How To Make Smart Investments in Energy Efficiency

By Jon Hudson, Montana State University Extension Pollution Prevention Program 

With energy costs in Montana predicted to skyrocket in the next couple years, now is the time to invest in energy conservation. But where should you start? How should you prioritize energy conservation projects? And, what are the best strategies for making sure projects that will save you thousands of dollars over the long term don't break the bank in the short term? This article is the first of a two part series that will help you answer these key questions. 

The Bottom Line

Electricity and other energy costs account for a substantial percentage of the operating expenses for most hotels and motels. Correspondingly, improving energy efficiency can produce big savings. In recent years there have been tremendous technological advances in building systems and controls. As a result, you can often get off-the-shelf building technologies that provide higher comfort for significantly less than you are currently spending. You can probably cut your energy costs anywhere from 10% to 50% with simple low-cost strategies combined with capital investments that in many cases will pay back in three years or less. 

Start With Simple No-Cost Strategies

The best way to start is by investing a little time to find effective no-cost and low-cost conservation strategies. Such strategies can include: turning up or turning back thermostats in unoccupied spaces; filling south and west facing rooms last in the summer and first in the winter; turning off lights and office equipment when not in use; weather stripping and caulking around windows and doors; finding and fixing any hot water leaks; ensuring that hot water running to rooms isn't more than 120-130 F; ensuring that radiators, air intakes and vents are not obstructed; and sticking to a thorough maintenance schedule for all equipment to ensure that it runs as efficiently as possible. 

Prioritize Before Investing

Before investing capital in equipment and building upgrades it's time to prioritize. Start by analyzing your energy bills for the last couple years to identify your areas of highest energy use. This analysis may point you toward specific areas to focus on such as air conditioning or your heating system. 

An effective strategy for maximizing your savings is the five-stage approach recommended by EPA's voluntary, non-regulatory ENERGY STAR program. The concept behind this approach is to start with low-cost and rapid-payback steps to reduce your building's demand for heating and cooling, before making more capital-intensive upgrades to the equipment that supplies heating and cooling. Major upgrades requiring substantial capital investment and payback periods longer than three years should be done last, once you are seeing savings from the smaller projects you have already completed. 

The first three stages EPA recommends are Lighting, Building Tune-up, and Load Reductions. This work brings down the loads as much as possible, so that when upgrading the Air and Water Distribution Systems (stage 4), and Plant Upgrades (stage 5) you are modifying equipment to meet the lower loads. 

Stage 1, upgrade your indoor lighting by installing compact fluorescent lamps which last 10,000 hours, use a third of the electricity of comparable 2000-hour incandescent bulbs, and are now available in a wide variety of styles; light emitting diode (LED) exit signs which last up to 220,000 hours, use only .6 watts, and cost approximately $30 to retrofit; T-8 fluorescent tubes with electronic ballasts which are approximately 40% more efficient than older T-12 tubes and magnetic ballasts; and occupancy sensors in spaces that are used only occasionally throughout the day. These lighting technologies have fast payback because they use a fraction of the energy of incandescent lights and run much cooler, lowering your air conditioning requirements. Lighting upgrades can also improve lighting quality, making your facility more attractive. Also consider upgrading your outdoor lighting with metal halide, high or low-pressure sodium, or low-temperature compact fluorescent lights. 

Stage 2, conduct a "building tune up" to get all your existing equipment functioning as efficiently as possible. Adjust your heating and cooling systems and repair any malfunctioning equipment. 

Stage 3, reduce heating and cooling loads. This stage could include insulating hot water heaters and hot water pipe runs, installing low-flow showerheads and faucet aerators to substantially reduce hot water use, installing window films or awnings, upgrading roof insulation or adding a radiant barrier under your roof, replacing old office equipment with new ENERGY STAR labeled equipment, or adding trees and vines to your landscaping to block direct sunlight. 

Stage 4, upgrade your heating and cooling distribution system. This could include installing variable-speed fans in a centralized system, or installing centrally controlled programmable thermostats if your facility doesn't have a centralized heating and cooling distribution system. 

Stage 5, upgrade your heating and cooling equipment. Examples could include purchasing new more efficient air conditioners or chillers, or a new boiler, or replacing the burners in your boiler. These upgrades should generally be done last, because they require the greatest investment of capital. Also, depending on how successfully you have reduced heating and cooling loads in stages 1-3, you may now be able to downsize your heating and cooling equipment. 

Finally, always make energy efficiency a high priority when remodeling. This is an excellent opportunity to make major improvements that might not be economically feasible by themselves. 

Get Help From Experts: 

Don't try to figure it all out yourself. You hire a professional accountant to do your taxes. For all the same reasons, you should consider working with professionals when planning and implementing energy upgrades. There are lots of technical assistance providers and building professionals who can give you good advice to help you make smart decisions. 

If your operation is small enough, and your electricity is provided by the Northwestern Energy, a great place to start is with a free "Commercial Energy Appraisal" (call NWE at 1-800-823-5995). Unfortunately, most hotels and motels don't qualify, because they exceed the "small commercial customer" threshold of an average peak demand of 50 kW or less. 

The MSU Extension Pollution Prevention Program also offers no-cost, confidential, non-regulatory site assessments to help you identify energy conservation and other waste reduction opportunities at your facility. Montana Pollution Prevention Program staff are also available to help you research specific questions related to energy conservation technologies and strategies (call 1-888-msu-mtp2), or e-mail Barb Allen. 

EPA's ENERGY STAR program has a toll free hot line (1-888-STAR-YES) and small business and hospitality industry websites (Small business: http://www.epa.gov/, Hospitality Industry:http://yosemite1.epa.gov/estar/
business.nsf/webmenus/Hospitality), with a wealth of information on finding energy-efficient equipment, service providers, financing for energy upgrades and much more. Much of the information presented in this article is from Putting Energy Into Profits, a 100-page Energy Star small business guide available in PDF format on the ENERGY STAR website. 

The Montana Department of Environmental Quality (DEQ) also maintains two energy conservation websites (Buildings: http://www.deq.state.mt.us/ppa/tfa/energy/
buildings.htm, General: http://www.deq.state.mt.us/press/Energylinkst.htm) with links and contact information for many resources and service providers available in Montana. 

Another excellent source of good information is a reputable contractor or consultant who specializes in lighting, air conditioning, insulation or any other area you wish to focus on. Contractors may be willing to do free walk-through audits to identify energy-upgrade opportunities. For large projects, it can be well worth the investment to hire a consultant to help plan the project, prepare bid specifications, and oversee the work.

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Making Energy Efficiency Upgrades Affordable

Originally Published in the Montana Inn Keepers Association Newsletter - November 2001

Investing in energy-efficient upgrades makes great business sense, especially if you take advantage of traditional and nontraditional financial resources available to provide you with a positive cash flow while you pay for your upgrade projects. 

Most energy-efficient equipment and building materials last 7 to 20 years, and pay for themselves long before the end of their lifespan. Thus, they provide long-term returns well beyond the payback period. And if these savings are reinvested, they will compound over time. Most lodging businesses have limited capital available, and energy efficiency may be just one of many investment opportunities promising to increase your profits. But how many of those other investments can promise significant, long-term, low-risk, easily measured returns? 

For inexpensive projects, the best way to keep payback time low and return on investment high is to fund your upgrades using your own internal funds. However, larger projects may not be affordable without careful financial planning using one or a combination of the mechanisms described below. 

Remember, each month or year you wait to invest in energy efficiency, the savings and profits are lost forever. 

Conventional Loans:

Whether you borrow from a bank or from an equipment supplier, try to structure a conventional loan so that you maintain a positive cash flow while making payments. Before committing to a project, ask the company you are considering purchasing from or contracting with to help you calculate your projected savings. Then arrange a loan payback period long enough to ensure that your monthly payments will be less than your monthly savings. 

For a comprehensive listing of lenders in Montana who specialize in energy-related loans, the ENERGY STAR web site provides an on-line PDF. In addition, the Small Business Administration (SBA) 7A loan guaranty program backs loans for energy-efficiency projects. For more information call 1-800-8-ASK-SBA or visit their website: http://www.sba.gov 

Operating Leases:

Equipment suppliers and manufacturers may be willing to negotiate an operating lease contract, in which you lease equipment with the option to extend the lease or buy the equipment for fair market value when the contract ends. Ideally, monthly payments will be equal to, or less than monthly energy savings. An advantage of this financing mechanism is that the costs of leasing the equipment show up on your books as operating costs rather than debt. 

Capital Leases:

Equipment suppliers and manufacturers may also be willing to negotiate a capital lease or lease-purchase contract, in which you pay for equipment in equal monthly installments, but you do not own it until the financing term is over. Though your payments will be higher than with an operating lease, an advantage of this mechanism is that you can claim tax benefits for equipment depreciation. 

USBC Funds:

The electricity deregulation legislation passed by the 1997 Montana Legislature requires that energy bills in Montana include a "Universal Systems Benefits Charge" (USBC). Funds collected through this charge are available for a wide range of energy efficiency and conservation projects through energy providers in Montana. Following are some of the USBC-funded programs that may be available for your business. 

NorthWestern Energy "Efficiency Plus" Programs:

NorthWestern Energy's Efficiency Plus program offers energy upgrade funding mechanisms for Montana businesses. For details about these programs call 1-800-823-5995 or visit the Efficiency Plus website. 

Matching Funds Program:

NorthWestern Energy's Efficiency Plus Business Partners Program makes matching funds available for conservation projects and studies. Details about this program and a copy of the RFP are available on the Efficiency Plus website, or by e-mailing [email protected]. 

Commercial Lighting Rebate Program:

Any lighting upgrades you undertake may qualify under this program, which can substantially reduce your costs. Visit the Efficiency Plus website for more information. 

Energy West in Great Falls:

If your facility is located in Great Falls and served by Energy West, you can contact your local Wells Fargo Bank to apply for a loan of up to $2000 at 0% interest, or $2000-$5000 at a low 4-7% rate with a 48 month payback period. Projects and purchases that qualify for these loans include weatherization projects, and purchase of many kinds of new energy-efficient equipment such as boilers and furnaces. Call Energy West at 800-570-5688 to request more information about this program 

Electric Cooperatives:

If your facility is served by one of Montana's 26 electric cooperatives be sure to contact them to find out what financial incentives they may offer to businesses that invest in energy efficiency. Many electric coops have programs that include benefits such as free energy audits, or rebates on investments in new energy efficient equipment such as hot water heaters. 

Performance Contracts:

If you are faced with tens of thousands of dollars in costs for a major project or a comprehensive facility-wide upgrade involving multiple projects, the best financing strategy may be to negotiate a performance contract. Performance contracts guarantee that you always maintain a positive cash flow. While they are generally fairly complicated, they are very low risk and eliminate most up-front costs because the savings are guaranteed in the contract, and all project costs are paid for from the savings, usually over a 5 to 10 year period. However, you receive a lower level of cost savings at first. Several big Energy Services Companies (ESCO) that operate nationwide may be willing to negotiate a performance contract for investments of $100,000 or more. Energy West Solutions (800-757-9522) is a new Montana company that will negotiate performance contracts for considerably smaller investments as well as for larger projects. To locate ESCOs that operate in Montana, call Georgia Brensdal at the Montana Department of Environmental Quality 444-6750. For more information on performance contracts, visit the Energy Services Coalition website. 

Reinvest Your Savings:

Whenever you implement energy conservation strategies and upgrades, calculate your savings, then reinvest those savings in further upgrades. Following the integrated five-stage approach to building upgrades described in Part 1, makes sense not only for technical reasons, but also because you can use the savings from each stage to finance the next stage. 

Montana Tax Incentives:
Small businesses that invest in any form of energy conservation upgrade are eligible to take an income tax deduction equal to 5% of their capital investment up to $300. Call Paul Tschida at the Montana Department of Environmental Quality for more information (406-444-6864). 

Federal Tax Incentives:

The federal tax code currently allows businesses to deduct equipment upgrades as an expense. This way, capital costs that would normally be amortized and deducted from declared profit over several years can be advanced into a current year tax deduction. 

Additional Energy Upgrade Financing Info:

In addition to EPA's ENERGY STAR program, another source of extensive information on financing energy upgrades is The Department of Energy's (DOE) Energy Efficiency and Renewable Energy Network (EREN) small business financing website.

In conclusion, always think about your energy costs as a substantial investment that you need to get as much out of as possible. Through a combination of modern technology, some common-sense operations changes, and good financial planning you can increase both your profits and your guests' comfort. So start investing now.

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