Many of the largest value-creating opportunities in the built environment are found after initial design and construction. First costs (original design and construction) often comprise less than one-third of the total life cycle costs of a building, excluding financing. Utilities and operations, maintenance and repairs make up much of the remaining “hard” life cycle costs. “Soft” costs or benefits of building operations, such as occupant productivity, health, safety and well-being, are significant, although more difficult to measure and therefore often ignored.
Services and technologies that reduce building operating costs (such as energy, water, operating and maintenance savings) and/or improve occupant productivity and well-being (e.g., better lighting, cleaner air, power quality and reliability, ease of operations, etc.) offer immense value-creation opportunities, as shown in Exhibit 1.
FMI Capital Advisors’ Energy Services & Cleantech group focuses on merger and acquisition (M&A) and capital formation transactions with companies that improve long-term building operating performance. FMI’s staff has been performing transactions in this sector for 17 years. Some of the core lessons we have learned that stand the test of time are set forth below.
LESSON 1: ENERGY EFFICIENCY IS THE FOUNDATION
Buildings consume more than $350 billion per year in energy, including about 70% of the electricity produced in the U.S. and 40% of the natural gas used. The DOE’s Energy Information Agency estimates that 30% of energy used in
commercial buildings is wasted.
Opportunities for energy and building efficiency are abundant, high-value-add to building owners and profitable to service providers. The energy efficiency marketplace in North America is large. We currently estimate that the building efficiency market is approximately $20 billion and growing quickly. We expect this market to be more than $30 billion within the next five years (see Exhibit 2).
Even with promise of cheap domestic natural gas for the foreseeable future, energy efficiency remains the lowest cost “fuel” source, or the “first fuel” as some call it (see Exhibit 3).
LESSON 2: OWN THE CLIENT RELATIONSHIP AND DELIVER A TOTAL SOLUTION
Solution sets constantly change. Technologies, cost structures, incentives, financing options and other solution components are always in flux. Likewise, client needs change over time. Understanding your clients’ needs, being their trusted advisor, and designing and delivering optimal solutions is a winning strategy.
A client’s initial needs for energy services or building operations services vary, but many of the services interrelate (see Exhibit 4). Delivering value in one particular area often leads to other building improvement opportunities.
Furthermore, clients often value properly integrated and optimized solutions, including financing and guaranteed performance (see Exhibit 5). Being in a position to “own” the client relationship and deliver a turnkey solution, even if many of the solution components are outsourced, can allow a firm to capture an attractive share of the profits in the value chain.
LESSON 3: PEOPLE AND TECHNOLOGY MATTER.
We see the continued convergence of historically separate services as a theme running through many segments we follow in this market. Building owners and operators want well-functioning and efficient buildings, not a complex maze of separated energy and building services. A key area of convergence is the pairing of on-the-ground operations and maintenance (people) with the more sophisticated energy and building technical services (technology). The mid- to long-term vision that buildings increasingly will be monitored, maintained and optimized more efficiently and effectively via software systems, with fewer staff on-site or on-call, makes sense. Nonetheless, in the short- to midterm, we expect to continue to see businesses leveraging on-site or on-call operations and maintenance staff, while further integrating sophisticated energy and building technologies.
LESSON 4: ENERGY WILL BECOME MORE DISTRIBUTED.
Power production continues to move towards distributed generation, including renewables and traditional generation. A parallel can be drawn from the computing industry — as the price of computing power declined drastically and the minimum efficient size of a computer decreased, computational power moved closer to the user. Although the trend is much slower (so far) in energy, the underlying economic forces remain the same.
There is no reason to believe distributed power and energy storage will not continue to become cheaper, more reliable, smaller and more abundant, with better connectivity to the larger power grid. We view the question as one of rate, not whether. We do not know how rapid the movement to distributed power will be, playing out over several decades or at a much quicker pace (there may be breakthroughs that greatly accelerate this trend).
Power quality and reliability increasingly are important for energy users and goes hand in hand with distributed generation. The need for power reliability has been displayed prominently in recent years, with several devastating storms in the U.S. leaving millions stranded without power. This lack of power availability is not an option for some mission-critical users, such as hospitals, data centers and military applications. Furthermore, these high-tech facilities are extremely sensitive to power quality.
As power generation becomes more distributed and the importance of power quality and reliability increases, buildings and/or groups of buildings will become more active components of the larger energy grid.
Throughout FMI’s 60-year history, the technologies and services available to optimize long-term building performance have expanded greatly. Nonetheless, there remains significant opportunity to create long-term value for your clients by lowering energy consumption and operating costs, enhancing building performance and improving occupant safety, comfort and well-being.
Tim Huckaby is a managing director with FMI Capital Advisors, Inc. He can be reached at 303.398.7265 or via email at firstname.lastname@example.org. Russell Clarke is a research analyst with FMI Capital Advisors, Inc. He can be reached at 303.398.7249 or via email at email@example.com.