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.

 

Is HVAC Disruption Possible?

— December 7, 2017

HVAC is ripe for disruption in global buildings of all kinds. Why? It is one of the highest energy consuming components installed in any building. Additionally, the chemical substances that HVAC equipment uses to cool a space are highly polluting and even dangerous to handle. Space heating and cooling, along with water heating, are estimated to account for nearly 60% of global energy consumption in buildings. The global building stock accounts for over one-third of final energy consumption, with an equally large amount of greenhouse gas emissions attributed to the space. Reducing the energy consumption and emissions of buildings is a necessity, or at least a significant opportunity, if the world hopes to meet its sustainability and emissions goals.

If It Ain’t Broke, Don’t Fix It?

So why is disruption of the heating and air cooling of buildings necessary? It’s not. Using today’s technologies, buildings can achieve net zero energy consumption. But this requires the implementation of renewable generation sources to offset consumption demand from heating, cooling, and other electrical loads. Demand can be reduced through the use of intelligent building management software and efficient technologies such as high performance insulation and building envelope materials, high performance windows, proper building siting, efficient lighting, and others. Even HVAC has improved in efficiency over time with advanced controls, ductless systems, variable refrigerant flow, and outside air handlers, for example. Intelligent building management tools such as building energy management systems tie these components together to optimize energy demand and consumption.

The above are optimizations of existing technologies, but they are not truly disruptive. Disruptive technologies make existing technologies irrelevant, changing the model of how a technology or process is used. Companies that fail to recognize the market adoption of the new disruptive technology will be left behind.

If It Ain’t Broke … Disrupt It!

Let’s look at a few examples. Smartphones existed before the iPhone, but Apple created a transition in how people use these devices. Trains reduced the time necessary to travel west from weeks or months to several days. SpaceX reduced the cost of access to space by a factor of 10 through reusability. Elon Musk’s new company, Boring, will reduce the cost of digging subterranean tunnels by around the same factor. In all these instances, the efficiency gained is measured in factors, not increments. If the HVAC operational model can be disrupted by similar factors, the global building stock drag on energy demand and emissions will be reduced significantly.

So let’s disrupt HVAC! That’s always easier said than done. It may be impossible to disrupt this industry if governed by, for example, the immutable laws of thermodynamics. But it is an area ripe for disruption mainly due to the significance of savings that can be achieved. Are there technologies that exist or that are being researched that can achieve this disruption, like solid-state heating and cooling? Maybe so. Disruptive technologies sometimes hide in plain sight for long periods of time.

Other headwinds to HVAC disruption also exist. Large incumbent HVAC vendors have the resources to maintain their market positions. There are high barriers to entry and large capital costs in this industry, making it more difficult for startups to innovate. It is a highly regulated industry. However, it is also in high and increasing demand in certain parts of the world, and building tenants are requiring more and more with regard to air quality, comfort, and individualized space conditioning.

The thing about disruption is that the naysayers win until they don’t. That was the case with the iPhone. In the case of HVAC, let’s hope someone’s collective vision gets blurred enough to capitalize on this huge opportunity.

 

When Competitors Help You Succeed

— November 14, 2017

Today’s energy efficient buildings solutions can involve complex interactions between technologies and vendors. As building components become deeply integrated with intelligent building technologies, it is increasingly rare for one vendor to supply the entirety of the technology. Large global vendors may have the resources to acquire or build diverse sets of technologies, but it is difficult for one company to claim market leadership or even significant competence in all technological areas. In some instances, this strategy can even amount to brand dilution or lack of focus.

Models for Success

Business models are playing into this quickly emerging market dynamic. In the past, the prevalent model was for companies to offer a single product or unit for sale. Sales were mostly a one-time transaction with a marketing follow-up when the product became outdated or reached the end of its useful life. Customer retention was difficult with this model, and revenue streams were uneven and influenced by the economy, market trends, and a host of other drivers or hurdles. As a service business models, such as software as a service or platform as a service, alleviated some of the risks and downfalls of single product or license-based sales. For vendors, this meant a more recurrent revenue stream, more consistent interaction with customers, and an opportunity to upsell additional products and services as part of the ongoing relationship. However, these as a service models are still somewhat limited, as they may only solve one aspect of a customer’s problem. In an increasingly integrated world, as a service offerings can be seen as being similar to single product offerings when viewed from the perspective of a customer’s problem set.

Selling solutions or projects has evolved as a business model with market advantages. This model looks at a customer’s priorities and a specific problem or problem set, and combines technologies and services to solve that problem. Notice that competitive advantage was not used to describe it. The reason? Assembling the best solution set may involve working closely with direct market competitors, or coopetition, as the term has been coined.

Coopetition

Energy service companies (ESCOs), for example, are familiar with coopetition. ESCOs utilize a financial structure called an energy savings performance contract (ESPC) where, in simple terms, the efficiency upgrades are financed and paid for out of the energy savings. ESCO projects can be designed to deliver specific equipment upgrades, but typical projects encompass a bundle of improvements across technology types. This approach improves the economics of the entire project by blending the returns of high cost, longer payback pieces of equipment (e.g., HVAC systems) with lower cost, faster payback items (e.g., LED lighting). As described in a recent Navigant Research report, ESCO Market Overview, the necessity of bundling technologies and services to make the ESPC work from a financial perspective has caused ESCOs to embrace coopetition with a solution or a project-oriented business model.

Coopetition allows vendors with complementary strengths to apply those strengths to a project and share in common gains. Additionally, vendors are realizing there is great opportunity in shifting from the single point solution or component manufacturing role to the platform play that will support deeper, ongoing customer engagements. Success in this realm means positioning solutions in terms of broader business impacts, with a desire to engage directly with the c-suite. There is no cookie cutter design for partnerships or coopetition in commercial terms. This is a nascent market where flexibility is a key parameter. In this landscape, creativity and openness will be rewarded, and unprepared vendors may face real market disruption as they realize that they are unprepared for competition from non-traditional sources.

 

Beyond Energy and Pizza

— November 7, 2017

As November rolls through and autumn settles in the Northern Hemisphere, attention quite naturally turns to energy. Not only was October Energy Action month, but the changing of seasons marks a time to reflect on how the built environment consumes energy. As we put our air conditioners away and turn our heaters on, autumn gives us time to reflect: Can we be doing this better?

Indeed, there is near universal consensus that action should be taken to reduce energy intensity and carbon emissions. But taking steps to increase energy efficiency affects far more than just energy costs and greenhouse gases. To explore this concept, let’s look at a theoretical pizza parlor (October was also national pizza month, after all). What energy action should this restaurant take?

Popular Energy Conservation Measures

The first answer is likely an evaluation of HVAC systems. According to the most recent Johnson Controls Energy Efficiency Indicator Survey, investments in HVAC improvements were the most popular energy conservation measure last year. For restaurants, kitchen exhaust can create a substantial cost. Cooking causes grease to splatter and can create odors, steam, and smoke, all of which need to be exhausted out of the kitchen. The wood-burning oven in the pizza parlor, for instance, will need to exhaust all of its smoke out of the restaurant. But replacing this air with conditioned outside air can be expensive, particularly in hot and cold climates.

Air Challenges

Some restaurant owners take a shortcut by shutting off their make-up air unit. This puts the entire restaurant under negative pressure, which forces air to infiltrate in through cracks in doors and windows. Though it may save some on utility bills, it is ultimately a Pyrrhic victory: it creates an unpleasant, drafty environment in the dining room and it could even pull in odors from outside. A far better energy action would be to ensure that ventilation and all HVAC are properly balanced, all equipment is properly maintained, and any old, inefficient equipment is replaced with ENERGY STAR equipment.

Lighting Challenges

After HVAC, lighting should be the next concern. LED retrofits typically provide quick payback in energy savings based on the initial investment. But in addition to energy, lighting (like HVAC) creates the atmosphere of the pizza restaurant. That atmosphere affects patron behavior and will ultimately drive business performance. According to a study published in the Journal of Marketing Research, consumers are more likely to select less healthy food options in restaurants that are dimly lit and healthier options when restaurants are bright. That’s great news for the pizza parlor: by installing dimming controls on lighting, it’s possible to not only cut back on energy, but also drive pizza sales.

The Broad View of Energy

Taking action on energy stretches far beyond utility bills and carbon emissions. Those are noble objectives, but building owners and operators are increasingly looking beyond these effects to justify investment in the built environment. Though simplistic, the pizza parlor example highlights how to improve the customer experience and drive sales with investments in energy action. In reality, a broader set of controls, analytics, and efficient equipment can help many businesses reduce costs and increase revenue.

 

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