Richard Smith

Hospitals and health systems are investing in energy efficiency improvements to reduce costs, although financing these investments is challenging.


At a Glance  

  • Managing energy efficiently can reduce long-term costs for healthcare organizations.  
  • The two top improvement areas in energy management are lighting and heating and cooling.  
  • Financing investments in energy efficiency is a challenge, but several financing options are available.  

The recession has forced everyone in healthcare organizations, from C-level executives to facility operations and finance executives, to keep closer tabs on where operating dollars are invested. Many healthcare organizations have implemented cost-savings measures that have forced them to make important decisions related to building maintenance and staffing.

Despite economic ambiguity, one area of operations that continues to be top of mind with senior leaders is energy management, according to a recent survey.

In partnership with the International Facility Management Association (IFMA) and the American Society of Healthcare Engineering (ASHE), the Johnson Controls Institute for Building Efficiency conducted the fourth annual Energy Efficiency Indicator (EEI) survey in March 2010. The EEI study polled 2,882 CEOs, CFOs, real estate leaders, and facility managers from a range of organizations, including small businesses, public sector institutions, and healthcare organizations.

Healthcare Organizations Focus on Energy Efficiency

What the survey found is quite simple. Across all industries, organizational energy management remains a top priority for leaders. In fact, across all industries surveyed in North America, 52 percent of respondents indicate energy management to be very or extremely important to their organization. In the healthcare industry, the topic was of even greater concern, with 58 percent of respondents indicating energy management at this same level of importance.

The healthcare segment comprised 20 percent of all North American respondents. Of these, 85 percent were members of ASHE. According to the study, the majority of healthcare professionals not only believe energy management should be a priority, but also plan to make facility improvements over the next year to support these priorities. Sixty-seven percent reported that they are planning to make a capital investment in energy efficient facility improvements over the next 12 months, compared with only 52 percent of all North American respondents.

Motivating Factors for Energy Efficiency Improvements

Why the sudden focus on energy efficiency? The answer is twofold. First, healthcare organizations, like other institutions, have seen the green movement take off. Employees and the community expect hospitals and health systems to have standards for increased sustainability in place and to be committed environmental citizens.

Second, healthcare organizations know that energy efficiency, when implemented in a strategic manner, can reduce long-term costs and create a safer and more comfortable environment for patients.

According to the EEI survey, 65 percent of respondents reported they are paying more attention to energy-efficiency-related topics than they were one year ago. They are looking closely to identify which solutions are worth exploring to continue to provide the finest patient care while finding ways to reduce costs and environmental impact.

A growing number of healthcare organizations are also aiming to either certify their buildings to a recognized green building standard such as those available by the United States Green Building Council, or incorporate green elements into their new construction projects. Since 2008, the percentage of organizations that consider this certification a priority has risen from 72 to 80 percent.

Healthcare leaders recognize what colleges, universities, schools, and major corporations have learned from improving and leveraging their green initiatives: These programs help enhance brand image.

Being able to promote a facility-whether a small community hospital or a regional player-as energy-efficient, sustainable, and state-of-art helps attract the staff, patients, and donors who want to be a part of a progressive organization. Seventy-two percent of respondents indicated this to be a major motivator for investing in energy efficiency.

But according to respondents, the most important factor motivating the healthcare industry to explore energy efficiency investments is cost reduction. Nearly all respondents (99 percent) indicated this is the primary reason to invest in energy efficiency, as illustrated in the exhibit below.  

Exhibit 1

f_smith_exh1

For hospitals with sophisticated medical equipment critical to patient care, energy costs can be astronomical. Administrators are constantly exploring ways to reduce costs, exploring myriad options-from more efficient lighting to renewable energy solutions such as solar panels-to help defer costs.

Although current energy costs are high, respondents also believe they haven't hit their peak yet. The survey found that 60 percent of healthcare decision makers expect energy costs to rise over the next 12 months.

What's Being Done to Keep Costs Down?

The survey asked respondents to indicate measures they have implemented over the past 12 months to reduce costs. By far the most popular measure among healthcare leaders was to switch to more energy-efficient lighting, ballasts, and lamps in their facilities, with 73 percent of respondents indicating they have begun these improvements, as shown in the exhibit below. In facilities that are open all day and night, inefficient lighting can easily cause energy costs to soar. By installing energy-efficient bulbs, facilities can quickly reduce costs.

Many facilities also have focused on improving their heating, air conditioning, and ventilation (HVAC) systems and lighting systems account for approximately 60 percent of all energy used in traditional buildings. So it is no surprise that improvement to HVAC controls is the second highest priority for facilities, with 57 percent of respondents indicating they have made improvements over the past year.

These top two improvements alone can help healthcare facilities move a long way toward energy efficiency. Additional improvements that respondents have implemented over the past 12 months include upgrades or improvements of building automation systems (56 percent), which can help all lighting, security, and temperature controls to operate under a single platform, eliminating redundancies. Replacement of inefficient equipment (41 percent) and installation of occupancy sensors (56 percent) were among the more common improvements made in the past year. Retrocommissioning, which identifies low-cost operational and maintenance improvements in existing energy-using systems such as lighting and mechanical equipment to optimize system performance rather than overhauling major equipment, continues to gain traction in health care. Nearly a quarter (23 percent) of respondents have implemented retrocommissioning of these systems in the past 12 months, up 7 percent from 2008.

Healthcare facility managers have also begun embracing new technologies that continue to grow in popularity and align with clean energy solutions. Seventeen percent of respondents indicate they've invested in personal computer or IT management in the past 12 months, 9 percent have installed energy and carbon information management systems, 5 percent have turned to an on-site renewable energy system, and 4 percent even have vegetative green roofs to further support their environmental missions. The evolution of these products is likely to continue.

Exhibit 2

f_smith_exh2

The Challenge: Financing

The EEI study found that energy efficiency investments remain top of mind with healthcare leaders, and many have taken initial steps over the past year to begin the process toward energy efficiency. However, organizations face several barriers preventing them from investing to their desired extent to reach the full savings potential. The largest of these barriers is financing.

Nearly half (45 percent) of healthcare respondents cited a lack of capital budget as the primary barrier to making increased energy-efficiency investments. Additional dollars that could be used toward efficiency and greening investments simply do not exist, which can make paying for energy-efficient improvements challenging.

Also, most healthcare organization boards want to see an ROI. The survey found that 35 percent of leaders say a primary barrier to investing in energy efficiency is insufficient paybacks or uncertainty that the projected ROI would be realized, which is magnified even more in the current difficult credit environment. From 2008 to 2010, the average maximum allowable payback for investments dropped from 3.8 years to 3.4 years. This tough credit environment and narrowing hurdle rates within healthcare organizations will continue to impede investment.

Financing Options to Make It Work

Among these challenges, optimism exists to make energy efficiency a priority. More than three-fourths (76 percent) of respondents plan to pay for energy-efficiency improvements over the next 12 months through the capital budgets of their facilities, as illustrated in the exhibit below. Planning will be key in these instances to identify what can be done in the short term.

Yet to finance longer-term improvements, new financing vehicles are now on the table for industry facilities. Twenty-one percent of respondents hope to turn to grants or tax credits to pay for improvements, but other options need to be considered to help remove some of the barriers for building upgrades.

Today, retrofit projects that replace older building equipment with more energy-efficient systems are easier to capitalize, less risky for building owners and lenders, and mutually beneficial for building owners, tenants, and, in the case of healthcare facilities, the community. Several options that are viable and of different levels of interest, based on the survey, require no up-front capital.

Energy savings performance contracts were the most popular option being considered by respondents after grants, with 18 percent indicating they would explore this option. These contracts help building owners guarantee energy savings over the term of the contract that can repay capital costs, in most instances. The energy service company repays any savings not offset by reduced energy and operating costs.

Power purchase agreements allow businesses to receive money for capital improvement projects that improve energy efficiency with no up-front cost. A hospital would agree to the installation of third-party photovoltaic panels or a high-efficiency central heating and cooling plant in exchange for purchasing the resulting energy or chilled and heated water. The third party would incur the construction costs. Ten percent of respondents planned to consider this financing option over the next 12 months.

A third option some healthcare professionals indicated they would explore is shared savings agreements (7 percent). With this option, the energy service company sells a portfolio of building improvements to a third-party ownership company. The owner receives the energy and operational savings and remits a set percentage in monthly payments back to the third-party company, which retains the balance of the savings.

The typical term of a shared savings agreement is 10 to 12 years, after which the building owner takes possession of the improvements and retains all consequential savings. Customer benefits include improved environmental stewardship, improved facilities performance, and improved financial performance.

Other financing options include capital or municipal leases, property assessed clean energy (PACE) tax lien financing, and utility on-bill financing (OBF). Each has its own pros and cons that may be appropriate for healthcare professionals. Healthcare finance executives should explore the options to determine which might best meet their organization's needs.

Exhibit 3

f_smith_exh3

What the Future Holds

The healthcare sector, like many other sectors, faces a number of challenges. Rising energy costs, financing questions, and the increased importance of meeting the demand to do good while saving money and the environment can be daunting to healthcare leaders.

The light at the end of the tunnel is that energy efficiency can be both rewarding and financially beneficial to any healthcare system. The EEI survey shows that energy efficiency remains a priority and something that is not going away in the United States or around the globe. As leaders in the industry, healthcare finance executives have an opportunity to continue to lead the way as pioneers for energy efficiency. They should realize the challenges ahead, but also appreciate the opportunities that energy efficiency and, ultimately, energy independence can mean to their organizations. Their livelihood and ability to continue to deliver the best patient care will continue to grow when energy efficiency is realized.


Richard Smith is director, energy solutions healthcare, Johnson Controls, Milwaukee (richard.w.smith@jci.com).

Publication Date: Friday, April 01, 2011

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