Every successful resource efficiency retrofit involves an ongoing integration of three normally distinct and separate functions: operations, technology and finance. In spite of all of the tangible benefits that can be attributed to the greening of existing buildings, finance and operations typically operate within silos and the collaboration of technology, operations and finance has been woefully lacking.
Improving the performance of our existing buildings (approx. 98% of our building stock) is critical to addressing climate change. However, greening existing buildings still face a number of barriers to reach large scale implementation. We believe that an integrated approach with strong collaboration between technology, operations and finance is essential to the success of any retrofit, especially deep retrofits.
The understanding and application of key aspects of this three sided relationship and its information exchange form the three segments of what is called in this article the ‘retrofit triangle.’ In a retrofit triangle program, they need to be integrated, eventually becoming a flywheel driving a building-wide data flow that improves the overall asset management and bottom line creation. This framework streamlines retrofits and creates value. When operations, technology and finance work together seamlessly, it removes barriers to capital flow toward efficiency upgrades. For each stage of the retrofit process, the retrofit triangle framework drives building-wide information flow, improves overall asset management, addresses operational risk, and allows for better management, measurement, and forecasting of building performance.
Technology typically falls into one of three groups: tools used to model, measure and manage building operations. This is a combination of hardware, controls, software and visualization tools to track and report performance as well as analytical tools to identify trends, producing intelligence sufficient for financial manager’s decisions.
The following sections outline a step-by-step process of a typical retrofit process and how technology, operations and finance teams can collaborate to ensure the project’s success.
STAGE ONE: Investigate
1. Set goals and create a team.
Cracking the code of the retrofit triangle starts with creating the team whose members often operate in organizational silos. Building owners pursuing deep retrofit opportunities must first select a team (preferably with prior experience with retrofit projects), set goals, and apply integrative principles to help manage and finance building retrofits. The first 10-20% savings could be achieved with standard operational practices, but to get deeper, long term savings, integrative design principles should be implemented. Technologies that enable integrated project delivery, benchmarking, rapid energy modeling, utility analytics and portfolio analysis help in the early decision support.
2. Develop a baseline.
Before any upgrades take place, a building baseline must be established using utility bills or a calibrated energy model. The building baseline or the ‘business-as-usual’ scenario is the basis from which all the energy conservation measures will be compared against. [pagebreak]This is critical, not only to help identify the best retrofit options specific to the building, but also to compare the amount invested against the value impacts of the future efficiency savings. Failure to establish the baseline or “as-is” scenario is one of the key barriers to clearly defining the impact of energy efficiency upgrades in existing buildings. As capital investments create avoided costs, having a baseline to measure the savings over time helps make the efficiency business case.
Take as an example the City National Plaza deep retrofit project in Los Angeles, which included $11 million dollars in energy upgrades of its central-plant, with chiller, boiler and cooling tower replacement, as well as tenant space upgrades. Completed in 2010, the building today uses 37.5% less energy and it has saved over $12 million in energy costs. This resulted in a six year payback on the energy savings investments. Looking at the investment from a 15 year NPV (net present value) analysis results in a 375% ROI (return on investment). At a 7% cap rate the $4 million dollars of annual energy savings is worth $61 million dollars in additional value. Without establishing the building baseline, or business as usual scenario, Thomas Properties Group (who owned and operated the building), would not be able to identify the amount of money saved.
3. Model anticipated savings.
With the baseline established, the next step is to calibrate an accurate model. Calibration is achieved by verifying that the simulation model reasonably predicts the energy patterns of the facility by comparing model results to a data set that includes utility bills and detailed operating data obtained from metering and sensors. Metering and utility analytics that uses metered data allows you to detect faults, flag critical events in the building operations and can be used to complement your energy model.
With the building baseline set and performance continuously tracked, credible third party (not lender and not borrower) reports can be generated. Such due diligence documents are common in loan processes and often required by bank regulators. Disclosure rules create market impacting information, and knowledge, which drives decisions. These reports create an expert opinion, which transfers risk from the lender to the expert.
STAGE TWO: Implement
4. Start with load reduction projects.
During the opportunity identification process, focus on starting with load reduction projects and continue to make improvements over time. Operational changes, installing meters and lighting upgrades are typically the low-hanging fruit with shorter payback periods.
5. Measure and verify.
Technology tools used to model, measure and manage building performance enable operations data and finance analysis to merge. The deeper the retrofit the more detailed analysis is needed to support ongoing capital investment decisions. [pagebreak]Reliable whole-building energy models and financial analysis can support increasingly improving performance targets. Technology links the key operational and financial decisions, such as the evaluation of individual and bundled measures, determining whether implementing some measures at once or to spread them out over several years is the best option. It also helps to target the correct order for the various measures.
6. ‘Simple ROI’ and the competition for investment capital.
To compete for investment capital, building upgrade projects should be evaluated using standard financial analysis tools that evaluate cash flow. Although reliance on payback period is widespread, yield analysis discounted cash flow tools such as NPV and internal rate of return (IRR) are better choices, because they take into account the time value of money and the full stream of benefits over the project life. Evaluating upgrades with “simple payback return on investment” is misleading as it does not reflect reality since investments should consider both payback during the holding period as well as the increase in value at sale.
Looking at the table from Energy Star Investment Analysis report, two options were evaluated side-by-side, time clocks versus occupancy sensors. Since occupancy sensors had higher first cost than installing the time clock, the central time clock resulted in a higher IRR. But on a NPV analysis the occupancy sensors were a much better investment in the long run.
STAGE THREE: Improve
7. Integrate building operations.
Finally, the last piece in the technological toolkit is an integrated building management system to ensure the building continues to perform well over its lifespan. The movement toward inter-operable systems within a building, utilizing multiple operating software and functions has been a challenge. However, despite setbacks, collaboration over the past two decades has led to the adoption of open standards such as BACnet, Modbus and LonWorks. The result of this collaboration is that now lighting, HVAC, elevators, security and other systems are able to efficiently function together.
Investments in smart technologies and measurement and verification tools are key to monitor continuous buildings operations and effect ongoing performance improvements. When systems are automated it is significantly easier to avoid, manage and correct systems’ malfunctioning, hence driving on-going building performance through greater reliability.
The value to the building owner increases manifold when the data from BMS, sub meters and sensors can be visualized and analyzed in real time with a feedback loop.
8. Use technology to manage risk.
Money flows to investments when there is a clear and measurable anticipated risk adjusted rate-of-return. [pagebreak]When adequately applied, technology brings down the barriers to building performance analysis and supports data transparency, ultimately helping building owners, property managers, real estate developers, and financiers to better measure, manage and forecast building performance.