Johnson Controls Paints a Promising Picture for the Future of Energy Efficiency

Johnson Controls is the world's largest provider of energy efficiency solutions for commercial buildings. While their approach -- provision of services as an ESCO (primarily for governmental organizations) and the sale of large-scale, proprietary energy management systems -- differs a bit from what we do at Octus Energy, our focus is the same: Generate sustainable energy savings through various means for commercial building owners. JCI is big brother. When they speak, people and companies and analysts take note.

At last week's CleanTech analyst day -- as summarized in an investment brief by analyst Canaccord|Genuity -- Johnson Controls shared a few interesting morsels:

The cleantech “megatrend.” Clean technology is now a “long-term global growth megatrend,” according to JCI management. Management specifically noted that buildings in North America and Europe, which together account for 40% of the world’s energy consumption and 70% of electricity usage, represent the single biggest opportunity for cleantech.

$24 billion opportunity. JCI estimates the energy solutions market is a $24 billion global opportunity, growing at approximately 9%-14% per year. Key market drivers for the energy solutions market include: 1) climate legislation and energy security; 2) corporate climate commitments; 3) volatile energy costs; 4) innovative funding models (including PACE, as Octus discussed here and here); 5) deployment of smart-grid technology; and 6) energy efficiency renewable resource standards.

Feds step up. Legislation and regulation are key drivers in the energy efficiency marketplace. In the United States, there have been energy efficiency bills in both the lower and upper house (the American Energy and Security Act of 2009 in the House and the American Clean Leadership Act of 2009 in the Senate). The Senate bill has been passed out of committee and includes the following features:

• National electricity and renewable electricity standard
• Energy efficiency building retrofit program
• Energy efficiency programs for states
• Building codes incentives
• Building performance information
• New clean energy deployment administration

Meanwhile, recent events in the Gulf of Mexico are spurring interest in energy and climate bills that otherwise would not have been brought up or passed this year.

PACE financing programs gaining momentum. Property Assessed Clean Energy, or PACE, is a financing solution that enables property owners to pay for energy efficiency, renewable energy and water efficiency projects via an additional assessment on their property tax bill over a five to ten-year term. The PACE program benefits building owners by: 1) eliminating the need for large upfront cash payments; 2) offering a competitive cost of capital; 3) solving credit rating collateral issues; 4) potentially moving the projects off-balance sheet; and 5) allowing owners to pass through retrofit costs to tenants. Johnson Controls echoed our sentiment that PACE financing will be one of the keys to unlocking the huge retrofit opportunity in the commercial building sector.

IT convergence. JCI sees the “smart building” as the starting point that is needed before a “smart grid” is even possible; again, echoing Octus's energy management and building automation strategy through our Smart Energy Platform. Put simply, the “smart grid” can’t analyze much without a “smart building” providing it with real-time information. The company noted that the integration of equipment and controls coming together in one product has been a major advancement for the industry.

Energy Efficiency Investments Remain Strong

We chime often about the outstanding virtues of investing in energy efficiency: The ability to slash energy costs, increase property values, bolster occupancy and lease rates, improve workspace environments, and reduce carbon impacts. Add to this the return-on-investment generated by investing in energy efficiency improvements -- typically in the 30-to-50% range, oftentimes higher -- and it's no surprise that such investments are mushrooming.

A global survey of 2,882 companies (the Energy Efficiency Indicator) released by Johnson Controls last week validates and amplifies the emerging opportunity. "These survey results indicate the growing importance on having energy efficient buildings that are cost effective and sustainable," said Dave Myers, president, Building Efficiency, Johnson Controls. A few snippets:

• Energy price increases: More than two-thirds of companies surveyed expect energy prices to rise, and many have made or are considering efforts to cut operational costs with energy efficiency retrofits.
• Illuminating savings: Among companies that have conducted energy efficiency retrofits, 73% modified their lighting, 64% trained building superintendents to be more energy efficient, and about one-third made larger investments, including replacement of HVAC units and installing efficient glass.
• Money, money: The biggest factor in energy efficiency investment for these companies is that the investment pay for itself -- quickly -- within three years.
• Making it happen: Sixty-three percent of companies surveyed plan to make capital investments in energy efficiency and 70% plan operating budget expenditures in efficiency programs over the next 12 months. And, 85% plan to make efficiency a priority in their new construction and retrofit projects.

"Despite the recession, decision-makers have put efficiency high on their agendas for 2010, especially those in India and China," said Clay Nesler, vice president, Global Energy and Sustainability, Johnson Controls. "It's encouraging to see that the financial returns and environmental benefits of energy efficiency investments are recognized in all regions around the world."

Why Sustainability is Sustainable for Commercial Real Estate

Great post last week in RealEstateJournals.com engaging how and why sustainable buildings make sense for commercial real estate developers, investors and managers. Here's the initial tease from the post's author, Don Schoenheider, a vice president of Liberty Property Trust (NYSE: LYR), a $6.6 billion REIT:

Fifteen years ago the word “recycling” was something aging hippies did and a “carbon footprint” was what was left if you stepped too close to the fireplace and then walked on a rug. How times change: today both are top of mind for commercial real estate developers, brokers and tenants, and it is crucial to understand the benefits if you want to best serve your company or client.

Schoenheider believes -- and we concur -- commercial real estate development has forever changed on four important levels: building occupancy cost, employee productivity, customer relations and commitment to the future of business.

1. Occupancy cost. Sustainable buildings are first and foremost about efficiency – saving energy, saving water and keeping reusable materials out of landfills. Liberty has consistently demonstrated they can provide tenants with a commitment to a sustainable environment and save them money; at least $.15-$.30 cents – or more – a square foot in occupancy costs. Lower electric bills, lower water bills, lower gas bills … something they can easily (and happily) relate to.
2. Healthier buildings. Sustainable buildings tend to be healthier, meaning less time is lost to illness which translates into greater productivity and lowered employee turn-over.
3. Customer relations. Investors see the cost savings, employees see the health benefits, vendors see the opportunity to work with a progressive company and customers are actively looking for a commitment to the environment.
   
4. Sustainability: The future of business. Who will be the commercial real estate decision makers in just 10 or 15 years? Schoenheider posits. People who have grown up recycling, tracking that carbon footprint (and I don’t mean across the carpet), installing solar panels in their homes and driving hybrid cars. How will they view non-sustainable buildings? Just like disco (and grunge and ponchos and Ugg boots and …): obsolete.

Schoenheider wraps with a reflection of the past decade: We at Liberty remember saying in 2002 that a sustainable building was only expected to cost 10-20% more to develop than a standard building. Today as we approach break-even, the goal is to make them even less expensive to develop than standard buildings.

Companies like Liberty get it. The qualitative virtues of sustainable buildings are somewhat difficult to grasp; they're there, but they are intangible. However, there's no argument with the quantitative benefits. When you invest in making your real estate assets more efficient and sustainable, your NOI increases, asset values are bolstered, occupancy rates rise, and you can command higher lease rates. It's a sustainable path to the bank.

Octus, Wickool featured in UC Davis Innovator magazine

Hot off the presses: The UC Davis Graduate School of Management's Spring 2010 Innovator magazine includes a cover story -- The Drivetrain of Sustainability: Powering Innovation in Clean Tech -- profiling, among others, Octus and our team. Here's an excerpt:

For a virtual case study in the power of GSM networking, look no further than Octus Energy.

Davis-based Octus specializes in reducing energy use for its clients by applying an array of tools and approaches, from lighting and HVAC retrofits to smart energy automation and creative project financing. “We try to cut a building’s utility bill in half,” says alumnus Chris Soderquist ’98, CEO and president of Octus.

The company recently licensed Wickool®, a passive evaporative cooling technology from UC Davis that promises to pay for itself in three years through energy savings. Within five months of the first napkin sketch, Wal-Mart was trying it out atop a West Sacramento store and it’s now installed on a Target retail store’s roof-top air conditioners.

“It wouldn’t have happened without the UC Davis Western Cooling Efficiency Center and without the GSM,” says Soderquist. The company has a distinct Davis flavor to it. “We have five GSM grads out of seven people at the company… because of our networks.”

On top of that, several of the GSM connections also have been—or still are—involved in other local start-ups that grew out of the Big Bang! or other university programs. “The greatest untapped asset the GSM has is its alumni and their networks,” Soderquist says.

Soderquist sees UC Davis as rich in the expertise, technologies, networks and relationships needed to become a hotbed for clean tech. And Dean Currall notes that a reputation for world-class science and connections with government will attract more financial and social capital to seed start-ups.

“It would be difficult to argue,” Soderquist says, “that there’s a better place to build a company in the cleantech area… than Davis.”

Energy Efficiency and Real Estate: Opportunities for Investors (take two)

In a post last week, we summarized a Mercer and Ceres report, Energy efficiency and real estate: Opportunities for investors. The report equips real estate investors and property managers with a pragmatic framework, and anecdotal evidence, to make informed decisions about how to implement energy-efficiency initiatives, with a central theme: If you’re not investing in energy efficiency, you are leaving money on the table. Corroborating music to our ears.

The report concludes with eight terse and meaningful morsels:

• Energy efficient buildings offer a measurable financial benefit over non-green buildings, in the form of higher rent, occupancy, valuation and lower operating costs
• No- or low-cost energy efficiency improvements can have quick and dramatic impacts on property operating costs
• Poorly performing buildings represent an opportunity for a significant investment gain when it comes to energy efficiency
• Additional improvements require planning, partnerships and initial investments, but can also decrease operating expenses and raise resale and leasing value
• Investment managers and products that consider energy efficiency and green building practices are increasingly available to investors
• Barriers to implementing energy efficiency improvements are eroding as demand grows, research on the benefits continues, and supporting products and services improve feasibility and cost-effectiveness
• A growing number of strong networks, initiatives and tools are helping investors, owners and property managers measure and improve energy performance and prioritize new projects and programs
• All of the above factors facilitate indirect approaches to energy efficiency improvements, which provide further opportunities to investors

Key Lessons: Energy Efficiency Retrofits

Leanne Tobias, author of Retrofitting Office Buildings to be Green and Energy-Efficient (recently published by the Urban Land Institute), shares a high-level summary of readily-available energy efficiency opportunities. Here's a snapshot:

• Energy efficient and sustainable retrofits can be remarkably cost-effective. A number of the case studies profiled in the book achieved payback in a year or less, and an early sample of U.S. LEED-certified retrofits showed average paybacks of approximately 17 months, with an average cost per square foot of just $.21.
• Many of the retrofit approaches with the best paybacks are the simplest. A few of the readily implemented, low-cost ways to reduce building energy use include such approaches as operational changes, lighting retrofits, and replacing constant speed drives with variable speed drives on major mechanical equipment. These types of changes are not technologically advanced, but they are extremely cost-effective.
• There are also some fascinating technological advances being introduced to the building energy-efficiency market. Among them: smart meters and smart grid systems, which use wireless technology to monitor and optimize energy use in real time.
• One of the most intriguing trends is the extensive use of passive heating and cooling to minimize reliance on mechanical systems. Passive heating and cooling approaches include the use of natural ventilation, the uncovering of thermal mass (exposing walls and underfloor slabs), and the use of vents or chimneys to regulate interior temperatures.

Click here to read the entire post published in GreenerBuildings.

Building Star: The latest star for energy efficiency?

First there was Energy Star, the long-established energy ratings system. Then came Home Star, an energy-efficiency incentive program for homeowners. Now, the Senate is contemplating creating a Building Star program to provide incentives to commercial buildings related to their energy efficiency. Is the third star a charm?

Rebate and incentive programs are proliferating for commercial building owners, most all regionally managed and delivered by utility companies. Building Star has catalytic potential to nationally incent and reward energy-efficient measures in commercial and multi-family residential buildings. Additional incentives plus low-cost project financing ... there's a potential star in the making.

According to Environmental Leader:

The bill was introduced March 4 by Sen. Jeff Merkley (D-Ore.) and Sen. Mark Pryor (D-Ark.).

The program is expected to save building owners more than $3 billion on their energy bills annually by reducing peak electricity demand. “Buildings represent 40 percent of the energy used in the United States, and many have old equipment that waste energy and money,” Pryor said.

In addition to rebates to reduce the cost of energy-saving measures such as high-efficiency heating and improved insulation, “Building Star” would also extend low-interest financing options to small businesses and other building owners.

Through the umbrella group Rebuilding America, Building Star has the support of the National Electrical Contractors Association, the Energy Future Coalition and the Center for American Progress Action Fund. The American Architectural Manufacturers Association also has pledged its support for the measure.

Among items proposed to be covered by the Building Star incentives are:

- building envelope insulation;

- mechanical insulation;

- windows, window films, and doors;

- low-slope roofing;

- HVAC equipment, water heaters, and boilers;

- duct testing and sealing;

- variable speed motors;

- interior and exterior lighting;

- building energy audits, commissioning, tune-ups, and training; and

- energy management and monitoring systems.

Why Smart Energy Matters

Commercial, industrial and municipal buildings are dumb, inefficient and, above all, wasteful. If you own or manage a building (or a portfolio of buildings), you are unnecessarily wasting money every day.

Dr. Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute, quantifies the potential:

There are abundant opportunities to save 70% to 90% of the energy and cost for lighting, fan, and pump systems; 50% for electric motors; and 60% in areas such as heating, cooling, office equipment, and appliances.

Abundant and immediate savings. Here are additional reasons why smart energy matters:

• An estimated 97% of buildings lack controls or automation. For these building owners, energy use is invisible: Owners do not know where, when and at what cost their buildings are consuming electricity.
• Energy demand and utility rates continue to increase, while incentives to reduce energy use proliferate.
• In the U.S., the energy cost to light and cool buildings is approximately $100 billion per year, and experts believe there is an immediate opportunity to reduce energy bills by 50% of more. That's $50 billion per year in wasteful spending -- or, potential savings.

Andre de Fontaine, Markets and Business Strategy Fellow at the Pew Center on Global Climate Change, recently presented the Seven Habits of Highly Efficient Companies:

• Efficiency is a core strategy for the company
• Leadership and organizational support is real and sustained
• Energy efficiency (EE) goals are SMART: specific, measurable, accountable, robust, and time-bound
• The company uses an effective EE tracking and performance measurement system
• The organization puts substantial and sustained resources into efficiency
• The EE strategy shows demonstrated results
• The company communicates about EE as a core "story"

Is being smart about energy efficiency difficult? No. But it’s not enough to say you can do something – generating measurable, real-time results are the bottom line. For Octus, smart energy works based on our ability to generate significant energy cost savings, while improving the quality of our clients’ facilities, optimizing their operational savings, capitalizing available rebates and incentives, and reducing maintenance costs. Immediately and for years to come.