Policy Matters: The Johnson Controls Study and Energy Efficiency ROI.
Johnson Controls released its study results yesterday from the Third Annual Efficiency Indicator Survey, finding that business leaders are "increasingly aware of the need for energy efficiency," (71 percent said they are paying closer attention this year than last) and understand the potential for efficiency to reduce operating costs, (58% called it a top priority) but... according to C. David Myers, president of Johnson Controls Building Efficiency division, "Economic and regulatory uncertainty, however, are inhibiting organizations from investing in proactive measures."
A closer look at the results reveals that business leaders have a very specific reluctance to invest in energy efficiency despite recognizing the inherent benefits and importance.
When asked about the barriers to capture potential energy savings, limited capital availability for investments (42 percent) and unattractive payback (21 percent) were cited. Nearly 50 percent of executives who oversee energy efficiency investments expect a payback period that is less than three years. This is a striking comment about our mindset on returns. A staggering 70% of the electricity used in the United States is consumed by buildings, which contribute an impressive 48% of carbon emissions. Clearly we are in need of a sharper, more encompassing, rubric under which to examine return on investment. While the emphasis on speedy, cash-focused return on investment is understandable when the only consideration is short-term energy costs, that equation drops out the true cost of carbon, and presumably the future escalation of energy prices.
As Marc Rosenbaum of EnergySmiths argues compellingly in his article, "Cash-flow v. Payback in New Home Construction," energy efficiency improvements are best considered in the context of future energy costs, indoor air quality, and long term comfort in buildings. As Rosenbaum demonstrates, failure to recognize the full range of economic and health factors at the time decisions are made can result in long-term costs, and dissatisfaction for building occupants. While somewhat nebulous, these benefits are readily quantifiable once corporations examine escalating healthcare costs. In the broader economic terms, creating more efficient buildings not only reduces an economic drain, it also creates a boon. Reducing energy usage limits the need to drill, to build more nuclear plants or burn more coal. It is, as RESNET CEO Steve Baden recently said, "available in large amounts everywhere."
This is where the role of incentives and stimulus become key - to carry us over the short-sighted gap between upfront investment and long term benefits. While most if not all energy efficiency retrofits will bear better health and financial returns than many types of investment we might make, it's clearly time for more holistic math on how we calculate that return (in the economist-speak of my academic training--capturing the externalities).