Navigant Research Blog

Sustainability as a Business Model

— December 12, 2017

Energy efficiency and emissions goals form an important piece of sustainability initiatives for many corporations and other professional entities. Sustainability is often solely associated with energy and climate-related metrics, but it is not the only factor contributing to a sustainable organization. Investors are starting to recognize what a sustainability-focused business approach can mean for long-term organizational success. Increasingly, sustainability performance (or environmental and social governance) is being defined more broadly to include social issues such as education, injustice, and poverty.

UN Sustainable Development Goals

In 2015, the UN launched the 2030 Agenda for Sustainable Development with the support of 193 nations. This agenda includes a set of 17 sustainable development goals (SDGs) and 169 targets that came into effect in January 2016. The purpose of the SDGs is to create standards that can measure progress on key issues like combating poverty, climate change, and injustice—among others. The UN agenda is designed to create an economic environment where the deployment of capital resources is considered in terms of economic, social, and environmental criteria. SDGs foster a discussion on investment quality beyond just the expected financials.

Socially Responsible Investment: A Growing Track Record of Outperformance       

Socially responsible investing may have begun in the 1700s with the Quakers, who refused to support “sinful” businesses such as tobacco, firearms, and the slave trade. More recently, sustainable investing has taken on the guise of promoting environmentally sustainable businesses, although financial performance is at the fore. The Morgan Stanley Institute for Sustainable Investing performed a study on over 10,000 sustainable equity funds that found that these investments have met or exceeded the performance of comparable traditional investments. UBS, a leading global investment bank, claims to have $970 billion, or 35% of its investable portfolio, placed in socially conscious investments. Al Gore’s sustainability-focused private investment fund, Generation Investment Management (GIM), has returned about 16.3% after fees since September 2014, while the MSCI World Index has returned 7.7% over the same period. Assessing the sustainability of companies can be done using the Dow Jones Sustainability Indices, which are a group of benchmarks that track the stock performance of companies in terms of economic, environmental, and social criteria.

The Foundation of High Performing Companies

Why do sustainable companies often outperform their peers? For Gore and GIM, not only is sustainability good for humanity, it is also a significant indicator of investment risk, management integrity and quality, robustness of business models, and products and services that are aligned with real-world problems and needs. Put together, these characteristics can identify high performing companies that provide consistent returns. An interesting note about GIM and its investment thesis is that it has broadened the scope of the definition of sustainability to include company diversity, human resources practices, community interaction, employee benefits, healthcare, and the values and ethics of the C-suite—along with the usual energy- and climate-related strategies. Each sustainable investment decision is aimed at choosing the factors that are most important to the sector where the company competes.

Many companies that use Navigant’s Energy research and services deliver energy-related products and services that can help their own customers meet sustainability goals. However, energy and emissions are only a small component of sustainable participation in the global economy. Similar to the dramatic efficiency results that can be achieved with a holistic approach to commercial building energy management, corporate sustainability efforts—and often business performance—can be dramatically improved with a more holistic view of what sustainable business performance means and how it can be achieved. There do not have to be any tradeoffs, and the real-world results are starting to speak for themselves.

 

Monetizing Energy Efficiency: Creating Additional Value Streams for Your Customers

— December 8, 2017

Much is transforming the global energy landscape these days. Building technologies are progressing from single point solutions to system and platform-based solutions utilizing the latest in smart digital technologies and the Internet of Things. Utilities are reshaping entire business models and strategies to integrate and enable a swiftly growing and diverse stock of distributed energy resources. These are just two of the more visible market evolutions. But as with most industry transformations, change does not happen all at once.

Large groups of buildings (of all sizes) lie along the continuum of advancement with regard to building technologies. Most organizations realize the potential benefits of energy efficiency; however, there are still hurdles that could prevent these types of projects from moving forward. According to a recent Navigant Research report, Energy Efficient Buildings Global Outlook, these hurdles include confusion about which technologies to adopt, what internal resources would be required to manage an advanced building, and how to best understand and calculate payback and ROI to get a project approved.

On the supply side, utilities are also realizing the benefits of making the buildings in their service territories more efficient. Utilities must be concerned with their conglomeration of generation assets to ensure a reliable future energy supply. Energy efficiency and demand-side management (DSM) are two ways that utilities manage this critical task. In fact, at less than 3 cents/kWh, energy efficiency is the most cost-effective source of energy compared to all other sources of generation.

For decades, utilities have had success reaching large commercial and industrial and even residential customers with incentive-based DSM programs like energy efficiency and demand response. PJM is an example of a regional transmission organization (RTO) that understands and actively pursues energy efficiency initiatives to include in its regional capacity planning. Over time, PJM has encouraged over a gigawatt of annual energy efficiency projects in its current and future capacity markets.

The one hurdle faced by utilities and RTOs is awareness of these programs. Small- to medium-sized businesses, energy service companies (ESCOs), and even larger commercial customers may not be fully aware of the availability of these programs. Incentives can go a long way toward clearing energy efficiency project hurdles. For example, utility and RTO incentives may be the final project piece that enables payback and ROI calculations to meet internal financial requirements. Organizations can benefit from working with outside specialists in this area to help understand what is available and how best to assess and include incentives in efficiency and sustainability initiatives.

Join the Conversation

Navigant Research is hosting a free webinar, Monetizing Energy Efficiency: Creating Additional Value Streams for Your Customers, on December 12 at 2 p.m. EST. I will be joined by Meg Kelly, Senior Director of Energy Efficiency, and Russ Newbold, Director of Sales Operations at CPower. Learn the benefits of utilizing PJM capacity credits as a value to you and your customers.

The webinar will help end-use customers—and ESCOs that serve customers—learn what capacity credits are, how to attain them, and how to make them a part of the value chain to earn more energy efficiency project business. This webinar will outline how to benefit from these credits and, for ESCOs, how to add value to proposals all the way through receiving the payments.

 

Reimagining Energy Efficiency as a Pillar in the Climate Action Strategy

— December 5, 2017

A recent Wall Street Journal blog post by Sam Ori from the University of Chicago, “Why Government Energy-Efficiency Programs Sound Great–But Often Don’t Work” starkly criticizes energy efficiency programs and ideas on how to revisit residential program design. The author’s conclusion is sound, but there is more to be said on how energy efficiency can become a sturdier pillar in the strategy to combat climate change. Ori points out, “there is an opportunity for policymakers to rethink the ways they choose, design, implement, and evaluate energy-efficiency programs.” Based on ongoing Navigant Research analysis, policymakers play a role, but the challenge requires a balanced two-pronged approach.

Utilities Are Only Part of the Equation

The reality is that a transformation of the energy industry is underway. A more dynamic, digital infrastructure of renewable, distributed, and non-traditional resources is being applied in the commercial buildings context. Navigant Research characterizes this new energy ecosystem as the Energy Cloud. In the buildings sector, rapid adoption of behind-the-meter energy management technologies, alongside onsite power generation and storage and ongoing investments in information technologies on the utility side of the meter, are redefining the relationship between electricity supply and demand.

This means federal and state policy and electric utilities will no longer be the gatekeepers of energy supply or the rule makers for how to orchestrate shifts in energy demand. Energy efficiency improvements are crucial for building optimization, which is made possible by intelligent technologies—notably the uptake of Internet of Things infrastructure and analytics. Navigant Research’s recent Building-to-Grid Integration report outlines how the intelligent building represents a conceptual paradigm shift for businesses through the integration of facilities management and IT. The intelligent building unifies strategy, investment, and decision-making. The door is open to market influencers, utilities, and many others that can introduce creative ways to utilize existing technology infrastructure, deploy new solutions, and analyze increasing data streams to optimize facility operations that meet broad business demands with energy efficiency savings as a byproduct.

Do Not Undervalue Energy Efficiency for Commercial and Industrial Customers

The Wall Street Journal blog outlined some significant challenges to realizing greater carbon emissions savings from energy efficiency in the residential sector, but missed one important part of the climate change big picture: tackling commercial and industrial (C&I) building energy use. C&I facilities are important because they not only consume more energy, but are also more energy-intensive per SF of floor space compared to residential customers.

Furthermore, C&I customers can be effective partners in tackling energy efficiency improvements because the scale of their effectiveness (and business perspectives) can help accelerate change. First, the energy savings potential of a single large building, single customer with multiple buildings, or a campus simply delivers a greater volume reduction in energy use and therefore carbon savings. In order to meet the magnitude of savings to combat climate change in a significant way (as outlined in the Wall Street Journal blog), business customers need to participate. Second, business customers understand the risks that climate change presents to their bottom lines and the mounting environmental, social, and economic challenges tied to unfettered energy consumption. This sector deserves credit for showing leadership through sustainability initiatives. Read more about how C&I customers invest in sustainability and combat climate change in Navigant Research’s report Intelligent Building Technologies for Sustainability.

As Ori summed up, “Energy efficiency offers significant potential as part of a portfolio of climate policies. But that potential will only be realized if we crack the code to get programs structured to deliver results. If we don’t, dealing with climate change will be much more expensive than we realize.” Want to hear more about Navigant Research’s perspective on the importance of energy efficiency? Register for our upcoming webinar, Monetizing Energy Efficiency, with Tom Machinchick.

 

Rethinking Intelligent Building ROI: Follow the Money to Transactions

— November 14, 2017

The intelligent buildings market has undergone a makeover in recent years that has yet to move the needle on widespread investment. The narrative has shifted in the last 2-3 years from a focus on energy efficiency to business insight. The logic behind the push makes sense when you consider the financial impacts of energy costs relative to employee costs in terms of building ownership (remember the omnipresent JLL 3:30:300 calculator). The problem is, metrics that impact payroll or employee costs are complex and interactive. There is no mutually exclusive measure of productivity—if a workspace has the perfect temperature and lighting, an employee may still fail to meet a deadline because of so many hard-to-measure issues: personal life, management, workplace culture. The healthy building approach has been a pathway many stakeholders are taking to frame workplace conditions and worker productivity, but the reality is the numbers are still soft.

Energy efficiency remains a straightforward way to measure the impact of technology deployment. You invest in controls and automation in your office building, you see a reduction in your energy bill by 10%—that is a defensible measure of ROI. However, energy remains a small overall share of operating costs for many building owners, particularly relative to other business costs, so what can make building energy performance bare real weight in business? It seems a one-two punch of public disclosure and financial due diligence may be the answer.

Public Disclosure and Real Estate Valuation

Many US cities have aimed at building energy use as a lever to tackle greenhouse gas emissions. Public disclosure programs range from voluntary to mandatory but are generally limited to reporting, without mandates for efficiency improvements because of the politicization of climate change in the US. It seems there must be a bottom-line pressure that aligns with the energy performance rating to drive investment in energy efficiency. And now it seems there is.

A recent article in Urban Land explains, “If energy efficiency can be correlated to mortgage default rates, it could have a significant impact on energy disclosure and possibly even mortgage interest rates. Underwriters on new projects may consider requiring energy disclosure before issuing a new loan, or charging a higher interest rate (all else being equal) for energy-intensive properties. Mortgage companies looking to reduce their default risk may also look to engage their current portfolio in strategies to improve their energy efficiency.” This article was based on findings from a 2017 Lawrence Berkeley National Lab study, which aimed to correlate commercial mortgage default rates and energy efficiency. The study concludes that “building-level source energy use intensity (EUI) and the electricity price gap are statistically and economically associated with commercial mortgage defaults. Using building energy simulations, we find that building asset characteristics and operational practices that affect source EUI have very important effects on the likelihood of default.”

So, there it is, a roadmap for quantifying the relationship between building energy performance and real estate asset value. The argument could even go a step further and assert that intelligent building solutions are worthwhile investments to provide a foundation for minimizing EUI and ensuring ongoing energy efficiency gains. The analytics at the center of leading intelligent building solutions will monitor, report, and even predict changes in energy consumption based on space use. This insight can become strategic guideposts for business decisions around real estate. As more data is collected, there will be greater opportunity to tackle the challenge of quantifying those softer, yet significant, employee costs over time. Today, energy efficiency remains paramount in showcasing ROI.

 

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