Small Commercial Equals Big Opportunity
Bringing Your Residential Home Performance Experience to the World of Commercial Performance
You can’t manage what you don’t measure—right? This assumption is what home performance contracting is based on, and almost all residential energy programs require pre- and posttesting: Test in and test out. In the world of commercial buildings, it seems like the saying is “Set it and forget it.” This means that unless there is a major equipment failure or comfort problem, facility managers and building owners typically say, “It is what it is” or “It’s always been that way.” So can you bring your residential performance contracting experience to the commercial market? And how big is the market?
The statistics are compelling. Out of all the commercial buildings in the United States, 95% (4.6 million buildings) are under 50,000 square feet; 90% (4.3 million buildings) are under 25,000 square feet; and 73% (3.5 million buildings) are under 10,000 square feet. On top of this, according to the Institute for Building Efficiency, “Nearly 75% of commercial buildings in the U.S. are more than 20 years old and are ready for energy improvements.” This represents a very big market that is underserved.
I started in the commercial market six years ago, when I was asked to test and inspect an older steel-frame building of 4,000 square feet. At the time, my company focused on home performance, but having performed energy audits on homes as large as 10,000 square feet, I felt we were ready to broaden our range. Since then, I’ve performed all levels of audits in over 150 commercial buildings ranging from 500 to over 100,000 square feet. We look at ourselves as project developers and so we do some level of energy audit on every building we work; the cost is wrapped into the overall project cost. If I broke out the energy audit part of it, I would say it represents approximately 5%–10% of our income, or $25,000–$50,000 per year.
Guiding Clients with a Five-Step Process
Once I decided to pursue this market, we needed to have a process to work from. We have found that most of our clients want a turnkey comprehensive approach in which we identify projects, quantify savings, aggregate financial resources, perform upgrades, and, of course, verify results. Clients do not like hurdles—every hurdle in front of them is a potential deal breaker. So you need to make it as easy as possible for the client.
Over the past six years, we have developed a five-step process that helps our clients see a clear path to energy efficiency and energy management. We don’t always perform all five of these steps, but we recommend that the client follow a process similar to this one to ensure the best possible results.
Step 1: Preliminary Energy Assessment
In the past, we included a preliminary energy assessment (PEA) in our energy audit, but we realized that it really should be a stand-alone first step and a client qualifier. If clients don’t want to do the PEA, we usually won’t continue working with them, because we feel they aren’t likely to act on our recommendations. We are in this business to get projects done, not just to talk about them.
The PEA is where you gather the client’s historical energy (and sometimes water) usage data and then generate a rating using the Energy Star Portfolio Manager tool. We really like this tool because the rating is not modeled; it is based on actual performance. Since you can’t manage what you don’t measure, one of the first things you can offer clients is to measure their building’s energy usage, and develop a benchmark and/or baseline for that building.
There is some confusion in the industry around the terms ‘baseline’ and ‘benchmark’, they are often used interchangeably but shouldn’t be. There is a difference between baseline and benchmark measurements: A baseline is an initial period of metered energy consumption used as a point of reference for comparison purposes. For example, the Portfolio Manager tool uses a 12-month period of metered building energy consumption as the energy baseline. A benchmark is the process of accounting for and comparing a metered building’s current energy performance with its energy baseline, or comparing a metered building’s energy performance with the energy performance of similar types of buildings (based on use, such as comparing the energy performance of an office to that of other offices). Benchmarking can be used to compare performance over time, within and between peer groups, or to document top performers.
The benchmark is the heart of the PEA. The Energy Star Portfolio Manager is one of the most useful, widely accepted, and effective free tools for creating this benchmark. Portfolio Manager can help you and your client to set investment priorities, identify underperforming buildings, verify efficiency improvements, and receive EPA recognition for superior energy performance. It allows you to develop a rating by comparing the building’s energy usage against that of similar buildings in a similar climate. The primary energy usage metric is kBtu/ft2, which is nice and easy to use.
The PEA consists of four steps:
- Gather historical energy usage data. Gather three years or more, if feasible, of energy usage data; assess costs and rates, power quality, and peak demand; and develop graphs showing usage trends, highs, and lows.
- Identify patterns and trends. These are daily, monthly, seasonal, and event-driven.
- Develop an energy rating. Benchmark and compare the building’s performance to that of other similar buildings in a similar climate.
- Assess the potential for improvements. Determine whether further analysis and engineering are likely to find projects that will save significant amounts of energy.
Tip: When retrieving utility data, ask the client to sign a utility release form so you can get three years of billing data without having to ask the client to dig up old bills. You can usually get these data from the utilities in Excel, which helps with transferring data to other spreadsheets.
Step 2: Facility Energy Audits
The basic framework that we follow for conducting energy audits was developed by ASHRAE; it is called “Procedures for Commercial Building Energy Audits.” We wanted something that could be viewed as a national standard, and ASHRAE is well known and widely accepted. It’s not software but rather it’s a handful of useful forms and spreadsheets, and it costs about $80.
We also use various tools for estimating potential energy and cost savings. Here are a few free options. (See “learn more” for links to the tools.) Make sure that whatever tool you use can adjust to your climate and, as with any energy modeling software, the saying “garbage in, garbage out” stands true:
- The Commercial Practical Energy Management Process spreadsheets from Wisconsin’s excellent state energy program provide us with a lot of nice graphs and charts.
- The Back of Envelope (BOE) Calculator spreadsheet from Energy Center of Wisconsin (ECW) is another great resource.
- eQuest from Energy Design Resources is a high-powered energy-modeling software tool for more advanced users.
- Life Cycle Cost Calculator from Better Bricks helps with the financial analysis.
- The California Commissioning Collaborative has energy analysis software and Excel calculators.
- Noesis is a web-based energy management tool that has a free version that interfaces with Energy Star Portfolio Manager.
- Energy Star has an excellent Tools and Resources library online.
Step 3: Planning
If you don’t know where you’re going, as the saying goes, any road will get you there. So make sure you know where you are going and what roads you will use to get there.
Develop achievable goals for your clients based on Energy Star ratings. We prefer a staged approach. In year 1, for example, you might upgrade lighting and thermostats to achieve an Energy Star rating of 45. In year 3, you might perform air sealing and upgrade the insulation to achieve an Energy Star rating of 65. In year 5, you might install new boilers and a new ventilation system to achieve an Energy Star rating of 80. To promote ongoing energy management, we recommend that some or all of the energy and maintenance savings achieved pursuing an efficiency goal go toward funding the next goal.
Being actively involved with the utilities and the state energy program positions us so that we have input and are prepared to maximize incentives for our clients. For example: Focus on Energy, Wisconsin’s state energy program, recently started a new Small Business Program which is focusing on lighting. We coupled these great incentives with other utilities bonus incentives which ended up buying down projects by up to 100%. And when you add the tax deduction, some of clients were actually making money. Over the past 4 months we closed 90% of our sales and have added over 300 clients... this was starting with a staff of 4 and currently we have a staff of 17 to meet the demand of this program.
Prioritize projects on the basis of cost-effectiveness and necessity. Having a summary of potential projects is always valuable as you begin prioritizing projects. Table 1 is an example of a format our clients seem to like. It summarizes the financial (and non-financial) values of each project, allowing the client to begin prioritizing and budgeting. In the energy audit report, we would have a more detailed explanation of the energy efficiency measures (EEMs) that we recommend.
Provide help finding financing. (Also see “Financing Home Energy Efficiency & Renewable Energy, HE Jan/Feb ’13, p. 18.) Depending on the size of the project, financing is almost always one of the hurdles in getting a project done. So to help get it financed, we bring all of the incentives and options to the table. Here are a few resources and ideas:
- The Database of State Incentives for Renewables & Efficiency (DSIRE) is a comprehensive source of information on state, federal, local, and utility incentives and policies that support renewable energy and energy efficiency. Many state and local governments have a revolving loan fund for businesses, and the interest paid goes back into expanding the fund.
- Some utilities offer on-bill financing and will pay for energy upgrades with little to nothing out of the client’s pocket.
- The Energy Efficient Commercial Building Tax Deduction, IRS 179D, also called Energy Policy Act of 2005 (EPACT), provides a one-time accelerated depreciation for commercial, multifamily, and public agency-owned facilities. This benefit, which is vastly misunderstood and underused by most building owners, provides a significant reduction in
taxes for those who have retrofitted their buildings with energy efficiency upgrades. The federal tax deduction is calculated based on the energy efficiency of a commercial building, as compared to a 2001 benchmark, ASHRAE 90.1-2001.
- The maximum deduction is $1.80 per square foot; however, within this deduction there are three potential subsystem deductions:
- HVAC: $0.60 per square foot
- Interior lighting: $0.60 per square foot
- Building envelope: $0.60 per square foot
To qualify for the Section 179D tax deduction, the IRS requires an inspection by an engineer or contractor who is licensed in the jurisdiction where the property is located and is unrelated to the party claiming the deduction. It is a simple calculation for lighting but requires an energy model (using readily available HVAC modeling software) for HVAC and building envelope.
Specify which systems will best meet the client’s needs. Good places to research energy-efficient products are the Consortium for Energy Efficiency and Energy Star web sites.
Step 4: Implementation
The fourth step is to implement the project. You can either align yourself with some good contractors or do the work yourself. Our clients seem to prefer the seamless approach, where we take care of everything.
Step 5: Energy Management
This is a good long-term option you can provide to your clients. We charge an annual fee (typically $100-$175/meter) to summarize their usage and provide a simple report with analysis. You might give them an annual or biannual report on their usage while keeping them informed on new technology, utility and tax incentives, and policy. If you maintain a good personal relationship with your clients, they will hire you for future projects.
Selling the Benefits
Generally, we use the PEA as a qualifier for our clients as I explained above. If the potential client doesn’t want to spend a few hundred dollars gathering these data, he or she probably won’t pursue the project. Once we perform the PEA, we generally recommend specific performance testing, such as blower door tests. Data from these tests help to inform the client, sell projects, and of course verify results. An informed client can make educated decisions.
But sales are also driven by emotion—identifying a need and filling it. As our marketing consultant told me, after he dumped all of our old marketing material in the garbage, “The problem with technical people is that you always try to sell the features and not the benefits.” A feature is a factual statement about the product or service being promoted. But features aren't what entice customers to buy. This is where benefits come in. A benefit answers the question, What's in it for me and how will the project positively affect the business?
- Example of a feature: Air sealing and added insulation will reduce infiltration by 1,500 CFM50.
- Example of benefit: Air sealing and added insulation will result in fewer employee complaints and fewer sick days.
Energy upgrades provide two kinds of benefits, the first of which have to do with productivity. But business owners can often be bottom-line driven when it comes to investing in their buildings. There are some compelling business reasons to make energy upgrades, having to do with decreased maintenance and operating costs.
In commercial performance, unlike home performance, comfort = productivity = $. This means that the more comfortable your client’s employees are, the more productive they will be, and the more money your client will make.
Employees typically represent the largest expense for a business. Improved employee productivity from improved thermal and visual comfort can represent dollar savings that are 15:1 over dollar savings from energy improvements, such as insulation or lighting. There are a handful of studies on the relationship between productivity and comfort (both visual and thermal). West Bend Mutual Insurance upgraded their lighting and saw a 16% increase in productivity in their claims processing department. This, plus a 40% decrease in energy costs, resulted in significant savings.
Here’s another example of what improved comfort can achieve. This example is taken from a project we worked on. The client has 50 employees working in an office and shop building with terrible lighting and a leaky building envelope. Project cost =
$22,000. Projected energy savings = $3,500 per year.
The employees of this client make an average of $30,000 per year. We made lighting improvements (improved task and ambient lighting) and insulation/air sealing improvements. We assume that these improvements in lighting and thermal comfort resulted in a modest 3% improvement in productivity, and if a 1% improvement in productivity equals approximately 5 minutes in an eight-hour day, then these improvements in lighting and thermal comfort should equal a productivity improvement of 15 minutes per day per employee. We haven’t performed an official post-installation survey yet but the initial input is positive. The following calculations are what we provided the client to help justify the project that led to a 6-month payback when looking at increased productivity alone:
50 x $30,000 = $1,500,000 total cost of employees.
$1,500,000 x 3% = $45,000 savings in improved productivity.
Maintenance and energy savings = about $1,900 per year. If we tried to sell this type of project on simple energy and maintenance savings alone, we would be out of business. But when we showed the client an infrared photo of the temperature (~20ºF) under a desk, and provided the figures showing how a warm office would increase worker productivity, the client got the point and justified the cost of the project.
Energy upgrades provide other benefits as well. Here are a few of them.
Energy security. The less energy you use, the more control you have over the costs of operating your business.
Product reliability equals less maintenance. Energy-efficient products like some LED lights have a rated life of 150,000 hours! Compare that to a 300W incandescent bulb that is rated at 750 hours. This equals 199 fewer times up the ladder for the maintenance guys. And at $5 per incandescent bulb and $5 in labor, you could buy a pretty nice LED for $1,990. To say nothing of all the energy you would be saving
Energy savings. Savings go directly to your bottom line. So if a business has an operating margin of 5%, $10,000 in energy savings equals $200,000 in revenue! Check out Figure 1.
NOTE: A good salesman is a good listener. If your client says, “We change these lights twice a year,” then sell him on lower maintenance and longer-lived equipment.
Equipment Used for Testing Commercial Buildings
Most of the testing and inspecting equipment we use for commercial performance testing is the same as what we use for residential testing, like blower doors. We just use more of it. The biggest single space that we have ever fully pressurized and depressurized was about 50,000 square feet, and we used five blower doors (three of which we borrowed). What you need really depends on your level of knowledge (and comfort), but you need to know at least a little about everything (just as you do for home performance contracting). I must admit that the tools are pretty fun to use, so we do as much as we can ourselves, and call on specialists only when we have to. We use the Energy Conservatory blower doors and manometers, so we also use TECLOG2, their free data-logging software, which can handle multiple blower door fans and manometers. Other nonresidential equipment we use includes HOBO data-logging equipment by Onset, light meters to measure light levels, and ballast checkers to determine (from the ground) whether a fluorescent light has a magnetic or electronic ballast.
The commercial building statistics cited in this article are from EIA (2006) 2003 Commercial Buildings Energy Consumption Survey (CBECS).
Get more info on the Energy Star Portfolio Manager.
Tools for Estimating Costs and Savings:
We were introduced to the U.S. Army Corps of Engineers Air Leakage Test Protocol for Building Envelopes while working on a military base, and we now use it as a primary reference. This protocol includes the ASTM standards for air leakage testing, including E779 and E1827. Because ASHRAE standards are accepted nationwide, we also follow ASHRAE 62.1, 90.1, and 189.1.
Where to Start?
I recommend approaching small retail or office spaces at first. Most small commercial buildings have residential-sized equipment or small commercial equipment with simple controls that will be familiar to home performance contractors.
You do not need to be a general contractor. The services described in this article are a good fit for architectural and engineering firms and design-build firms as well. Keep your first few buildings under 10,000 square feet, so you don’t need more than two blower doors. We do a lot of interior lighting, HVAC, and insulation projects. Because we do our work in cold-climate Wisconsin, we like doing “no-brainer” projects like uninsulated block buildings and basements, which are basically the same as residential basements.
Commercial performance is an underserved market with a lot of opportunities for home performance contractors. Just like home performance, commercial performance is based on science, and the tools you use are virtually the same. One primary difference between the two is that the people who work in these buildings earn and cost money, and the happier they are, the more money they earn for their employer. Comfort equals productivity and happier employees, which equals happy business owners. And happy business owners are happy clients for you.
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