Reducing energy use in buildings often requires an investment of capital, making an obligation of some sort, or both. As with any investment, there needs to be an acceptable financial return.
Returns are usually quantified in dollars saved. When looked at strictly from a dollars point of view, the investment can be looked at like other investments. The investment might even be compared to alternatives such as repaving a parking lot, expanding a workout area, or hiring more staff. Except it should be easier to quantify the return on the investment in energy reduction. Energy consumption can be easily measured. Things like parking lot improvements and staff may be desirable, but the returns are largely guesswork.
Payback Period
One of the easiest ways to quantify energy reduction return expectations is by estimating a simple payback period. Divide the expected annual savings by the initial cost. If an expected simple payback period is really long, like 15 or 20 years, that investment can be quickly eliminated from contention without spending any more time on it. There are probably alternatives out there that will get a much faster payback.
Limitations to payback period as an investment metric include not quantifying changes in maintenance costs, which are not part of the initial investment. Also not accounted, but very significant are the returns that accrue after the payback period ends. The time value of money is not accounted for.
Discounted Cash Flow Analysis (DCF)
Discounted cash flow accounts for the time value of money, and is therefore a metric that can be used if the quick-and-easy payback period metric passes muster. DCF provides a closer look at the attractiveness of the investment opportunity.
DCF requires using a discount rate. Different discount rates make large impacts on the results of the analysis. Therefore, it’s important to use one that is realistic, and even more important, to be consistent in using the same discount rate for all DCF analyses.
Net Present Value (NPV)
Net Present Value also accounts for the time value of money, as DCF is used to determine NPV. Calculating the NPV results in either a positive number or a negative number. A positive result usually indicates that an investment is worth doing.
Where NPV is less clear is when two different investment alternatives end up with positive NPVs. The larger NPV is usually the best. However, if more initial capital is required to reach that higher NPV, and that capital requirement comes at the expense of other things, such as necessary maintenance, then the answer is not so clear cut.
Internal Rate of Return (IRR)
The internal rate of return is another useful metric. It shows the discount rate where the NPV of cash flows = zero (assuming NPV is positive). The IRR is useful for determining if an investment is worthwhile. If the IRR is higher than the cost of capital, and there is confidence in the assumptions made to determine the IRR, then the investment is probably worthwhile.
Valuation Effects
Another consideration for energy cost reduction is how the reduction in costs effects valuation. A change to energy assets that creates a lasting and meaningful energy cost reduction most definitely will increase the value of the property or business. Of course, to be true, the scale of energy use reduction must have a material affect on the cost structure.
More details about the subject of how energy costs cuts affect valuation is available in this blog post.
Other Financial Considerations
In the world of energy efficiency, there are often additional factors to consider. Some of these factors include:
- No money down loans
- Low interest loans
- Energy services agreements (ESAs)
- Tax credits
- Tax deductions
- Accelerated depreciation
- Grants
- Discounted fuel
- Discounted power
- Tradeable credits, and more.
CIMI Energy Can Help
CIMI Energy can perform these financial analyses and write up reports that help you to prioritize where to focus.
Beyond the financial aspects of these investments, there are environmental and sustainability considerations. CIMI Energy can help with this also. If so desired, these considerations can be considered within the reports.
Outdoor reset technology, which uses a single outdoor temperature sensor to determine boiler temperatures, is being eclipsed by innovative control technologies that utilize multiple factors plus artificial intelligence (AI) to increase efficiency.
As an efficiency solution, outdoor reset is a step above older technologies that didn’t use any external factors for setting the boiler temperature. However, with the most cutting edge technologies of today, there are many additional factors that can be taken into account, and which improve efficiency even more.
Outdoor Reset Technology
Outdoor reset is a technology that correlates boiler settings with the outdoor temperature in one spot outside the building. The purpose of this match-up is to increase efficiency by lowering systemic losses of energy that naturally occur from the production and distribution of thermal energy.
Here’s how outdoor reset works. Heating curves are shown in the image below. One of the curves is chosen manually by an installer or commissioning agent. The colder the outside temperature, the hotter the water that’s produced (or the longer the system runs, in the case of steam systems). The heating curve slope is chosen manually (top image) and the level of the slope is also chosen (2nd image).
Choosing an Outdoor Reset Curve
Often there are more than a dozen curves to choose from. There is inherently some uncertainty in choosing a curve. One could argue that choosing a curve is part art and part science. The main objective is to find a curve that will work for the building, and that leaves some room for error. Finding that a curve is not steep enough, for example, is only going to be discovered when it’s really cold out. This is not a good result. Yet by choosing a curve that’s steeper than necessary, some system efficiency is sacrificed.
Once the system is set up, the chosen curve is usually not changed more than once or twice, if at all, so there’s not much in the way of “fine-tuning”. Curve adjustments are only made after the fact, based on tenant complaints. If the curve is too steep, tenants will not complain, yet efficiency is sacrificed.
[Note that steam systems use outdoor reset, but don’t work exactly like this. Read about steam systems here:
A Modern Innovation for Improving the Efficiency of Steam Heating Systems]
Upgrading from Outdoor Reset to Leanheat AI
Among the factors that can be used to improve system efficiency is a group of building-specific factors such as how a building reacts to sun (e.g. amount of sunshine, time of day and time-of-year), wind (speed and direction), and “thermal inertia”, how a building responds to the heating system. Other important factors that are accounted for are individual unit temperatures, particularly those units farthest from the heat source. What’s needed to account for all these factors is energy intelligence software using algorithms that learn and adapt.
Leanheat AI actually takes into account all these extra factors using local weather forecasts, plus in-unit temperatures and humidity levels that are gathered by strategically placed sensors through cellular IoT technology. Without human intervention, a dynamic heating curve unique to the building is created. Boiler temperatures are controlled better, so there’s none of the typical large buffer that’s always been a necessary part of outdoor reset-controlled systems. As a result, the heating system runs more efficiently. In Finland, where Leanheat was first introduced, efficiency improvements of 10-20% have been realized.
An added benefit has been lower technical maintenance costs, such as from identifying and correcting housing units where climate control is problematic.
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Yesterday’s state-of-the-art steam heating systems will benefit from an upgrade to the innovative heating technology developed by Leanheat. This technology lowers energy use and costs. It does this by getting steam heating systems to run more efficiently.
Unlike hydronic systems which can easily regulate supply temperatures, steam systems always boil water to make steam. Making steam from hot water requires what’s known as a phase change (liquid to gas). Boiling water through this phase change requires a lot of extra energy*, so to wasting the energy, it’s important to limit the amount of steam produced to as close to what’s necessary to maintain comfort as possible. Steam systems are very sensitive to systemic heat loss because there’s a high temperature difference between the steam and the much lower temperatures around the system. Latent heat loss is costly, and drags down system efficiency to a much greater degree than is the case in the aforementioned hydronic systems, for example. For larger steam systems, there’s also an energy consuming vacuum pump that runs to distribute the steam. So the overall energy footprint of these systems is high.
Steam systems as they were initially constructed contained only passive energy saving technology. They relied on pipe insulation and good boiler design. But because getting even a little bit of heat through the building requires expending a lot of energy, any cycling on and off, plus overshoot effects lead to very inefficient operation.
Today’s steam systems typically operate with the first generation of active efficiency improvements. Outdoor temperature, together with a heating curve are used to limit the amount of time the boiler produces steam. For example, milder days require less heat, so by using the outdoor temperature as a factor to limit the time that steam is produced in each cycle, the costly waste of latent heat (see below) that results from overshoot (and thus overheated rooms and opening of windows) is partially avoided. The downside of this control technology, outdoor reset, is that it’s not able to account for outdoor temperature changes ahead of time, so a conservative buffer is required, which has a cost in lower efficiency.
What Leanheat technology does is take this concept of active energy saving quite a bit further, with more and better factors used to determine the amount of steam produced by the boilers. For example, rather than base the heat production of a long-lag heating system on the outdoor temperature right now, Leanheat factors in where the outdoor temperature is going (based on weather data), solar effects (e.g. expected sunshine or cloud cover), windchill effects, and so on. It also factors in how quickly room temperatures change when the boiler is running.
As a result of the Leanheat upgrade, less of a temperature buffer is required, and temperatures are more consistently comfortable throughout the building. The system also runs more efficiently, lowering costs.
More Reading
Read more about this topic in the blog post on outdoor reset here, and in the context of a building’s Unique Energy Fingerprint here.
And how lower energy costs effect property values here.
*It takes about 8,000 BTUs of energy to turn a gallon of boiling water into steam. An 80% efficient steam boiler would require over 10,000 BTU to make steam from a gallon of boiling water. The energy in the steam, know as latent heat, is given off as it condenses in the pipes and radiators.
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Outdoor reset technology, which bases operational temperatures on the outdoor temperature, is going to be eclipsed by innovative control technologies that can utilize more factors. As an efficiency solution, outdoor reset is a step above older technologies that use no external factors for achieving a measure of system efficiency, but there are plenty of external factors that, if taken into account, would improve efficiency even more. Information about energy intelligence software that accounts for these factors follows below, but first a review of outdoor reset.
Outdoor reset is a technology that matches up heating and cooling temperatures with corresponding outdoor temperatures. The purpose of this match-up is to increase efficiency by lowering systemic losses of energy that naturally occur from the production and distribution of thermal energy.
Here’s how outdoor reset works. Heating curves are shown in the image below. One of the curves is chosen manually by an installer or commissioning agent. The colder the outside temperature, the hotter the water that’s produced (or the longer the system runs, in the case of steam systems). The heating curve slope is chosen manually (top image) and the level of the slope is also chosen (2nd image).
Choosing an Outdoor Reset Curve
Often there are more than a dozen curves to choose from. There is inherently some uncertainty in choosing a curve. One could argue that choosing a curve is part art and part science. The main objective is to find a curve that will work for the building, and that leaves some room for error. Finding that a curve is not steep enough, for example, is only going to be discovered when it’s really cold out. This is not a good result. Yet by choosing a steeper than necessary curve, some system efficiency is sacrificed.
Once the system is set up, the chosen curve is usually not changed more than once or twice, if at all, so there’s not much in the way of “fine-tuning”. There’s just too much uncertainty for any one person or team to deal with.
Upgrading from Outdoor Reset to Leanheat AI
Among the factors that can be used to improve system efficiency is a group of building-specific factors such as how a building reacts to sun (e.g. amount of sunshine, time of day and time-of-year), wind (speed and direction), and thermal inertia. Other important factors that are accounted for are individual unit temperatures, particularly those units farthest from the heat source. What’s needed to account for all these factors is energy intelligence software using algorithms that learn and adapt.
Leanheat AI actually takes into account all these extra factors and creates, without human intervention, a heating curve unique to the building. As a result, the heating system runs more efficiently. In Finland, where Leanheat was first introduced, efficiency improvements of 10-20% have been realized.
An added benefit has been lower technical maintenance costs, such as from identifying and correcting housing units where climate control is problematic.
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Cutting energy costs has many benefits, not the least of which is increasing property values. The example below shows the effects on property values for a $10,000 cut in energy costs. If you consider that many properties can have their costs cut by some multiple of that figure, it’s clear that building (or business) valuations can be increased a great deal.
Investment Payback Considerations
For anyone considering the possibility of selling their property or business, the valuation should be factored into the payback equation. That is, even if a sale were contemplated for as little as one year out, an investment in energy cost cutting technology can make good sense even though the investment exceeds the returns on energy savings in that first year. That’s because the investment is not just lowering annual expenses, it’s also increasing the valuation by some multiple of that expense reduction. In other words, the investment results in a positive net present value.
Property Taxes
Another benefit of cutting energy costs is that the benefits over costs go directly to the bottom line. There should be little to no effect on property taxes because the added property valuation from the cost cuts would not be seen until the building or business is sold. In the meantime, energy cost savings accrue for the entire time that the asset upgrade is in place.
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Energy is used in many ways, from heating to cooling to power and motion. Opportunities to lower energy use are available in all of these areas. The challenge is to identify the best areas for reducing energy consumption by balancing opportunities with their costs. It’s possible to find a positive net present value (NPV) for many different upgrades.
Energy Audits
For many building owners and managers, an energy audit is a worthwhile first step. Often there are some glaring opportunities that easily apparent. Old technologies that use lots of energy are an example. Energy audits can provide a list of items where deficiencies exist, which can be prioritized and addressed by order of value.
Technical Fixes
The low-hanging fruit for energy reduction efforts is through the application of technical fixes. In new-builds as well as in retrofit situations, older technologies are being supplanted by new. Many leading industrial companies such as 3M, GM, and Volvo Group have made great efforts to reduce their use of energy in their processes. For example, Volvo Group announced in May 2018 that they have successfully reduced their energy consumption by 25% at their US facilities! As a company in an energy-intensive business, Volvo Group’s savings is impressive, and impactful. Reducing costs, lowering environmental impacts, and increasing competitiveness and investor returns are all resulting benefits.
Technical fixes are also available for other large energy users such as multifamily buildings, hospitals, and hotels. Larger organizations may have in-house expertise, or work with management companies that dedicate staff to energy reduction efforts. Smaller and medium size organizations in these business areas also stand to benefit from significant cost savings, and a corresponding increase in profitability.
Operational Fixes
As noted in the article at the Volvo link (above), that company is going beyond technical fixes: “As we shift from technical changes — which tend to have a large one-time impact — to operational and behavioral changes that are more people-driven” the company’s objectives are to continue to reduce energy consumption.
Companies like Volvo Group are showing great leadership in their commitment to, and success in reducing energy consumption. The behavioral and operational changes are a frontier that is ahead for everyone, though for the time being, for most, it is the technical changes which will bear the quickest payback.
