Why Traditional Energy Efficiency Doesn't Work for SMB

by ‐ Tags: property management, financing

Note: This post is part one of a two-part investigation into energy efficiency in the small and medium business (SMB) segment. This post explores the economics of an energy efficiency project for a small building and concludes (spoiler alert!) that a new approach will be necessary to unlock efficiency in the SMB segment. You can find part 2 here.

You may think you understand energy efficiency. A hospital administrator, driven by a desire to "be green" or reduce energy bills, calls an engineer to walk the campus, count light bulbs, meter chillers and boilers, test air pressure, maybe run some computer models, and eventually (a level III audit can take as long as a month) delivers a detailed report about energy use at the facility. In addition to the summary information, this audit report includes specific projects that the hospital staff can undertake to improve efficiency. These projects are presented in a menu format along with cost and savings estimates, allowing the building management to make an informed decision about the path forward. 

This model of energy efficiency has worked well for decades, and resulted in literally billions of dollars in energy savings, as well as significant reductions in greenhouse gases. But it will not work for small buildings. It is simply too expensive. And small buildings, although left out of the energy conversation for decades, represent 90% of the commercial buildings in the U.S. (For the energy geeks out there, I am using the DOE definition of small buildings as being under 50,000 square feet.)

Let's take a closer look at the numbers. I started with the national averages (EIA CBECS 2003) for a 40,000 square foot building, assuming everything is electric (no onsite combustion). In the chart below, you can see the breakout between space conditioning (heating, ventilation and air conditioning is affectionately referred to as "HVAC"), lighting and everything else. This is a pretty typical breakout for a small office building, but of course it depends on the local climate. In the "Other" category, imagine computers, televisions, copy machines, paper shredders, a water cooler and refrigerator. 

SMB Economics

Assuming a comprehensive approach to energy efficiency, we can apply some "rule of thumb" estimates for each category: 30% reduction in HVAC, 20% in lighting, and 10% on everything else. This calculates out to an annual savings of around 200,000 kWh. Borrowing from the fossil fuel extraction industry, this is the target "resource" available, and the challenge is to obtain this reduction in kWh at a lower cost than its value. 

The next step is to convert from kWh to dollars. There are many ways to do this, but a simple approach is to look at the incentives offered by the local utilities. For example, in California, a team of economists gets together every few years and figures out the value of a kWh of electricity savings. This number is a major input in the development of a suite of rebate and incentive programs. And in practice, many energy engineers and contractors in California perform calculations based on a fixed rebate amount. I used 15 cents per kWh here. Once we know the value of the energy savings, we need to calculate how much money is available for the project engineering. Because most of the money goes to the equipment and labor for the upgrade, we've assumed 10% for development and engineering. 

So that's a lot of numbers, but what's the bottom line? A little over $3,000 for the engineering of the efficiency project in this 40,000 square foot building. 

$3,000 is not a large amount of money, especially in a field where multi-million dollar projects have been the norm and $10,000 audits are business as usual. The takeaway is that the economics of small building energy efficiency require a novel approach to energy efficiency. Watch for another blog post soon that explores what this new model will look like, and in the meantime, please reach out and share your thoughts about how energy efficiency can gain momentum in the SMB market. 

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