WEEC: Future of Performance Contracting 1 Proven Strategies for Making Existing Buildings Energy and Operationally Efficient REMOVING OBSTACLES TO ENERGY

WEEC: Future of Performance Contracting1

Proven Strategies for Making Existing Buildings Energy and Operationally Efficient

REMOVING OBSTACLES TO ENERGY EFFICIENCYTHROUGH BUSINESS CASE AND REAL RESULTS John W. Conover IV, President, Trane Commercial Americas At Fairleigh Dickinson University

2

About John W. Conover IV

• Leader for the Trane commercial business in the Americas – 14,200 employees in the U.S., Canada and Latin America

• Been in the HVAC-R industry for 30 years

• During tenure with Trane, played integral role in better understanding customer expectations and market needs such as the growing search for energy efficiency solutions.

• Focus heavily on gaining innovative insights on what it takes to acquire, satisfy and retain customers.

• Earned a bachelor’s of science degree in civil engineering from Lehigh University and is a registered professional engineer.

• Attended the Executive Leadership Program at the Wharton School of Business at the University of Pennsylvania.

• John and his wife Marsha live in New Jersey and are the proud parents of four children

3

About Ingersoll Rand

• $17 billion diversified industrial company

• 64,000 employees worldwide

• More than 100 manufacturing facilities worldwide

• Operate in every major geographic region

• Strategic brands are #1 or #2 in their markets

About TraneCommercial Equipment + SystemsResidential ProductsAftermarket PartsTrane Building Services

4

How Ingersoll Rand Walks the Talkabout Energy Efficiency

INGERSOLL RAND IS REDUCING ITS OWN ENVIRONMENTAL FOOTPRINT• Trane and Ingersoll Rand – active with the U.S. Environmental Protection Agency

– Members of Climate Leader Program – Joined Smart Way Program: To reduce environmental impact of transportation activities – Members of the Green Chill program: Energy efficiency in the supermarket industry

• Member of the Dow Jones North American Sustainability Index, various investing indicies

• Established internal goals for reduction of energy use and climate change emissions

– Energy audit program to understand energy use/strategies for reducing consumption

– Established a Sustainability Strategy Council to further integrate Sustainability principles throughout our business

– Created “green teams” in all locations to engage employees and champion reduction

– Established national patch program with Girl Scouts of the Americas called “BTU Crew” to encourage girls to reduce energy use in community buildings

– LEED certified buildings in the U.S. and Asia

5

Why Trane is Talking About Energy Efficiency

WHAT WE DO

• Trane works with leaders who take a broad view of organizational performance

• We offer most energy efficient systems along with energy management and optimization service that leverages operational savings to support business objectives

OUR EXPERIENCE

• 1 out of every 2 buildings in the U.S. has a Trane system

• More LEED certified Accredited Professionals (AP) in the industry

• Most energy efficient large chilled water system on the market today

• More than 125 performance contracting projects

– Average project in the range of $2M with 10 year contract

OUR ENVIRONMENTAL CONTRIBUTION (ENERGY SAVINGS EQUIVALENT)

• 18,722 cars taken off the highway

• 11,323,812 gallons of gasoline saved

• 21,843 planted mature trees

• 68,074,062 gallons of water saved

• 224,666,420 pounds of CO2 saved

6

Perfect Storm:Factors Influencing Energy Efficiency + Building Owners Today

ENERGY USE IN EXISTING BUILDINGS A PRIORITY

• Buildings consume 1/3 of energy worldwide and expected to grow: Population growth, urbanization, developing countries

• Energy use in buildings projected to grow

– Up to 40% of total operating expenses of some buildings

– Single greatest contributor to global warming

• Tremendous amount of energy-related policy:

– Improve environment and reduce oil reliance

– Stimulate the economy and create jobs

– Reduce risk and increase business confidence

7

Perfect Storm:Factors Influencing Energy Efficiency + Building Owners Today

ESPECIALLY IN CHALLENGING ECONOMIC ENVIRONMENT

• Reduced operating budgets and deferred maintenance

• New construction outlook remains weak

• Considered to be operating in a global recessionary market

• Businesses pinched more than ever

– Operating costs continue to rise with intense pressure to reduce

– Access to cash and credit more limited than ever

– Limited appetite for capital investments without clear payback

8

What This Means:For Building Owners and Business Leaders

ENERGY EFFICIENCY IS A BUSINESS IMPERATIVE

• More than a “nice to do” or method for being socially responsible

• There are tangible business results directly associated with energy efficiency

– Financial, customer satisfaction, employee productivity

– Not to mention that it makes assets more valuable

– And there’s a positive environmental contribution

• As business leaders, our job is to remove obstacles to energy efficiency

– Must be C-level owned / championed

– Need a financially-motivated business plan

– Don’t get caught up in the noise – there are proven strategies and technologies for making existing business more efficient

9

Why A C-Level ImperativeFor Building Owners and Business Leaders

CONSERVATION IS FOR THE BOILER ROOM … EFFICIENCY IS FOR THE BOARD ROOM

ENERGY CONSERVATION

• Using less energy, without necessarily increasing the output

– Fewer truck runs to / from warehouse

– Turning off unused equipment on weekends / off-hours

– Modifying behaviors and practices

– Low hanging fruit / low first cost / fast payback projects

– “Holding the Gains” – depends on culture

ENERGY EFFICIENCY

• Using less energy and achieving more output

– Rightsizing / replacing infrastructure

– Process / product improvement

– Less environmental impact in the supply chain

– Often higher initial cost, but better life cycle payback (need to understand the financials)

– Holding the gains – depends on automatic controls and monitoring

The Value of Efficiency: Reduce production losses, spoilage, downtime while increasing good will and customer impact

Alliance to Save Energy: Strategic Industrial Energy Efficiency

10

Getting Started: A Financially-Motivated Business Case

11

Making the Case for Energy Efficiency

Critical question: Is your building overhead or an asset?

Owners who view their buildings as assets link the physical environment to business outcomes – customer and employee satisfaction, productivity, operating expense reduction, among others. These buildings can be “high performance” and tie to the mission, values and results of a business

• Value to people the building serves (environment, comfort, safety) • Value to customers and community (competence, environmental

responsibility) • Value to the bottom line (cost savings, avoidance, ROIC)

12

Public Private

Improve Infrastructure Stay Competitive (Attract Tenants,

Customers, Talent)

Reduce Maintenance Costs

Reduce Maintenance Costs

Reduce Operating Costs Reduce Operating Costs

Optimize Capital Budget Optimize Capital Budget

Improve Indoor Environment (Comfort & Occupant Performance)

Improve Indoor Environment (Comfort

& Occupant Performance)

Be Socially Responsible Add Asset Value


Critical question: What are your driving factors for change?

• Every building, project and customer is different – making each project unique

• Modeling begins with understanding:

– Why project was initiated

– Goals and objectives

– Appetite for risk

13

Critical question: How will you fund your project?

Three budget categories • Energy budget• Operating expense budget• Capital improvement budget

Potential for more robust projects • Evaluate benefits beyond payback

period• Energy projects reduce operating

and capital improvement budgets

Goal to Remain Budget Neutral

Capital Contributionfuture planned monies allocated

today to broaden project impact

Capital Budget

money for projects

planned to be completed in

the future

Operating Savingsnon energy savings from

conservation measures and maintenance practices

Operating Budget

Energy Savings from Conservation

Measures

Energy Budget


14

Goal to Remain Budget Neutral

Operating Budget

Operating Savings - non energy savings from

conservation measures and maintenance practices

Capital Budget - money for projects planned to be completed in the future

Capital Contribution - future planned monies allocated today to broaden project

impactEnergy Budget

Energy Savings from Conservation Measures

• Goal: Allocate potential savings from operating budgets and avoidance from capital budgets to fund project:

– Operating budgets should reflect the funding of the debt service for the project with offsets to energy and maintenance budgets.

– Capital budgets should also reflect the funding of debt service...this is the amount of capital avoided as a result of the project.

– Projects that take a comprehensive approach create a consistent funding expectation and help mitigate unexpected spikes in funding requirements.

Critical question: How will you fund your project?


15

Critical question: How will your project be delivered?

• Though capital remains the same, performance can be guaranteed by providers

• Providers compensated based upon success in achieving goals

• Contracts typically stipulate how incentives will be paid out for elevated performance or penalties assessed for missed targets.

Performance criteria examples

• Reliability (uptime, # of unplanned incidents)

• Efficiency (kW/Ton, mcf/BTU, etc.)

• Operating status (state of readiness, availability)

• Field conditions (clean towers, condensers, air intake)

• Output (BTUs, cooling tons, cfm, gpm)

• Capacity (peak output matched to load)

• Quality (power quality, load factors, IAQ)

• Rate of economic return (sustained energy efficiency)The Aberdeen Group, February 2007


16

Quick Return (0-3 yr payback) Intermediate (3-8 yr payback) Long-term

Retrofit lighting Install new building automation system

Replace high efficiency equipment (major systems chiller/boilers)

Update existing building automation systems

Improve HVAC systems (CV to VAV)

Building envelope improvements

Conduct retro/re-commissioning

Implement water conservation Apply renewable technologies

Make behavioral changes (Turn lights off, program systems)

Use fans and motors (VFDs, high efficiency change outs)

Apply on site/distributive power generation

Explore utility procurement options

Apply load shifting technology (ice storage)

Implement comprehensive maintenance and repair strategies

Critical question: What changes can be made based upon financial objectives?

• Purpose of the building determines the investment strategy

• If a lifecycle return / financial approach is taken, owners can enjoy the benefits of everything listed on the chart = significant energy, operating, environmental and business benefits


17

Breaking a myth: We need to wait for new technology or need emerging technology to improve energy efficiency


DISTRICT COOLING/HEATING SYSTEM

• Multiple buildings/ campus/ industrial

• Higher overall system efficiency

• Beautify city outlook

GEOTHERMAL HEAT PUMP SYSTEM

• Residential and commercial buildings

• Pump energy from underground

• Enjoy energy saving all seasons

THERMAL STORAGE SYSTEMS

• Large city with high peak demand

• Shift demand from daytime to night

• Reduce blackout during hot summer

Proven technologies available for all buildings types meeting various payback requirements

HIGH EFFICIENCY CHILLED WATER SYSTEMS

• Large commercial/industrial buildings

• Generate chilled water for cooling

• Reduce energy consumption by half

ENERGY RECOVERY

• Less energy to cool fresh air brought into the building in summer

• Less energy to pre-heat cold fresh air from outside in winter

• Free energy to provide hot water

INDOOR AIR QUALITY

• Proper ventilation with minimum energy

• Temperature and humidity control

• Filtration options ensure good IAQ

18

Critical question: What costs need to be considered when financially modeling an energy project?

Total cost of ownership approach

• All of these factors need to be addressed at some point

• Modeling the building as a long-term asset

– Offers greater financial transparency

– Will ultimately save energy and operating dollars throughout the life of the asset

Hidden Costs

Visible Costs

Price/Time

CFC IssuesEnergy Costs Engineering

Charges

Equipment Shutdown

Costs

Maintenance Costs

Legal CostsSecurity Costs

Construction Change Orders

Being Green Costs Performance

Problems

Start-up Delays

Indoor Air Quality

Fire Protection Cost


19

Critical question: How do owners ensure ongoing performance of energy projects?

Proactive maintenance strategy

• Ensure that desired outcomes as assured throughout the life of the asset

• Deliver an agreement that is cost-beneficial to Trane customers and provides value-driven service

• Doing so will avoid capital, energy and repair costs

• Return on investment: 10 times

• Reduction in maintenance costs: 25% to 30%

• Elimination of breakdowns: 70% to 75%

• Reduction in downtime: 35% to 45%

• Increase in production: 20% to 25%.

--- FEMP Guide, page 5.4


20

Breaking a myth: Maintenance is more than just “break / fix” – being proactive is a conscious strategy


21

Critical question: What is the financial model (example)?

Construction CustomerPro Forma

Cash PurchaseYes Yes 14-Apr-09

Yes Yes0 1 2 3 4 5 6 7

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalsEnergy Savings - Gas 300,000 600,000 630,000 661,500 694,575 729,304 765,769 804,057 5,185,205Energy Savings - Electric 125,000 250,000 260,000 270,400 281,216 292,465 304,163 316,330 2,099,574Operational Savings 300,000 309,000 318,270 327,818 337,653 347,782 358,216 2,298,739Capital Cost Avoidance 250,000 250,000 250,000Utility Rebate 500,000 500,000 500,000Total Annual Savings 425,000 1,650,000 1,449,000 1,250,170 1,303,609 1,359,421 1,417,714 1,478,603 10,333,517

Installation Costs 5,000,000 5,000,000Maintenance Costs 25,000 65,000 66,950 68,959 71,027 73,158 75,353 445,447Central Plant Operations 75,000 78,750 82,688 86,822 91,163 95,721 100,507 610,651Total Annual Costs 5,000,000 100,000 143,750 149,638 155,780 162,190 168,879 175,860 6,056,097

Annual Net Cash Flow (4,575,000) 1,550,000 1,305,250 1,100,533 1,147,829 1,197,231 1,248,835 1,302,743 4,277,420

Cumulative Cash Flow (4,575,000) (3,025,000) (1,719,750) (619,218) 528,611 1,725,842 2,974,677 4,277,4200

(4,575,000) 1,550,000 1,305,250 1,100,533 1,147,829 1,197,231 1,248,835 1,302,743(4,575,000) (3,025,000) (1,719,750) (619,218) 528,611 1,725,842 2,974,677 4,277,420

1.00 1.00 1.00 0.54 0.00 0.00 0.00Assumptions Net Cash Flow 4,277,420 Financing Institution: Fleet

NPV @ 15% 664,840 Amount Financed: 4,000,000

Payback Period 3.5 Years Interest Rate: 8.50%


22

Critical question: What is the financial model (example)?

Model offers comprehensive view• Driving factors, funding and budget allocations, capital expenses, total cost of

ownership and financial return • Analyzes cash flow over project life

Model incorporates more ECMs• If owner considers only energy savings in financial decision

– Project would yield a 11.7 year payback • If owner considers energy, operating cost, maintenance and asset replacement

cost savings over the life of the project– Project yields a 3 year payback and it generates positive cash flow


23

• Return calculations dependent on benefits received beyond initial payback

• Guaranteed returns support analysis beyond simple payback calculations and provide financial basis for long term investment in sustainability

• Simple payback calculations help assess risk

• Guaranteed savings minimize risk of evaluating longer term projects

Return on Investment

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

$1,000 Invest

$10,000 Invest

$100,000 Invest

$1,000 Invest, 30% Savings, 16.7% IRR$10,000 Invest, 20% Savings, 16.9% IRR$100,000 Invest, 16% Savings, 17.0% IRR

Critical statement: Different payback, same return on investment


24

How To Get Started: And Hold the Gains

Make efficiency a c-level imperative

Create a shared vision and create a mindset of “high performance buildings” rather than “overhead”

Make the business case to understand appetite for risk, payback and

realistic measures / actions that can be taken

Make decisions and initiate your project

Integrate energy efficiency into business strategies, build employee engagement

Measure progress to ensure continuous improvement

25

Proving the Model: Case Examples of Large Energy Projects

26

Situation:• Campus-style 102.200-sq-meter (1,1 million-sq-ft) heavy industrial manufacturing plant • Aging infrastructure with low energy efficiency and reliability and high operating and maintenance costs

– Dramatic downturn in product sales – While experiencing 70+% increase in energy costs

• Corporate goal of 15% reduction in energy cost by 2013

Approach:• Factors driving improvements:

– Need to stay competitive– Reduce maintenance and operating costs – Add asset value

Energy Project Makes Manufacturing Facility More Competitive

27

Identifying investment benefits:

2. ECM Selection 1. Assessment 3. Payback

Analyzed HVAC systems, compressed air and lighting for efficiency, capacity and effective operating and maintenance practices. Evaluated remote monitoring application potential.

Lighting retrofits, building automation upgrades and hot water boiler

Selected ECMs offer quick return

$2.1 million project investment in new air compressors, hot water boiler, lighting retrofit and remote monitoring

Results:

• Two-year payback with projected $1.13 million in annual energy savings + $275,000 in annual labor cost reduction

• Energy reduction of 11.5 MKWH equivalent to CO2 emissions from 11 tanker truckloads

• On track to achieve mandated 15% reduction by 2013

• Safer, more reliable and more energy-efficient plant operations

Energy Project Makes Manufacturing Facility More Competitive

28

Infrastructure Improvements Generate Increased Production

Situation:• Single-story 32.500 square-meter (350.000 square-foot) manufacturing

facility with 1,100 employees • Needed stable ambient environment for optimized consumer product

manufacturing• Outdated, unreliable infrastructure systems


– Need to stay competitive, improve indoor environment• Guaranteed performance of the upgraded system for one year, offering

on call maintenance support if ambient conditions were not met‑

• Assurance of improved performance and plant reliability, with available on-call support, convinced management to complete the upgrades

29


2. ECM Selection1. Assessment 3. PaybackAnalyzed chiller and air handling systems and the pneumatic building automation system (BAS) for reliability, efficiency, capacity and performance

High-efficiency chiller systems with variable flow water pumps, upgraded air handling systems and centralized BAS --

Quick return: BAS

Solid return: Chiller and air handling systems

Results:

• Customer able to more effectively compete

– Increased production in improved environment

– Maintained near-perfect system performance

– Completed needed adjustments within hours

– Project finished on time and on budget with minimal production downtime

$8 million system upgrade

Infrastructure Improvements Generate Increased Production

30

Five Star Hotel Increases Comfort and Efficiency

Situation:• Five-star Le Meridian Hotel on three-acre complex• High operating expenses and service costs• Outdated systems lacking centralized control• Noise levels compromising guest and employee comfort and

government regulations

Approach:• Factors driving improvements: increase competitiveness, reduce

operating costs, add asset value • Identifying investment benefits:

2. ECM Selection1. Assessment 3. PaybackEvaluated efficiency, capacity, noise, safety and maintenance

New chiller systems and a centralized (BAS)

Selected ECMs offer solid return

31

Deliverables:

• $375K project with reduction of operating costs, increasing reliability with a 3.5 year payback – included systems and remote monitoring

Results:

• Significant reliability increase and 30% improvement in chiller plant energy efficiency

• BAS achieved additional 6-8% energy savings

• Project completed in tight timeframe with minimal guest inconvenience

• Ongoing maintenance contract reduced service costs 30%

• Noise level reduction of 40% improved guest and employee comfort and brought systems to code

Five Star Hotel Increases Comfort and Efficiency

32

Hotel Hosts Upgrades for Increased Reliability

Situation:• 20-story hotel with 518 guest rooms, casino and meeting and exhibition • Frequent breakdowns, reduced efficiency and high operating costs from outdated systems• Difficult-to-access plant room and decentralized system control• Infrastructure systems generating noise complaints from guests


– Increase competitiveness– Reduce operating costs – Increase asset value – Environmental responsibility in compliance with 2010 mandate

33


2. EMC Selection1. Assessment 3. Payback

Evaluated central plant comfort systems for performance, energy consumption, operational efficiencies and maintenance access

High-efficiency chiller systems with variable flow water pumps to reduce energy use and a centralized BAS

Selected ECMs offer medium timed return

Delivered $2 million integrated systems solution with projected six year paybackResults:

• 15% improvement in overall building energy efficiency (30% system improvement)

• Significantly reduced carbon emissions to meet 2010 mandates• Increased comfort by reducing system noise by 25dbA• Reduced system breakdowns to near zero (reduction in maintenance

costs) • Completed project off-season without disrupting hotel operations

Hotel Hosts Upgrades for Increased Reliability

34

Municipality Conserves Resources, Increases ComfortSituation:

• Master-planned city of 36,000 residents

• Aging infrastructure, high energy consumption and mechanical system and comfort issues in city buildings

Approach:

• Factors driving improvements: Improve infrastructure, reduce operating costs, improve comfort, be environmentally and socially responsible

• Identifying investment benefits:

2. ECM Selection1. Assessment 3. PaybackAnalyzed HVAC and lighting efficiency, and capacity and effectiveness of maintenance practices

High-efficiency HVAC, lighting, water saving fixtures, BAS, building envelope and insulation

Medium return: Water, lighting, building envelope and insulation

Life cycle return: BAS and HVAC

$1.3 million performance contracting with 11.5 year payback including annual savings of $120,000 based on today’s utility rates

35

Results:

• No capital funding increase to make significant physical improvements

• Project guaranteed energy savings of 877,266 kWh per year, equivalent to recycling 215 tonnes of waste

• First full year following renovations showed 10% energy savings above predicted savings

• Project has also saved 18,448 therms of natural gas and 1.2 million gallons of water

• Comfort and maintenance issues resolved

Municipality Conserves Resources, Increases Comfort

36

Bottom Line Business Case

Documents

WEEC: Future of Performance Contracting 1 Proven Strategies for Making Existing Buildings Energy and Operationally Efficient REMOVING OBSTACLES TO ENERGY