Financial Aspects of Achieving Energy Reduction Goals

by John Klein, Sharon Levin, and Deborah Cloutier

The following excerpts are from IREM's Key Report, A Practical Guide to Energy Management (IREM Copyright 2005):

In addition to evaluating operational and human resource issues associated with the Opportunities table, it is also important to evaluate whether requisite financial resources were available to initiate and sustain change. This is where upper and executive level management commitment is critical. Without their support, an energy improvement program is dubious at best. Therefore, potential financial gains must be quantified, objective, accurate, and communicated to management in an understandable manner. Prepare management reports defining and explaining specific projects and the effects on financial measures typically used by management to identify the attractiveness of specific capital investments. For example, management uses the following measures when evaluating and comparing one financial investment to others.

• Decrease to operating expenses - used to determine the annual reduction in operating expenses associated with each energy savings opportunity.
• Increase to net operating income (NOI) - used to determine the annual increase in NOI and who will benefit from this increase. (It may be the tenant/occupant.)
• Net present value (NPV) - used to determine whether an investment is worth considering (NPV must be greater than zero for an investment to be considered viable).
• Internal rate of return (IRR) - this percentage rate must be equal to or greater than the required interest rate set by management.

Energy cost reductions achieved through improved energy performance give building owners and managers an opportunity to provide services to tenants at lower rates and thereby increase their competitiveness in the market. According to several government agencies and organizational studies, the potential exists for decreasing energy consumption in commercial real estate up to 30% using a holistic approach to energy efficiency improvement programs. Other examples of low-cost energy efficiency improvements include:

• Overall improvement in the O&M process.
• Installing more efficient lighting and reducing lighting demands.
• Utilizing controls to monitor and reduce consumption.
• Reducing the electrical load of equipment, fans and motors.
• Changing occupants� behaviors by educating them about reducing energy consumption in their space.