EMAIL INTERVIEW Leland Smith & Ken Sinclair

Leland Smith, East Coast Director, Private Sector, Johnson Controls

Energy Efficiency in Private Sector Buildings

Retrofitting of these facilities has the potential to create both environmental and economic impact for building owners, tenants and communities. Given the scope of improvements needed, there is potential to create more than 360,000 jobs to service these facilities over the next 10 years.

Sinclair:  What opportunities exist for energy efficiency in private sector buildings?

Smith:  Growth opportunities clearly exist in the private building sector. Market potential in the US for commercial building retrofitting is estimated at $18 billion annually, with most buildings struggling with inefficient lighting, windows, doors and heating systems.

Retrofitting of these facilities has the potential to create both environmental and economic impact for building owners, tenants and communities. Given the scope of improvements needed, there is potential to create more than 360,000 jobs to service these facilities over the next 10 years.

Estimates demonstrate that improvements could translate into 22 percent average energy savings across the nation’s commercial buildings that already consume 18 percent of the countries energy and 18 percent of its greenhouse gas emissions. These efficiencies could reduce some 142 million metric tons of carbon dioxide emissions from the environment, or the equivalent of the emissions from 31 coal-fired power plants.

Sinclair:  What have been some of the drivers for more buildings to be energy efficient?

Smith:  Energy efficiency continues to be an important area that business and building owners monitor closely. In fact, in a recent study commissioned by Johnson Controls found that among C-level executives both in North America and globally, energy efficiency continues to be an important business priority to address.

Efficient facilities and equipment means lower energy usage and operational costs, which help maintain margins and keep profits high. Additionally, ongoing legislation and global regulations for greenhouse gas level reduction is forcing companies to carefully look at how they can improve their facilities.

Finally, community perception of a company as a good citizen is also forcing businesses to do what’s in the best interest of their community and employees, also driving the need for energy efficiency.

Sinclair:  What have been some of the barriers as to why the private sector hasn't embraced energy efficiency to this point?

Smith:  The biggest barrier for private, commercial building to embrace energy upgrades has been capital. Capital costs for projects require a large up-front investment with a longer payback period through energy savings. The typical facilities budget has minimal allocations for capital improvements and the process for getting approval for capital expenditures takes significant time and effort. This lack of capital is a difficult hurdle, even for projects that show an impressive return on investment and net present value.

Sinclair:  Does performance contracting impact the private sector?

Smith:  Performance contracting has had limited appeal in the private sector, as these businesses tend to expect payback much sooner, often in two years or less. Private organizations have different priorities, different expectations for return on investment, and different risk profiles than those in the public and nonprofit arenas.

The public and nonprofit sector has embraced performance contracting, as these organization leaders are committed to a longer-term vision for the facility. In the private sector, building ownership and tenants can change regularly and it can become difficult to realize the savings. As long as energy prices are relatively low, capital budgeting for energy-efficiency retrofits is often put on the back burner.

Sinclair:  How can commercial building owners finance energy projects?

Smith:  New financing models in the private building industry have helped remove the barriers for building improvements. They range from a variation of performance contracting to performance-based infrastructure programs. Six primary models include:

• Anchor tenant financing enables a long-term tenant to benefit from energy retrofits by passing cost to the tenant by way of the lease. The tenant uses the guaranteed energy savings to offset the higher lease cost while pocketing the excess savings.

• Shared savings agreements (SSA) results in immediate energy savings for the owner without making a capital investment or assuming debt. The energy service company sells a portfolio of building improvements to a third party ownership company, while the owner receives the energy and operating savings, and remits a set percentage back to the third party company in monthly payments.

• Under a capital lease, energy efficient equipment appears on the balance sheet as a capital asset and requires the building owner to account for depreciation, providing tax advantages leading to rates lower than market averages.

• Power purchase agreements (PPA) allow the business to get a known benefit from the installation of third party photovoltaic panels or a high-efficiency central heating and cooling plant in exchange for purchasing the resulting energy or chilled and heated water, respectively.

• Property-assessed clean energy (PACE) bonds enable property owners to borrow money to install solar systems.

• Green leases create a win-win by helping tenants lower total operating costs, and owners improve building marketability and reduce vacancy risks.

• On-bill financing is offered by electricity or natural gas utilities. The utility fronts the cost of the improvements and recoups it over time by incorporating loan repayment into future energy bills.

• Performance-based infrastructure shifts full responsibility for building operations and all financial and operating risk to an energy service company for a term of up to 30 years.

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