the c-suite of real estate (owners) onto SunEdison and its investors” who would have their own expectations of return.

As well, payback times vary from property owner to property owner.

JCI’s research shows the average payback time for an energy efficiency project is 3.1 years.

But David Raezer, founder of consulting firm Cleantech Approach, says he focuses on institutional clients, like universities, who don’t need to worry about making Wall Street analysts happy.

“They own their properties and aren't going anywhere,” he says about universities. “This affords them the ability to not have to worry about payback period; a 15 year payback period is palatable for them.”

While JCI’s Nesler points out that his survey shows energy efficiency gains are sometimes enough to warrant investment in new, more efficient equipment before the old equipment is obsolete, says Raezer. "There has to be the pressure of an old system.”

And while rapid rises in energy costs should boost energy efficiency projects, Raezer adds that making the call to replace outdated, but still functional, infrastructure means you need good data on its energy consumption.

Even with the pressure of energy costs today, he says, that data is often unavailable or unmeasured.

“Even when property owners are doing the upgrades, they are not sub-metering the new infrastructure,” he says. “So it’s difficult to assess the actual return on investment and share this data with others considering such a deployment.”

JCI’s Nesler agrees, saying his research shows that firms aggressively seeking energy efficiency gains measure their consumption data on a weekly, daily or even hourly basis.

“If you’re looking at [energy consumption] on a monthly basis, you’re likely just reading a utility bill” which just isn’t enough to go on, he says.

If the surveys results are correct, and energy price volatility continues to prompt deeper scrutiny of corporate energy costs, the future of energy efficiency projects looks rosy.

“Overall, the direction is positive,” says Raezer. “Small, low-hanging fruit projects, like lighting upgrades, will move forward briskly.”

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