Portfolio-Wide Energy Optimization Can Deliver Outsized Returns

Leveraging actionable and economically focused analysis to support portfolio-wide energy investment strategies

Download RMI’s new report, Capturing Value Through Portfolio Energy Optimization: Best Practices for Real Estate Owners and Investors.

For owners of building portfolios, improving the bottom line through energy projects continues to be an undeniable opportunity. The financial benefit directly associated with implementing energy projects was projected to be a $290 billion net present value opportunity in the U.S. commercial building sector by McKinsey & Company in 2010, and it likely continues to increase due to plummeting technology costs for key upgrades such as LED lighting and controls. Employee, tenant, and investor expectations have the potential to further sweeten the deal through increases in rent, valuation, and fund performance.

The motivation to improve building energy performance exists. In fact, nearly half of Fortune 500 companies have at least one climate or clean energy target. And yet, this $290 billion opportunity has barely been tapped. Results from the US Energy Information Administration’s 2003 and 2012 Commercial Building Energy Surveys (CBECS) suggest that energy use intensity (kBtu/ft2) has remained the same in all commercial building use types except office and education buildings. In short, the industry is stuck.

These modest improvements are not due to lack of opportunity. Many proven and economically viable technologies are currently available to reduce energy use. Many case studies are available of buildings consuming only a fraction of the average energy use reported in the CBECS survey. For instance, Rocky Mountain Institute recently moved into a new office in Boulder, CO, with a projected energy use intensity of 26 kBtu/ft2 (not including the solar photovoltaic system), which is 70 percent lower than the average office building in the city.

Yet a disconnect remains between awareness of this “prize,” and a portfolio owner’s ability to capitalize on it—for good reason.

Industry Barriers to Reaping the $290 Billion Prize

For one, asking organizations to deploy difficult and time-intensive energy projects can be challenging when building energy isn’t part of their core business. In a recent survey from Johnson Controls, energy and facility management executives indicated that the key barriers to energy project investment are lack of funding, insufficient payback, uncertainty in project performance, and lack of technical expertise to evaluate projects.

These hurdles can all be linked to a deficiency in early project identification and evaluation.

Although not a panacea for all implementation barriers, providing consistent and accurate portfolio-wide identification of investable projects can be an excellent start to scaling efficiency projects. Unfortunately, these insights can be difficult to come by, especially for owners of large portfolios of buildings. Two key challenges are (1) the sheer number of potential project types and (2) local economic factors dramatically impacting project viability.

That’s why RMI believed it was necessary to develop an approach and toolset that allows portfolio owners to consistently and holistically evaluate all major energy opportunities across a portfolio, and understand the associated economics. Having a consistent and holistic approach can help portfolio owners capture the opportunities available through better energy performance that is optimized for savings and value across an entire portfolio.

This is how we framed the problem:

Critical Issue 1: Optimized deployment of funds requires evaluation of many project types. “Energy project” is an umbrella term for hundreds of potential upgrades. Figure 1 characterizes the different project options, but these are only examples. It is challenging to evaluate such a broad spectrum of projects accurately and consistently. Common issues include:

  • Estimating project cost savings. Many tools are very good at calculating savings for one project category, but poor at evaluating others. For instance, evaluating energy storage projects requires consideration of complex hourly utility rate structures, whereas many lighting project calculations do not consider the complexity of hourly analysis.
  • Developing an accurate library of economic criteria for projects. It can also be difficult to collect accurate data about implementation costs for such a broad set of projects because this information is typically not published, especially for bulk purchases.


Critical Issue 2: Local economic factors can have huge impacts on project viability. Prioritizing investments requires economic analysis, not just energy analysis. Local economic factors such as lease terms, utility rates, incentives, and labor rates can have as great an impact on project viability as energy cost savings. Figure 2 illustrates the impact these variations can have—summarizing the results of an LED retrofit analysis considered at identical buildings in three different locations. The example assumes the exact same number of fixtures and virtually equal amounts of energy saved at each location. Even with these simplifications, the economic performance of the three projects varies substantially and for different reasons, illustrating the need for full economic analysis per project, per building for optimal deployment of funds.

Comparisons of similar buildings analyzed by RMI supports this observation. For example, two stores with similar use, climate, operating hours, and age were both evaluated for the same library of projects. One store was located in California and the other in Texas. The differences in utility rates and available incentives resulted in the California store having seven and a half times more net present value investment potential compared with the Texas store.

Mass Customized Simulations to the Rescue

From the range of analysis options available, energy simulation is the best solution for project prioritization as described in this blog. This is because simulation allows energy savings calculations for individual measures to be isolated and linked to project-specific economic analysis. Nonetheless, the crux of the problem isn’t in finding a tool capable of evaluating economics for a broad array of projects. Energy simulation paired with life cycle-cost tools have been able to do that for years. The solution lies in providing accurate and consistent results at an acceptable price point and timeline for an entire portfolio of buildings.

Advancements in energy analytics are providing a path forward. Tools, such as Big Ladder Software’s Params/Modelkit, provide an additional layer of automation, enabling thousands of simulations. These simulations are all necessary for customizing models to each building within a portfolio, then evaluating the fit of each building for potential projects contained in the database. There are a few solutions on the market using this methodology, but because of the high potential for impact and the evolving nature of the approach, RMI opted to develop its own tool. Two unfulfilled market needs drove this decision:

  • Sufficient Specificity: Most current tools are web-based with direct owner interaction, which provides fast and low-cost results but limits the amount of data that can be collected to maintain a user-friendly experience. More building asset data is required to provide specific and actionable results. Therefore, RMI is focused on developing a consulting-based model supported by software.
  • Portfolio-Centric Insights: The key outcome from RMI’s analysis is a comprehensive list of projects that can be sorted and filtered based on a range of economic factors (e.g., net present value [NPV]) eliminating the need to aggregate multiple single-building reports to create a portfolio-wide investment strategy.

By developing our own approach, we have been able to glean several best practices for this type of analytics, each of which is further explained in RMI’s recently released Capturing Value Through Portfolio Energy Optimization report.

  1. Evaluate All Potential Investments Using a Common and Holistic Methodology
  2. Prioritize Investments by Project Economics Instead of Energy Savings
  3. Optimize Cash Flows over Time
  4. Leverage Portfolio Benefits
  5. Enable Continuity with Ongoing Work
  6. Don’t Shy Away from Data
Recent Portfolio Analysis of Recreational Equipment, Inc. (REI)

One of the more interesting insights that has come from our work is the lack of patterns in project deployment. The confluence of a broad array of potential projects, varying existing conditions, and highly sensitive local economic factors has a tendency to turn buildings that initially look to be relatively standardized into unique snowflakes.

This point was underscored during a recent project we worked on with REI to evaluate 134 of its retail stores across the United States. We evaluated each store for the same set of 35 potential projects and yet over half of the stores ended up with a unique combination of projects. The investment potential across the stores varies substantially with the highest potential store having over 70 times the net present value as the lowest. Having a prioritized list of projects allows for development of an optimized investment strategy that directs funds toward high return properties, thereby ensuring economic thresholds are met while driving deep savings across the portfolio as a whole. For REI, the analysis suggests a potential for 39 percent energy savings while achieving a four-year simple payback portfolio-wide.

This work and the work of others in the field are removing the information barriers associated with investing in energy projects on a portfolio level. Developing the truly streamlined solution demanded by the market will require an ongoing industry-wide effort.

We encourage you to download the report, then engage with us to determine how portfolio owners, investors, and service providers can collectively capture this market opportunity.

Image courtesy of iStock.