Exploring the Energy Information System Value Proposition
The main value proposition of energy information systems (EIS) is that significant savings can be realized by providing greater visibility into energy and building use. Without such a system, data cannot be centralized and analyzed efficiently. There is reliable research on this topic: according to a 2013 report from the Lawrence Berkeley National Lab (LBNL), energy information systems (EIS) were cited as a critical component in realizing 17 percent median site savings and 8 percent median portfolio savings. (See the report: “Energy information systems (EIS): Technology costs, benefit, and best practice uses.“ available here http://eetd.lbl.gov/publications/energy-information-systems-eis-techno)
This makes sense, since the foundational software component in most industries is the information system. Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) solutions are fundamentally information systems, and serve as an important technology tool for many enterprises. Their use is ubiquitous, and whole ecosystems have been built around these platforms. The same should be true for the building and energy management industry: information systems as a foundational technology platform. However, 10 years since enterprise energy management solutions began to appear in the market, industry observers would agree that this market has not crossed the chasm. Moreover, the lack of a ubiquitous information system platform has not slowed other technology developments.
LBNL’s report uses the phrase “critical component” to describe energy information systems, stating, “an EIS enables savings, rather than directly generating savings.“ And, unlike industries that adopted CRM and ERP systems, the building and facility management space is starting from a relatively robust technology posture.
Almost all large buildings already have a building automation system, perhaps also a lighting management system, and the outcomes are usually positive: occupants are productive and generally happy. Adding an information system to the mix would provide incremental savings, but not nearly the same benefits that a firm would realize after implementing a CRM for the first time. The old way of tracking sales and customer information was with paper notes and spreadsheets that individuals or small teams used to document information about their prospects and clients. In such a scenario, the CRM offers a significant order-of-magnitude improvement, not just an incremental one.
Additionally, sales, finance and operational professionals would point to CRM and ERP systems as a foundational technology investment. After deploying a CRM, the firm could invest in marketing automation software to increase the sales pipeline, which has a direct benefit on the business. The same is not true for buildings. Building automation and lighting control systems can deliver positive outcomes and cost savings and do not rely on foundational information system (though, they can be incrementally more effective with one). The stated value proposition for energy and building information systems is similar to how CRM and ERP solutions are positioned. But, does this value proposition actually resonate with facility professionals and their superiors?
There have been a number of reports over the past few years that provide many of the data points that one would need to better understand the financials of deploying an energy information system, which helps to understand the relative value of the solutions. The LBNL report and Lux Research (http://blog.luxresearchinc.com/blog/2014/05/picking-winners-after-300-million-worth-of-vc-investment-in-bems-software/) have each published guidance on the cost of energy information systems. LBNL estimated an annual cost of $0.06 per square foot, and the Lux table of various offerings shows most of the information (not control or analysis) systems at $0.05 to $0.10 cents per square foot.
LBNL’s research also included a review of the energy savings potential of such information systems, noting a median portfolio savings of 8 percent. Additionally, NRDC published a report (https://www.nrdc.org/resources/real-time-energy-management-case-study-three-large-commercial-buildings-washington-dc) on the energy savings of real-time energy data in a few commercial offices in Washington, DC, and found that these three buildings saved 13 percent (though this was using real-time interval data, while some EIS may just have utility bills or delayed interval data, which may limit the savings potential). Other reports find savings in the same range, usually 8 – 10 percent.
Finally, the Commercial Building Energy Consumption Survey (CBECS) provides metrics around square footage of building by type, which can be used to quantify the costs and benefits for real-world buildings. The Building Energy Data Book quantifies the associated energy cost of commercial buildings (http://buildingsdatabook.eren.doe.gov/TableView.aspx?table=3.3.8), finding that it is typically between $2.25 and $2.50 per year.
As a first real-world example, how would a single large 1 million square foot commercial office building think about investing in an energy information system? The total energy cost would be $2.5 million dollars and the software would cost $60,000 per year. With an 8 percent anticipated savings, the building could expect $200,000 in realized energy savings, but only $140,000 once the software cost is deducted. Additionally, there may also be some hardware costs to meter the building and also some initial implementation costs (but these probably are only charged in the first year).
Another real-world example could be a corporate or college campus of 10 buildings, about 250,000 square foot each. This portfolio would spend $6.25 million per year on energy and could anticipate $500,000 in savings per year from an EIS. This could be realized for a software cost of $150,000 per year. In the case of this portfolio, the implementation and hardware costs may be more significant, because there are more meters to install, more existing systems that need to be integrated, and more work to be done.
In both of these cases, the return on investment is good, but perhaps not a home run. Additionally, there are other factors that lead to some hesitancy on the part of building owners and operators:
- Many buyers would be skeptical of the 8 percent savings estimate, and may overvalue the costs to implement the solution, in addition to the risks if the software doesn’t provide an anticipated return. A Harvard Business Review article from 2006, entitled “Eager Sellers and Stony Buyers: Understanding the Psychology of New-Product Adoption“ (https://hbr.org/2006/06/eager-sellers-and-stony-buyers-understanding-the-psychology-of-new-product-adoption) notes research from Nobel Prize-winning economist Daniel Kahneman, who finds that people evaluate products based on a reference product they already own and that losses have a far greater impact than gains (called “loss aversion”). Said another way, most people value what they have more than what they don’t have. In many cases, these systems will automatically be directly compared to building automation systems, even though they offer a different value proposition and feature set.
- Beyond building automation systems and lighting controls, many buildings and portfolios have consultants or accounting software that provide at least some visibility into energy and building costs. Unlike firms implementing CRM and ERP systems, the EIS doesn’t necessarily provide an order-of-magnitude improvement over the current practice. The current state of practice provides a reliable and well-understood service with a perceived value. For example, EIS might enable a firm to identify billing errors, but there may be a consultant or bill pay provider already doing this. Some of the value of an EIS is being realized without the EIS.
- The EIS software space continues to be complex, fragmented and confusing (http://www.greentechmedia.com/articles/read/what-building-professionals-can-teach-us-about-the-way-forward-in-the-smart), which makes it more difficult for firms who actually do want such a solution to pick one. The long sales cycles are difficult for EIS companies to navigate, and push buildings to stick with the status quo.
- As LBNL notes, the information itself does not lead to energy savings. Most facility professionals understand this. Someone has to act on the information, which requires a rethinking of how facility management tasks are performed. This requires a commitment from the firm to train its employees and invest in the new technology. This cost, in addition to software licenses and implementation, may make the overall financial return less compelling.
- Additionally, the overall cost savings of an energy information system is very small compared to operating budgets at most organizations. Knowing that every $3 dollars in energy spend per year equals $30 dollars in facility costs and $300 in staffing costs (https://eponline.com/blogs/environmental-protection-blog/2016/08/smart-buildings-unlock-exponential-value.aspx), even significant energy savings are a small portion of operating expenses. Even looking at energy costs above, in the case of the single large office building example above, the overall financial gain from the EIS is $140,000, which is only about 5 percent of the total $2.5 million dollar energy budget. Some EIS vendors have moved to cheaper per-building pricing models, but even with a smaller ongoing fee, the overall savings opportunity isn’t that significant compared to overall operational costs.
While EIS may be a difficult value proposition for the early and late majorities, there are opportunities for new product offerings in the building space, which is why there still is significant interest from large, established firms, venture capitalists, and even utility companies. The compelling offerings just aren’t exclusively information systems. Many leading software solutions are offering deep analytics and/or device control capabilities that have a far different value proposition. For example, there has been significant growth in the number of fault detection and diagnostics (FDD) solutions over the past few years, in addition to “automatic Measurement and Verification” (Auto M&V) software (See LBNL’s ongoing research on this topic here: http://eis.lbl.gov/auto-mv.html).
Some vendors are focused on providing better and more scalable building automation systems that provide device control through a cloud-based solution. This offers deeper energy savings opportunities: GSA’s sub-metering guide highlights Department of Energy research estimates that continuous commissioning can save 45 percent on energy, far more than an information system (http://www.gsa.gov/portal/mediaId/156791/fileName/Energy_Submetering_Finance_Paper_Knetwork_2012_11_269(508).action). Providers of control systems can automatically tune buildings to be more efficient and usually combine some level analysis to optimize performance. These can provide bigger benefits, and because they can operate without significant staff oversight, they may require less staff time and training compared with an information system. While they are more complex systems under the hood, they can be deployed and used with less complexity across the organization.
At the same time, there are some specific scenarios in which an information system makes sense for building owners and operators. In the case of regulation, such as municipal benchmarking regulations or certifications like Energy Star and LEED, some building owners and operators see value in tools to manage these data and automate collection and reporting. In some cases, these offerings are software systems that are provided via managed service engagements.
In such a scenario, facility managers many not actively use an information system, but work with a team of experts who use it on their behalf. The same could be true of budgeting and targeting – some organizations have internal controls and guidelines around energy cost tracking, and require information systems to manage performance. However, in this latter case, there are mature software solutions providing these features and most organizations who want this kind of solution appear to already have it.
Many of the most promising technology solutions in the building and energy management space provide capabilities beyond what an information system offers. These solutions offer order-of-magnitude benefits and require less behavior change on the part of the building operators. This makes them easier to deploy and use, improving user adoption.
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