Navigant Research Blog

In Smart Buildings, Co-opetition is on the Rise

— February 2, 2012

The building equipment and services industries have always been highly fragmented.  While leaders such as Honeywell and Johnson Controls have large, multinational presences, most of the market is divvied up among thousands of smaller companies with a relatively narrow regional or technological focus.  Even CB Richard Ellis, the real estate firm with the largest footprint of space under management (2.9 billion square feet), has only captured less than 1% of the world’s 400 billion sf of commercial space.

The result is an industry that has historically consisted of an overwhelming array of service providers, each with different capabilities.  This has posed a challenge to tying building systems together into single solutions, as I explained in my last blog.  In the past, vendors designed products such as building automation systems, controls, and certain types of equipment specifically so that they would not work with other vendors’ products, ensuring the vendor a long-term market for replacements and upgrades.

These vendor-specific fiefdoms are starting to break down as demand for building energy management systems (BEMS) as well as comprehensive, end-to-end solutions for energy efficiency including new capabilities such as demand response and energy procurement continue to grow.  The word of the decade in the building sector is convergence: the integration of building control technologies with ICT.  No single player on either the HVAC or IT side can do it all, so the drive toward convergence has resulted in “co-opetition” – i.e., partnerships between competitors that would have been pitted squarely against each other in the past, and in some cases still are.

This week Schneider Electric and Cisco announced that they were expanding their partnership efforts to deliver better enterprise energy management solutions.  The partnership will pair the strengths of Cisco’s EnergyWise platform, which is ideally suited for data center and IT energy management, with Schneider Electric’s building management system (BMS).  The union is mutually-reinforcing, as the BMS can be used to monitor and control parts of the information and communication technology (ICT) network, and vice versa.

This is not the only example of this we’ve seen over the last few years.  IBM made one of the earliest moves toward co-opetition in smart building technology when it launched the Green Sigma Coalition in 2009, an industry alliance that has helped tie smart building technology into enterprise energy management and includes Honeywell, Siemens, Johnson Controls, and others.  There are also countless sub-rosa partnerships between rivals to enable a wider range of offerings in RFP responses and major contracts.

The co-opetition trend, however, isn’t all about vendors deciding to play nice.  It’s about vendors finding that the combined capability of two systems – whether ICT systems linked with BMSs, demand response services tied with energy procurement services, or one of the dozens of other possible permutations – is often greater than the sum of the parts.  Combining two powerful solutions from separate vendors can open up new opportunities that are impossible to achieve individually.

Make no mistake; competition is still alive and well in the building sector, and that’s a good thing for the industry as a whole.  But these co-opetion arrangements demonstrate that the highly fragmented building industry is finding opportunities to pair technologies in novel ways to deliver smarter buildings in mutually beneficial ways.


Building Automation’s Babel Problem

— January 30, 2012

There’s a lot of promise in energy management systems.  Buildings produce tons of data every minute of the day, and much of it is fed into building automation or building management systems so that facility managers can monitor and control energy and operations.  In our recent report, Building Energy Management Systems, we observe that these systems are starting to take that data one step further by visualizing and quantifying energy in buildings for CEOs, building occupants, and other key decision-makers.  Getting this information to the right users, though, involves pulling data from a number of separate systems (lighting, HVAC, security, etc.), which becomes an exceedingly difficult process when systems communicate using different protocols, such as BACnet, LonWorks, Modbus, and many others.

Here’s the problem: While it is certainly possible to tie together systems (say, an HVAC automation system based on BACnet and a lighting system based on LonWorks) into a single energy management system, the cost of the labor required to integrate systems cannot always be economically justified.  Moreover, in many cases, the automation functionality of two independent systems on different protocols is often higher than a system that integrates the two, as much of the data is lost in translation.

So how did we get to this modern-day building automation Tower of Babel?  BACnet was originally developed in the late 1980s in association with ASHRAE, the HVAC industry association, and is one of the leading protocols in the U.S., particularly for HVAC and lighting control systems.  LonWorks, the other top protocol in the U.S., was developed in the 1990s by Echelon, one of the leading smart grid and automation technology firms in the world.  While BACnet’s association with ASHRAE has curried favor among HVAC vendors, LonWorks has been a favorite among lighting controls manufacturers given its rapid response time.  Other protocols serve other niches or are favored by specific vendors as a way of discouraging mixing-and-matching of products from competitors.

The result is a world in which systems that perform very similar functions can’t communicate with each other.  Imagine if Blackberry owners couldn’t call iPhone owners.  That’s the basic reality in the building automation systems world today.

Last week, Echelon made a major step toward breaking these barriers down through the launch of a suite of tools and products aimed at integrating systems based on LonWorks and BACnet.  This is a particularly fitting move for Echelon, which is the gatekeeper of the LonWorks protocol and is carving out a leading role in developing technologies at the “edge of the grid,” the interface between buildings and the utility distribution network.  Through the platform, which involves hardware, software, and service components to translate between LonWorks and BACnet for rich energy management, Echelon will be able to connect with whole buildings, not just isolated systems within buildings, and prepare them to play a role in overall grid management through demand response and other types of utility programs.

Over time, automation systems will likely shift to IP networks for new buildings, doing away with the polyglot automation world of today.  However, the existing building stock will continue to speak many languages, and solutions such as Echelon’s will play an important role in synthesizing building energy data to make buildings smarter and more energy-efficient.


Better Buildings Challenge Boosts ESCOs

— January 12, 2012

In late 2011 President Obama announced the Better Buildings Challenge, a $4 billion program sponsored by the DOE with the support of a number of public and private sector partners.  The program aims to make American buildings 20% more energy efficient by 2020 by directing federal agencies to engage in performance contracts (driving efficiency with zero taxpayer funds) as well as mobilizing major companies to invest in efficiency upgrades to their own buildings and plants.

The list of partners in the Better Buildings Challenge is impressive, including major building service providers such as Schneider Electric and Transwestern, as well as industrials with large building portfolios such as Saint-Gobain and General Electric.  To date, 1.6 billion square feet of space have been committed to the program, and that figure will grow as more companies, government agencies, and other organizations get involved.

But is it enough to reach the 20% goal by 2020? Four billion dollars may sound like a lot, but some studies have indicated that reducing energy consumption in U.S. buildings will take much more than that.  A 2009 study from McKinsey found that a potential $1.2 trillion in gross energy savings sit latent in the U.S building stock – but it would take $520 billion in upfront investment to unlock those savings and reduce projected energy demand by 23%. The amount of capital directly engaged for the Better Buildings Challenge is less than 1% of the $520 billion McKinsey believes is needed.  So the 20% reduction by 2020 may be a stretch with these funds alone.

However, the announcement could have a ripple effect on the energy service company (ESCO) market and in energy efficiency investment more broadly.  In the federal sector alone, President Obama has ordered federal agencies to invest $2 billion in energy efficiency.  That money will likely be spread out over the next few years and will go to energy performance contracts with the 53 ESCOs qualified to do federal work.  That, in turn, will put ESCOs in a better cash position to build new capacity and reach more customers.

Other emerging trends in building efficiency policy might help the U.S. chip away at the funding gap.  Regulations such as PACE financing are starting to lower the bar for commercial building owners to engage in efficiency upgrades in cities from Los Angeles to Washington D.C.  And commercial benchmarking laws in cities like New York and San Francisco will soon make energy efficiency even more of a differentiator in commercial real estate markets.

The Better Buildings Challenge follows shortly after the announcement of a major zero energy building initiative by the General Services Administration, the federal government’s real estate manager.  GSA will launch zero energy retrofits of 30 federal buildings around the United States over the next few years.  The federal government has long adopted a “lead by example” approach to efficiency in commercial buildings, and these two major federal energy efficiency initiatives will help accelerate investment in efficiency not only in the public sector, but also in the private sector.


Ameresco Acquisitions Mark Strong 2011 Finish for Energy Efficient Building

— January 4, 2012

The competitive landscape in the energy efficient building industry has shifted over the last year.  Earlier this month, Ameresco, one of the largest pure energy service companies (ESCOs) in the United States, announced that it had acquired the xChange Point and energy projects businesses (including auto demand response) of Energy and Power Solutions (EPS), an energy management and sustainability firm.

Ameresco has experienced significant growth in the last few years, reaching over $600 million in revenue in 2010, a 44% increase over the previous year.  Its renewable energy business nearly doubled from 2009 to 2010.  In addition, it captured over one-third of the federal ESPC market in 2010, beating out industry stalwarts such as Honeywell and Trane that year.  Ameresco’s acquisitions in the areas of auto demand response and energy management will help enhance the company’s ability to compete in an increasingly IT-driven building services landscape.

This follows on the heels of other major acquisitions over the last twelve months.  Back in March, Schneider Electric acquired Summit Energy, an energy procurement and sustainability services company.  It followed up in June with the acquisition of Viconics, an industrial and commercial HVAC controls vendor.  Johnson Controls made a similar move back in March when it acquired EnergyConnect, a demand response service provider. The list goes on, including Siemens’ acquisitions of Encelium, a lighting and energy management service provider, and Advanced Telemetry, a cloud-based energy management service provider.

These moves lead to two key conclusions about the building space.  The first is that, when faced with the decision of whether to buy or to build, many of the major players are opting to buy, placing them on the map either geographically or technologically, rather than taking the time and invest the resources to build new capabilities.  This is evidence of a rapidly expanding and intensely competitive environment for energy efficiency and energy management, an environment in which the major service providers are looking to plug gaps in their coverage through acquisitions – and quickly.  In some cases, such as the acquisitions by Ameresco and JCI, the objective is to round out their ability to address a specific technology market such as demand response.  In others, such as World Energy’s acquisition of Northeast Energy Solutions, the move helps to expand the parent company’s coverage of a particular region or provide the manpower to capture others.  In any case, the buying spree signals the expansion of the energy efficiency services market.

It also shows that companies are breaking out of their shells in the building efficiency and energy management space to provide a more comprehensive set of solutions than their initial entry points could have provided alone.  This trend has been set by companies like EnerNOC, which has moved beyond its initial demand response solution to a broader set of services including ESCO-like performance contracts and energy procurement over the last few years.

The common thread through these moves is that energy efficiency service providers are aiming to monetize efficiency services across the board.  Yes, an ESCO can provide energy cost savings to building owners through performance contracts, but if it can provide demand response and energy procurement services as well, it can multiply the number of revenue streams coming from a single contract.  Moreover, providing the full suite of services allows the service provider to optimize these services simultaneously, such that the building owner receives the best possible outcome given the complexities of electricity rates, utility regulatory schemes, and wholesale power costs for a particular building in a given territory.  We’ll continue to see these service providers move to comprehensive, monetized efficiency services over the course of the next year.


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