by Tim Smith, PhD, 14 May 2003

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Building energy efficient buildings has been a pursuit of many ecology minded activist and architects, but economics has driven the market towards the standard edifice. Greg Kats of Capital E however presented a compelling economic argument in favor of Green Buildings at the Spintelligent Metering, Billing, CRM/CIS Americas conference held in Chicago, IL during May 2003. In his keynote speech, Mr. Kats revealed preliminary data that examined the costs and financial benefits associated with building energy efficient office buildings and hinted at the potential new market opportunity.

Building green office complexes would have significant financial, energy, and ecological effects. As a market segment, office buildings consume 30% of the US energy. Specific to the electricity, in which most of the conference attendants were engaged, 65% of electricity is consumed by office buildings.

With regards to costs, making energy efficient and green office buildings adds approximately three to four dollars per square foot. For a large office building, this added cost is an upfront investment that must be recouped over the relevant lifetime of the building. Mr. Kats examined the financial benefits of a green office building using a 20-year lifecycle and assuming a discount factor of 5% above the rate of inflation.

The financial benefits of a green office building come from multiple sources. Directly, electricity accounts for only 1% of the cost of running an office. Lowering the electricity requirements will lower these costs, but only at the $5 to $6 per square foot range over the buildings lifetime. These savings are largely captured through shifting electricity utilization away from peak load times and better management of lighting. While the value gained through cutting direct electricity costs is sufficient to cover the higher investments required in creating green office buildings, it has been insufficient to encourage the market to adopt green architecture.

Another source of financial gain from creating a green office building can be captured through the greenhouse gas exchange markets. Mr. Kats reminded the audience of the exchange in NOX, PMO, SOX, and CO2 gas emissions at the $3 to $5 per ton rate. Building managers of green buildings can sell their reduced emissions requirements to others in dirtier industries where the economics for changing the industrial process prohibits the adoption of greener technologies.

A third significant source of value from green office buildings comes from increased productivity of its inhabitants. In offices work, approximately 84% of the cost of running a business is related to human capital. Numerous studies have demonstrated that office worker productivity increases with improved ventilation, lighting, and heat control. While a range of productivity increases have been reported, Mr. Kats suggests that an estimate of 1.8% will suffice for demonstrating the value of green office building technology. As a result, increased productivity for this large cost factor would yield a savings in the range of $60 per square foot over the buildings lifetime.

Combined, these and other sources yielded an anticipated cost savings, over a 20-year lifecycle of an office building, in the range of $50 to $75 per square foot depending upon the level of green technology used in construction. These savings are significantly greater than the direct costs and we might anticipate a high interest in green office building construction.

However, these savings are not always realized. Mr. Kats provided data, which indicated that green building failed to provide savings both initially, and on a persistent basis when metering of consumption and data flow for operational decision making failed.

To realize these potential sources of value, air quality, electricity usage, and other factors must be managed. This requires better metering of consumption and, importantly, the sharing of this data with the building maintenance and operations staff. Without the capture of the information through metering and the routing of this information to both the utility and the building management staff, the potential savings are lost. Information capture and management leading to decision making, which in this case is a simple manner of selecting when to operate certain pieces of equipment, yields value.

Because there is value in the information capture and management, there is also a market opportunity. Innovative business initiatives to provide for the capture of the consumption data and the real time posting of this data for decision-making would enable the owners of green buildings to capture more value. As such, we might hope to see innovative offerings from some of the metering and meter data management companies. Any takers for this potentially lucrative opportunity?

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Tim Smith, PhD is a principal at Wiglaf, a Market Research and Sales and Marketing Strategy consultancy serving tech-driven businesses operating in business markets. Small and medium sized businesses select Wiglaf for our quantitative and fact driven approach to intelligent revenue growth. www.wiglaf.biz.

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