Building Energy Budgets You Can Believe, Part 1

May 8, 2018 Chad Holder

Building Energy Budgets You Can Believe, Pt. 1

For those in the commercial real estate (CRE) space, it’s already time to look ahead to 2019 and begin the energy budgeting process. And, because energy is a significant – but unpredictable – cost driver, a property manager may face an uphill battle during this process. Most CRE professionals agree the three key characteristics of their annual energy budgets are budgeting accuracy, accountability and adaptability.

Ben Mason and Ben Manna, two of Schneider Electric’s client managers and energy experts in CRE, chatted recently on the budgeting best practices that address each of these characteristics.

Here’s part I of their two-part conversation:

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Budgeting Accuracy

Ben Mason:
To kick us off, in your mind, what makes a successful budget?

Ben Manna:how to achieve budgeting accuracy in the CRE industry
Accuracy is the number one thing. In real estate, the old saying goes, ‘It’s location, location, location.’ The same is true here, except it’s all about budgeting accuracy. I think that’s what all property managers are looking for. They need their energy budget projections to be reliable so that they can plan their entire fiscal year – and energy is the #2 or #3 item on their list of expenses.

They want to proactively charge their tenants, or let them know what to expect so the tenants can plan accordingly, as well.

Mason:
So, the accuracy of the budget – or the lack of budgeting accuracy – can have a real domino effect for property managers and tenants, then?

Manna:
That’s absolutely right.

Gathering Market Intelligence

Mason:
How critical is market intelligence in driving budgeting accuracy?

Manna:
Very. The ability to interpret the different impacts of invoice information in combination with what’s going on in the marketplace is important… especially for clients that have a lot of sites in a lot of different areas. With 50 U.S. states, any or all of them might be positioning for rate changes at any given time. Maybe more than that at the utility level.

Mason:
Yeah, I completely agree on rates. And that’s just one aspect, right?

Manna:
Certainly. There are also the seasonal trends of a given site’s load. If you have a site in California, for instance, maybe it’s not really affected by winter, but it might have some summer peaking load. Meanwhile, you have sites in Chicago or New York where January alone blew up your budget because it was so cold. You’ve got to understand each of those markets because it’s not only the rates that affect your budget, it’s the weather trends as well.

Normalizing Weather Data

Mason:
That’s a great point on understanding the affect of weather on energy budgets. If you can’t forecast the weather – especially with the unpredictability of January – then how do you create a budget that’s still accurate come February?

Manna:
Well, for starters, your budget can learn from itself, so to speak. You want to make sure that January 2018 doesn’t affect the 2019 budget. And for weather anomalies, you can achieve greater certainty within your budgets through weather normalization.

Mason:
So, in other words, you need to be able to look back in time and correlate usage with weather moving forward?

Manna:
That’s right. Let’s say you have a colder than normal winter, then the next year you’re going to want to ramp down those kilowatt hours.

Minimizing Budget Variances

Mason:
We talked earlier about the importance of minimizing variances. Is there a ‘magic number’ that comes to mind for most clients?

Manna:
That all depends on the tolerances of the property’s ownership. Some ownership groups are fine with a SWAG (Scientific Wild-*** Guess) at their budget. Some of them really want to drive to the local percent variance, or something like that. Sometimes a good rule of thumb is plus or minus 5%. But every group may be different. But, to quote our friend Ron Burgundy, it’s kind of a big deal. That’s why it’s a discussion point that should occur early on in the process.

Customizing Budgets by Property

Mason:
Ok, last question: do you think it’s wise – or even possible – to develop a budget tailored to each property?

Manna:
Yes, absolutely. And it’s particularly wise to take into account each building’s load profile and rate class. It’s not a one size fits all approach. You’re not going to get to or below that 5% we talked about if you’re just taking one swipe across the board.

Mason:
Or looking at last year’s actuals and adding a flat percentage. I’ve got some property managers that have told me, ‘Oh, I just look at last year and add 3%.’

Manna:
That approach won’t get you anywhere, and it’s exactly opposite of the pursuit of accuracy. For every percent that you’re adding or removing, you should be able to attribute that change to some specific variable.

***

Read part two of Ben and Ben’s conversation on accountability and adaptability.

If you have any questions on energy budget development and how to drive greater accuracy in your 2019 budget, drop them a note.

 

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