Apples to Apples

Office buildings abandoned during the COVID-19 pandemic may never regain full occupancy. Shopping centers losing customers due to both the pandemic and a shift to online shopping may need to reevaluate their operating needs. Large apartment complexes may find their hours of peak energy consumption changing with work-from-home trends.

FMs can reduce the impact of energy volatility and improve sustainability by making better decisions about when, where, how much and how often to purchase energy according to their facilities’ specific needs.

Different facility types, different demands

Strategic planning for energy use enables facilities to make the best purchasing choices based on facility type. Before signing 12-, 24- or 36-month contracts with power suppliers, the first step for FMs involves evaluating a property’s energy demand. This includes calculating current energy usage and understanding the location’s distinct patterns of energy consumption.

Different types of buildings have different energy demand patterns:

1. Commercial facilities

Commercial facilities, such as office buildings, typically consume the most energy during the peak hours of 9 a.m. to 5 p.m., Monday through Friday, when they are in use by businesses and employees. Building systems may run during off-peak hours, but those energy needs are relatively less compared to the weekday push.

This seemingly simple pattern of peak-hour usage can become extremely expensive, especially if large facilities that were full of tenants during pre-pandemic times are now underutilized during traditional business hours. FMs must find creative ways to reduce energy demand during those peak hours to purchase only the energy they need and maintain a profitable net operating income (NOI).

First, managers must determine their facility’s demand. Whereas usage or consumption is measured in kilowatt-hours (kWh) and reflects how much electricity is used over a period of time, demand is measured in kilowatts (kW) and reflects how much electricity is needed at a point in time. Utility charges will often be based on peak demand, which will be reflected on the utility bill. Demand can be reduced by replacing equipment or changing equipment that is running at any given time.

Once a facility estimates its demand, FMs should try to optimize energy usage during peak hours to reduce costs. Mitigating energy demand is not a simple task; buildings cannot just shut off the power on people who are trying to be productive during the workday. What are some ways FMs can rein in demand during peak hours?

• Divide and conquer: Evaluate each tenant’s daily physical presence in the facility. Consider requesting that tenants use only specific floors or sections of the building and cordon off unused areas where power can be turned off or limited.

• Restrict hours: Survey tenants to determine which hours are less utilized and when power usage can be shut off or reduced.

• Switch to greater efficiency: Consider changing the energy mix to include sources that are more cost-effective in the long term. Installing solar panels on the roof of a sunny Arizona facility may be a large capital investment upfront, but it could mean cost savings over time.

If a commercial building includes retail establishments, determining which hours yield the best return on investment (ROI) is key to reducing energy usage and overall energy costs. Obtaining data on daily and hourly sales of retail businesses in the commercial facility can help reveal which times of day are most profitable. Business owners can then set their best hours for operation and potentially save money — for themselves and for building owners — by limiting power during less-frequented times.

2. Multifamily housing

Apartment complexes and condominium associations typically use the most energy during off-peak hours, when tenants are home and use the pool, gym and other common areas. This means FMs may be able to curtail usage during typical work hours from 9 a.m. to 5 p.m. Restricting power to certain parts of the facility or installing motion-detecting light sensors during peak hours can help manage energy use on evenings and weekends.

This off-peak power-usage pattern changed for residential facilities during the COVID-19 pandemic, when many tenants began working from home. A recent study showed that, globally, 62 percent of workers aged 22-65 occasionally work remotely. The study indicated that this trend may be reversing, however, as only 16 percent of companies are fully remote, and 44 percent do not permit remote work at all. Where people are going back to offices, multifamily housing facilities may be able to consider limiting energy demand during working hours.

3. 24/7 Facilities

Some facilities, like health care establishments, must keep all systems running 24 hours a day, seven days a week, so there is no option to limit energy demand. This type of usage pattern has its advantages and disadvantages.

On the one hand, 24/7 facilities have consistent, reliable energy demand patterns, so it is simple to calculate energy supply needs. Facilities typically use a certain amount of energy — kilowatts or megawatts — during specific blocks of time. Though some hours may require more energy than the typical block and others may need less, facilities with steady, reliable patterns of usage have better load factors, so their electricity will be slightly cheaper — even though more power is being used overall because the power must be on all the time.

On the other hand, these 24/7 facilities are at the mercy of energy market price swings, making their energy procurement potentially costly. Being “on” all the time makes them more sensitive to market fluctuations.

In these cases, facilities must be extremely discriminating in their energy purchasing strategies — essentially controlling energy supply — to weather the difficulties of energy price volatility.

Controlling energy supply

Manipulating demand for energy is not always possible. What can be done if facilities cannot reduce energy demand during peak hours? If they cannot shift to more off-peak operations? If they cannot reduce their energy usage at all?

Different types of facilities have different options. Some, like universities, have a complex mix of energy demand patterns for each type of building. Classrooms may follow the peak-hour weekday schedule, while dormitories and recreational facilities require more energy during off-peak hours and on weekends. Medical facilities, laboratories and technology centers may need power 24 hours a day, seven days a week. Each type of building would require a different purchasing strategy to minimize risk and maximize ROI.

In these cases, better managing the energy supply for specific types of facilities can help combat price volatility and promote sustainability. Purchasing energy at the right times and under the right market conditions is a good option to reduce costs and make energy planning more sustainable over the long term.

FMs should consult energy procurement experts who not only understand how to assess risk in energy purchasing but can also make targeted purchasing decisions according to specific daily conditions.

Energy hedging is one strategy for making data-based purchasing decisions that save facilities money and keep them sustainable in the long term.

Energy hedging

Rather than purchasing energy at fixed prices over 12 or 24 months (the typical energy strategy widely thought to be the most cost-effective), skilled procurement specialists can help property managers get the best ROI by purchasing energy at short intervals, based on daily calculations of risk, global and local prices, utility rates, occupancy levels and tariffs.

Called “layered hedging,” the strategy involves making a series of energy purchases that are planned, flexible and able to take advantage of market opportunities as they arise. This calculation is based on the weighted average of all “hedges,” or percentages of a facility’s total energy load that are locked in at a fixed rate. Facilities “top up” the remaining energy needed by purchasing at a floating rate when market conditions are favorable.

Considerations

When choosing an energy purchasing strategy, FMs should consider:

• What percentage of energy supply will be part of an energy hedging plan?

• Should the electricity and natural gas strategies be the same?

• Should the same strategy be used across different locations and types of facilities?

• What local, state and utility regulations may influence purchasing options?

The bottom line

FMs must understand their options for managing energy demand and delivery in a given facility to positively impact the company’s bottom line.

As each facility has distinct needs, professional energy advisers can develop targeted strategies that maximize purchasing outcomes. Trusting experts to make daily energy procurement decisions, rather than signing long-term contracts under which suppliers are more hands-off, empowers facility managers to take control of their energy procurement — and realize significant savings and peace of mind.

Using analytic tools and proven methods, skilled energy procurement specialists can develop and deliver energy strategies that mitigate risk, reduce the impacts of energy volatility, increase budget certainty and reduce energy expenditures. By auditing energy supply accounts, advocating vis-a-vis suppliers, overseeing system updates and discovering appropriate savings programs, advisers can assist managers in making more sustainable decisions about their facilities’ energy plans.