Energy efficient buildings, demand response, and overcoming the barriers

The best way to make a kilowatt-hour available isn’t green power generation. It’s to have not used a kilowatt-hour somewhere else in the first place. Energy efficiency is the greenest power source. And it can be among the most lucrative as well…

Energy efficient building technologies (mostly lighting, HVAC and controls) have been getting a lot more attention lately, particularly when it comes to automation and general “smart building” approaches (which would include the on-site implementation of demand response-enabling equipment). On this site we’ve discussed the sector often and described why the economics of many of these technologies can often be quite strong (such as 1 to 2 year payback periods).

And yet, while the market for these technologies is growing quickly, it’s not growing quite as quickly as one might expect. Why is that?

There are four major obstacles to implementing smart building technologies.

First of all, there is the physical challenge involved in any retrofit of equipment. In the past (and still mostly true in the present as well), a smart building system has meant hard-wiring up a lot of equipment to be able to talk to each other. The air conditioner unit has to talk with the central or off-site decision-making server. The thermostats have to feed into the system as well. If lighting is being adjusted, every light fixture has to be wired. All this wiring is tough to do when the building’s walls are already up. Fortunately, wireless machine-to-machine communications technologies are getting to a point of cost-effectiveness where hard-wiring may not be as necessary. Leading “smart building” technology vendors are taking a system-level approach to this problem, bundling M2M comm networks in with their smart sensor (ie: thermostat) and smart energy load (ie: lights and HVAC) systems. But that’s still developing, and for now, smart building technologies are a much easier sell in a new-build situation than in a retrofit. The problem is, that’s a much more limited market.

Secondly, ownership is often a problem. In many office spaces, the occupant is not the owner. And when it’s a multi-tenant building, like a big office tower, the occupants may not be sub-metered so that they can be separately billed for their energy use. At one point earlier in my career, when I was with the World Resources Institute, I took on the task of planning how our organizational headquarters could implement a lot of energy-saving changes in equipment and the like. The problem was, we occupied just two floors out of eight or so. And all the tenants were billed their portion of the overall building electricity bill according to square footage, not according to actual electricity consumed. So the economic justification became very tough for me, in that if WRI spent our own money to implement energy savings in our own space, we would only get to enjoy about one-quarter of the electricity bill savings that we enabled. This is just one personal anecdote, but it explains a lot of the challenge in the commercial buildings (ie: office buildings) part of the market—the building owner isn’t incented to put in energy efficiency technologies because they’re just passing through the electricity bill to the tenants, and the tenants aren’t incented to put the technologies in because they don’t get most of the cost savings. Easy sub-metering and outsourced billing services would help a lot with this problem.

Thirdly, in the industrial buildings part of the market, the problem is that the loads aren’t simple and the potential buyers are naturally skeptical. Industrial buildings account for nearly one-third of the electricity consumption in the U.S. But unlike commercial buildings, where 85% of the consumption is in lighting and HVAC, industrial buildings are factories and manufacturing facilities and the like. All sorts of very different capital equipment, powered by electric motors, make up the energy load. And so the challenge of connecting with and controlling the various loads is a challenge by itself. Then, add on the fact that the facility manager is going to naturally be very sensitive about any change that might potentially impact production at the facility.

Take demand response as an example: dimming the lights a bit and letting the air conditioner cycle down a bit during a demand response event is one thing in an office building, it won’t really affect anyone’s productivity, but to affect the biggest pieces of equipment in a metal foundry or a manufacturing facility is a different equation. So it’s not just technically harder, it’s harder to make the economic argument as well when you have to consider potential lost productivity, and thus industrial sites have been much slower to sign up for demand response programs than office building owners have been. Fortunately this is also changing as entrepreneurs focus on the problem. Forgive the blatant promotion of one of @Ventures’ portfolio companies, Powerit Solutions, but this case study from Trojan Batteries’ use of Powerit’s technology is just a really good illustration of the overall potential for making smart building technologies accessible to industrial facility managers, with low disruption and strong economics.

Fourth and finally, Joel Makower points us to a compelling study that was recently released (although I couldn’t download the study itself this morning, so hopefully that link is getting fixed today…). And it shows that perception gaps are a big obstacle. Potential buyers of energy efficiency technology appear to significantly over-estimate the likely costs of energy efficient building approaches, by more than 300%. That would definitely make it tougher to get buyers interested. So there’s a big role for an industry voice that is really still not yet developed—there are some strong smart building industry groups out there, but they tend to be more internally-focused than big marketing-focused efforts.

Local governments, national environmental groups, and other related groups would be well-served in promoting the visibility of available building energy efficiency technologies (and particularly the strong economics they can provide).