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Our energy budgeting survey shows an increased focus on cost control in the organization

Gridium’s recent survey of energy budgeting practices yields some insights about how building professionals approach and manage energy budgets.

First, energy budgeting is especially prevalent in commercial real estate, where over 70% of respondents prepare an explicit annual energy budget, compared to 50% of owner-occupied organizations. If an energy budget is not prepared, the associated expenses are often budgeted with operational costs, leaving just 9% of organizations that have no energy budget whatsoever.

Second, energy budgets touch a large number of people and functions with organizations. The average organization has more than 3 people interacting with a budget either in preparation, approval or tracking. Budgeting is a solo task for only 5% of respondents.

Almost all buildings use a spreadsheet program like Microsoft Excel to prepare energy budgets, usually starting from a template from a prior year or another building. Two methods are most commonly used as a starting point:

Straightline projection
The simplest budgeting technique is simply to copy over the prior year’s figures, often with a percentage increase applied to account for anticipated changes in utility rates. Property managers monitor utility rate announcements to keep abreast of tariff changes. This method is used in about half of buildings.

However numbers are adjusted, straightline year-on-year projections make the implicit assumption that weather and occupancy will stay exactly the same from one year to the next, and do not attempt to adjust for any other factors that affect energy use.

Average of trailing years
A slightly more complex method for forecasting energy costs is to project forward based on an average of the previous several years, to help smooth out some year-on-year fluctuations. This method is used in about a third of buildings.

There are situations in which this budgeting method will actually be worse than a straightline projection; if the building shows a consistent long-term trend in energy use, then the most recent year may be the most accurate guide to the current year. However, in most cases, a multiyear average should smooth away some of the variability due to weather. Such budgets will still only be approximations, but they will be less susceptible to major upside or downside variance due to a single outlier year.

The remainder of the buildings use custom forecasting methods, often investing in custom models and heuristics to try and account for variation.

Adjusting projections
Almost all buildings apply budget adjustments based on a variety of factors, as shown in the figure below. Interestingly, the largest sources of variance — weather and calendar effects — are among the least commonly used for planning. (Calendar effects refer to the fact that different billing periods cover different numbers of workdays, driving large variances in energy use.)

Summary chart of the causes of monthly electric utility bill variances

Variance analysis
A whopping 83% of buildings in our survey report having to perform monthly variance analysis, a practice again slightly more prevalent in multi-tenant buildings than in owner-occupied. 11% of teams are only called to explain major variances and 6% get off scot-free with the budget remaining largely untouched until the next budgeting cycle.

Teams vary in the sophistication of their variance analysis. The go-to explanation is weather. In most cases, it’s enough to point to recent high temperatures. After weather, property managers will generally turn to more qualitative explanations for budget variance: recent capital upgrades, major occupancy changes, a faulty piece of equipment, or a rate change.

These explanations aren’t necessarily wrong. Facility engineers know their buildings well, and often they have a good grasp of the major drivers of energy use. Very often, though, these explanations are incomplete. Even if weather really does account for half of recent variance, that leaves fully half that might be the result of building drift or other operational causes. Worse, conflicting variances can confound analysis, as when the results of an energy efficiency project are obscured by an unusually hot summer, leading to unnecessary time spent by all participants.

Finally, the importance of energy budgeting is not lost on building professionals. 79% of respondents agree with the statement “Tenants are more cost-conscious than in the past” and 87% agree with the statement “Our organization is more concerned with energy costs than in the past.”

About Tom Arnold

Tom Arnold is co-founder and CEO of Gridium. Prior to Gridium, Tom Arnold was the Vice President of Energy Efficiency at EnerNOC, and cofounder at TerraPass. Tom has an MBA from the Wharton School of Business at the University of Pennsylvania and a BA in Economics from Dartmouth College. When he isn't thinking about the future of buildings, he enjoys riding his bike and chasing after his two daughters.

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