Surprisingly, a recent survey of corporate real estate executives by Jones Lang LaSalle found that only 15 percent of respondents had a strategy to deal with rising energy expenditures. Preparedness is essential to minimizing costs and risks in this chaotic period. The only solution to combat energy costs is to implement a comprehensive and strategic energy management program.

This paper will discuss the contributing factors to the rising costs of energy, including the United States' dependence on foreign oil, expanding global demand and the lack of available alternatives. More importantly, it outlines both the crucial components of an effective energy management strategy as well as the significant cost savings that a sound plan can deliver.

The Supply and Demand of Oil

The primary force behind escalating energy prices is the price of oil. The most highly prized of fossil fuels (due to its utility, ease of transport and storage ability), oil prices are intrinsically tied to the dynamics of supply and demand. The price of coal and natural gas fluctuates in relation to the price of oil. As the price of oil rises, electricity producers turn to those less expensive fuels, causing the prices of energy sources like coal and natural gas to rise in turn.

For the last hundred years, oil has been the lifeblood of the expanding American economy. Indeed, there has been a strict correlation between rising GDP and oil consumption. This relationship is not the United States' alone—growing economies in other nations have direct relationships between GDP and oil demand, particularly in developing nations such as China and India.

The United States currently imports 59.8 percent of its oil.² That number is expected to rise to 70 percent in the next ten years.³ Global oil demand has gone from 73.7 million barrels of oil per day in 1997 to 86 million barrels per day today. China and the rest of Asia represent 40 percent of the additional barrels of oil needed to satisfy global demand each year.⁴ Clearly, the surging list of developing nations will quickly consume any spare capacity in oil supply.

Experts believe that the world will pass the point of peak oil production sometime between the years 2000 and 2008, at which time we will have extracted half of the oil that exists on the planet. The remaining half of the oil reserves will be more difficult and costly to extract and refine. The result: decreased capacity and continuous price escalation. Perhaps even more troubling, 60 percent of the remaining oil reserves are located in the Middle East. The United States possesses only three percent of these reserves.⁵ Therefore, OPEC controls a majority of the crude oil supply and, in turn, the cost. Consequently, global politics play a significant and unpredictable role. For a country that imports so much of its oil, the precarious relationship the United States maintains with several OPEC nations creates uncertainty of supply in a marketplace with little elasticity of demand. Further, no new refineries have been built in the United States since 1976, despite a 25 percent increase in petroleum use in the same period, which forces greater dependence on overseas refineries.⁶

The Broken Promise of Deregulation

In an attempt to minimize increasing volatility and rising costs, the government has intervened to deregulate energy markets. Unfortunately, deregulation at this point has not led to lower energy prices—in fact, quite the opposite. Rules regarding power companies vary from state to state, and many power companies purchase electricity across state lines. As electricity is transported across the United States, the weaknesses of the aging national power grid are exposed. Transmission fluctuations and power congestion result in volatile electric prices, and worse, power failures. On August 14, 2003, a power shift caused electrical lines to sag into a tree in Ohio, triggering the largest blackout in North American history. While a few states, like Pennsylvania, have reaped the lower energy cost benefits of deregulation, others have not been as fortunate. For example, Connecticut Light and Power raised its rates by 22 percent in 2006.⁷

Real-time pricing of electricity is increasingly becoming the standard rate structure in the open market. Energy prices fluctuate daily, determined by use—peak hours occur in daytime, when electrical energy use is heaviest, which pressures businesses to alter consumption habits.

Lack of Viable Electricity Sources

While the United States has significantly decreased its reliance on oil to produce electricity (currently only three percent of supply is used for that purpose), no viable long-term electricity source has been found.⁸ The hydroelectric industry contributes only seven percent of America’s electricity and has little room for growth, as all of the country’s major waterways have already been dammed. And while nuclear energy currently provides for 21 percent of U.S. electrical needs, environmental and safety concerns have stalled that industry, forcing power companies to rely on coal and natural gas. Currently fulfilling 14 percent of U.S. electricity needs, imports of natural gas are expected to increase from 18 percent to 25 percent by 2015.⁹ But natural gas prices have risen sharply, and the infrastructure required to chill and transport it in liquid form (natural gas turns liquid at –260°F) adds significantly to its cost.

With worldwide electricity demand increasing from 14,781 billion kilowatt hours in 2003 to an expected 21,699 billion kilowatt hours in 2015 (an increase of 47 percent), electricity producers in both the United States and China rely on the cheapest and most plentiful fossil fuel, coal.¹⁰ With enough supply to last the United States another 250 years (at current usage levels), 49.8 percent of American electricity is generated from coal-fired power plants.¹¹ But coal produces the most CO² per unit of energy of any fossil fuel, and thereby exerts a different form of pressure on the energy marketplace—the need to minimize environmental pollution, and inevitably convert to sustainable energy sources.

Make no mistake. Finite supplies, growing global demand and constant volatility will continue to put upward pressure on energy prices for the foreseeable future. It is clear that the increasing dependence on oil and rising energy prices pose a significant threat to commercial real estate operations and corporate profits.

Effective and Strategic Energy Management

Yet, companies can minimize the impact of the inevitable and unending rise in energy prices. Consider that utility costs run approximately $2.50 per square foot. Typically 15 percent of those costs are wasted due to inefficiency—HVAC systems simultaneously cool and heat the same floor; and lights illuminate empty offices or burn at lumen levels higher than building specifications require. In a portfolio of 90 to 100 million square feet, that is nearly $40 million in excess spending. However, by implementing a strategic energy management program, this unnecessary consumption can be dramatically reduced. To achieve these results, the energy management plan must include a single point of accountability, metrics, and short- and long-term portfolio energy plans.

Accountability, Leadership and Management

Many companies assume that energy management can be handled on-site, as a shared responsibility of engineers and managers. But without a single individual to quarterback the myriad aspects of energy usage, this approach ultimately fails to provide substantive, long-term cost savings. Therefore, a comprehensive energy management program must be led by a single individual, a Portfolio Energy Manager (PEM).

The PEM establishes priorities based on specific corporate objectives, guides the development of a Portfolio Specific Energy Plan, oversees its implementation and is accountable for its effectiveness. This individual acts as the integrator of the numerous elements of the energy program, such as the analysis of accounting data, the selection of appropriate metrics and benchmarks to measure and evaluate energy usage, the myriad pathways of energy procurement, the proper operation and maintenance of equipment, the preparation of documentation to ensure consistency for long-range progress and the development of a capital investment plan.

In order to implement the energy program, the PEM guides a group of individuals from within separate divisions of the company who are responsible for the tracking of energy systems' performance in their respective departments.

Duties of the PEM include:

• Acting as the point of contact for senior management
• Increasing the visibility of energy management within the organization
• Leading the energy team
• Training staff
• Identifying areas for improvement and following up on implementation

Consumption Metrics and Benchmarking

The success of an energy management program is dependent on an array of metrics, which measure energy use continuously, ensuring that progress is properly reported and adjustments are made as needed. Metrics ensure an energy program remains focused.

For electricity consumption, some examples of metrics might include:

• Air distribution energy use: Reported as monthly totals, monthly daily averages, annual total and peak day in the billing period
• Building electrical demand: Reported as monthly values, annual maximum of monthly values, including the date and time of peak demand
• Building electrical demand intensity: Reported as monthly values, and annual maximum of monthly values

While the use of metrics ensures that the goals of a strategic energy plan are being met within the company (or exposes how they are not), benchmarking is a vital gauge of energy performance relative to the entire industry. Benchmarking typically compares similar properties in similar regions, and also facilitates comparisons of present energy use to past use in specific seasons, best-in-class use in specific industries and overall industry averages.

One of the best-known benchmarking programs is EnergyStar, a joint program of the U.S. Environmental Protection Agency (EPA) and the U.S. Department of Energy (DOE). The ENERGY STAR program provides buildings with energy performance scores, and has been used in more than 26,000 buildings across the United States, rewarding special certifications to high-scoring buildings.

Portfolio-Specific Energy Plans

Once the PEM has analyzed energy consumption habits, he/she can establish a strategic, goal-oriented energy plan specifically tailored to the portfolio. Minimally, one-, three- and five-year plans should be put in place to ensure that energy use reduction is a consistent element in long-range company growth. A three percent annual reduction across an entire portfolio is not unreasonable, and effects a 15 percent reduction over five years. Companies with no energy program previously in place can reasonably expect an initial 20 percent decrease in energy costs after adopting an energy management strategy.

A portfolio-specific energy plan has three key elements:

• Operations and Capital Improvements
• Procurement Strategies
• New Technologies

Operations and Capital Improvements While some executives erroneously believe that energy expenses can be reduced only through a substantial capital investment in new equipment, the most dramatic reductions in energy costs can, in fact, be achieved immediately through incremental improvements in day-to-day operations, such as the fine-tuning of lighting controls and HVAC systems. After that has been accomplished, appropriate capital expenditures can be evaluated.

Lighting accounts for the single largest portion of electric power use, amounting to 22 percent of the total electricity (8.2 quads) generated in the United States.¹² Commercial buildings consume more than half of that amount.¹³

Energy-efficient light emitting diodes (LEDs) are beginning to appear in the urban landscape, in traffic signals, street lighting and large animated displays, and in limited use in office interiors (continuously illuminated EXIT signs, for example). The variety of applications is expanding swiftly. Though considerably more expensive at present, LEDs last 100,000 hours, are durable (they have no glass or moving parts), are small, use up to 90 percent less energy than tungsten bulbs and radiate considerably less heat.

Advances in LEDs and breakthroughs in fluorescent lighting controls will ultimately lead to the replacement of the notoriously inefficient incandescent bulb (which turns only five percent of the power it consumes into light). Capital investment in new lighting systems can produce sharp reductions in electric costs, and often pay for themselves within a few years.

For example, exit signs using incandescent lamps consume as much as 40 watts of electricity. LED-lit exit signs consume less than five watts, potentially yielding an 88 percent savings of energy. According to the Department of Energy, if all U.S. companies switched to ENERGY STAR-qualified exit signs, they would save $75 million in electricity costs.

As for conventional fluorescent lighting, fixtures can now be fitted with solid-state dimmable ballasts, which provide variable light output in response to signals from photosensors, turning lights down or off in strong daylight. Also available are IP addressable ballasts, which divide overhead fluorescents into discrete zones that can then be dimmed or turned off by a computer connected to a server.

The use of motion detectors in conference rooms and bathrooms can also provide significant energy savings. In rooms where the lights are frequently left on, or where rooms are left unoccupied for large periods during the day or night, an occupancy sensor can cut lighting costs by as much as 50 percent.

Procurement Strategies Energy deregulation has changed the playing field for energy purchasers. As laws regarding energy vary by state, multi-state CRE portfolios may have complicated energy bottom lines. Introducing market mechanisms like real-time pricing to the anarchic transmission grid continues to produce unreliable supplies of power, marked by outages and rate spikes.

A carefully prepared energy procurement plan minimizes risk in periods of price volatility. A number of options are available, including long-term, fixed-price contracts involving hedges and swaps, and buying in groups, or “energy pools,” which allow for volume discounts. Additionally, the plan has to consider new and developing technologies that will alter conventional energy-buying habits.

New Technologies The need to produce more efficient energy systems has brought about considerable innovations in power distribution, challenging the traditional model of a distant power plant sending electricity over power lines.

Distributed Generation (DG) is the generation of power near its point of use, and one pathway to reducing consumption of highly priced electricity at peak hours. An example of DG is Combined Heat and Power technology (CHP), which recovers heat that would otherwise be wasted in the electricity-producing process, and reusing it for steam, direct heat, hot water, or manufacturing process heating and cooling. An integrated system may be comprised of a number of different technologies&mdash:turbines, microturbines, thermally activated technologies (such as absorption chillers and desiccant dehumidifiers), conventional reciprocating engines and solar panels—all operated by a computer-controlled neural network which continually adjusts system settings to accommodate current usage.

According to the U.S. Department of Energy, CHP systems currently:

• Produce almost eight percent of U.S. electric power
• Save building and industry owners more than $5 billion per year in energy costs
• Decrease energy use by almost 1.3 trillion BTUs per year
• Reduce nitrogen oxide (NOx) and sulfur dioxide (SO²), the main causes of acid rain, by 0.4 and 0.9 million tons per year, respectively
• Prevent release of more than 35 million metric tons of carbon equivalent into the atmosphere

An increasing number of states offer tax credit incentives and subsidies for the installation of such systems, another strategic area of energy procurement that companies should explore. Not to mention, CHP systems offer significant savings to individual users because they consume nearly 40 percent less fuel.

Conclusion

The global energy market now includes more buyers than ever, competing for diminishing energy supplies that are increasingly more expensive. It is unlikely that abundant, cheap power will appear again without a steep change in consumption habits and a host of new innovations.

To remain competitive and keep costs under control, companies must embrace a comprehensive energy management strategy that integrates the multiple components that comprise real estate energy systems—from detailed energy audits and procurement strategies, to environmental sustainability programs and the latest technologies. A proactive long-term energy management strategy is sure to be an industry best practice.

By Dan Probst, PE, and John Schinter, PE