Tuesday, June 3, 2008

Electricity Conservation Conundrum in Commercial Buildings With Multiple Tenants

In most existing commercial buildings a single meter measures the power fed to the entire building and the building pays for it at a bulk rate. The electricity cost is then included in the monthly maintenance or common charges, in the same proportion that other costs are allocated, typically on the basis of a tenant's square footage. Hence, tenants do not pay for the electricity they use individually. Furthermore, it is not unusual to find that some tenants are subsidizing others who are wasting electricity. This does not make sense.

One answer to this conundrum might be to install submeters (connected to the building's master meter) to each tenant space. These meters can monitor electrical consumption in kilowatt-hours and demand in kilowatts. Each tenant can then be responsible for their actual usage. If they use less electricity because of conservation measures, they will pay less. This is a much better system than allocating total building electricity cost by square footage.

Another conundrum is related to investment in energy conservation measures. Since electricity cost is often a pass-through cost directly to tenants, there is little financial incentive for building owners to invest in technologies to reduce electricity costs. Until tenants complain about high energy costs and threaten to move to more energy efficient space, building owners really have little incentive to act. This also does not make sense. Fortunately, the government is helping with tax credits and other financial incentives.

The real question still is who pays for all this. I believe that investments in submeters (which can cost as much as a few thousand dollars each) and other energy conservation measures should be viewed today as a cost of being in the real estate business. These investments will increase the value of a building and make a building more attractive to tenants, particularly as energy costs continue to spiral upwards. Moreover, if tenants can be convinced these investments can save them money, it may even be possible to have them pick up some of the cost.

While today such investments are still voluntary, in the next few years you can expect that they will probably be required by some form of government regulation. Sitting back and doing nothing does not appear to be an option!