Energy Overhaul: Improving efficiency saves money
As middle market companies search for ways to cut costs and increase margins, they should consider the benefits of maximizing energy efficiency of their facilities. An energy overhaul of a commercial building can result in average utility cost savings of up to 30 percent, depending on the age of the building, equipment, occupancy, hours of operation, and total energy use.
“By using less energy, businesses can insulate themselves against future swings in utility costs,” says David Wible, Comerica Bank vice president of middle market banking. “When structured properly, energy efficiency pays for itself and positions the property to outperform its peers and generate higher returns.”
It’s not rocket science. Relatively mundane improvements like adding insulation, caulking, and weather-stripping; window and door upgrades; automating energy control and recovery systems; and modifying or replacing heating, ventilation, and air-conditioning systems can pay handsome dividends. When a Grand Rapids, Mich., engineering company replaced high-pressure sodium lighting with a fluorescent system, for example, it realized $240,000 in annual savings.
The first step toward achieving such results is to conduct an audit of your facility’s energy use. Potential vendors should have appropriate engineering backgrounds, be familiar with commercial and industrial buildings, and adhere to professional guidelines such as those set by the American Society of Heating, Refrigerating, and Air Conditioning Engineers. Auditors should not represent any company that stands to profit from their recommendations.
“A quick analysis of your utility bills will cost between $500 and $1,000, while a deep-dive systems analysis, including projected payback periods, will cost $5,000 to $10,000,” Wible says. “But if your company has energy bills of $500,000 or more, that’s really a drop in the bucket when you consider that a middle market company can save on average from $50,000 to $100,000 on these types of investments.
An energy auditor can also identify modifications that could potentially qualify for tax deductions and rebates from utility companies — and help file the necessary paperwork.
If you’re not yet ready to engage a paid auditor, you may want to look into two free programs available in Michigan. The University of Michigan’s Department of Mechanical Engineering offers free energy assessments for Michigan companies that have gross sales of less than $100 million, fewer than 500 employees at the plant, annual utility bills between $100,000 and $2 million, and no in-house professional staff who can perform the assessment. Michigan’s RETAP initiative (Retired Engineer Technical Assistance Program) also offers free energy-efficiency analyses for Michigan companies. Free audits are generally a starting point and tend to provide a more limited analysis than a paid audit.
Wible advises companies to coordinate the installation of energy-saving renovations with other facilities projects, if practicable, to minimize disruption to daily operations. It can also make sense to include the cost of an upgrade when refinancing a facility or consolidate it with an already-planned business loan. Obviously, the least-invasive option is to do the work before a new building is occupied or as you are planning an addition. “Having this work done before you move into a building eliminates interruptions to your business,” he says.
For companies leasing space, pursuing energy savings can be more complicated simply because it is somebody else’s property. In that case, Wible recommends pursuing a “split incentive” agreement under which the tenant agrees to pay additional rent every month out of the savings realized from the efficiency upgrades.
“If it’s a good relationship and they realize there’s a value to them for you to improve the building, maybe you can work something out together,” Wible suggests. “If you have a five-year lease, it makes sense to make improvements that have a one-year payback. It might not make sense to do something that has a seven-year payback.”
Minimizing a company’s energy use footprint can make particular financial sense when it comes time to sell.
“The growing trend of tenants seeking ‘green’ office space creates a market risk for owners of less efficient properties,” Wible says. “Portfolio managers and appraisers in some markets are already identifying wasteful buildings as high risk and are assigning lower values to them.” Conversely, sale prices for energy-efficient buildings are as much as 10 percent higher per square foot than conventional buildings.
“When you consider that company values are based on a multiple of its EBITDA, if energy savings add $50,000 to $100,000 annually to your bottom line and the company sells for a multiple of five times that, that’s another $500,000 in your pocket,” Wible says.
Comerica Bank can help middle market companies navigate the energy evaluation and savings process.
“This isn’t a political thing (like) whether you believe in climate change; this is about making more money with more stability using existing technology,” Wible says. “We’re not talking about starting with windmills and solar panels; we’re talking about caulk, insulation, new lighting — things you can easily do.”
To find out more how Comerica can help with energy efficiency and your business, contact David Wible at 313-222-6085 or email@example.com.