Why it makes financial sense for buildings to utilize Energy Management Systems (EMS) software

By: Helen Zhao - Associated Renewable Inc.

Published: June 10th, 2013


Energy Management System (EMS) refers to a computer system which is designed specifically for the automated control and monitoring of the heating, ventilation and lighting needs of buildings. The data obtained from EMS can then be used to produce trend analysis and annual consumption forecasts for buildings’ comfort, safety, and efficiency. Basic functions of a computer-controlled EMS include controlling, monitoring, optimizing and reporting.


Financial Rationale Behind Use of EMS

Increasingly complex and volatile energy markets have placed a new emphasis on measuring and maximizing "energy productivity". Saving cost and improving energy efficiency is most important motivation in energy management. Besides, EMS can be an excellent marker for the intangible value potential. In addition, there is an increasing trend to restrict carbon footprint among companies participating in the Kyoto Protocol. As a result, companywide energy management has become an indicator of overall management quality and corporate performance.


Reduced Operating Costs: According to the Rocky Mountain Institute, most commercial, industrial, and institutional facilities have abundant opportunities to save up to 90% of the energy used for lighting, fan, and pump systems; 50% for electric motors; and 60% for heating, cooling, office equipment and appliances. An Energy Management System often saves customers between 10% and 30% on energy consumption and expenses. Cutting a building’s energy use by 30% yields the same bottom-line benefits as a 3% increase in rental income or a 5% increase in net operating income.


An early study on cybernetic building systems found that an advanced EMS could save 37 cents per square foot per year in energy operations, repair and maintenance cost. The same study found that the cost for installation of such systems averaged about $1 per square foot per year, which means benefits of EMS can cover installation costs in three years. And most EMS implementation costs are small part that mainly consist of staff time and data collection costs, which are about $30,000-$60,000 per year in North America.


Increased Productivity and Sales: Studies have shown that an energy-efficient environment can increase sales, enhance employee productivity and reduces absenteeism. Increasing energy efficiency usually improves lighting, heating, ventilating, and air conditioning performance. For example, in a study by the California Energy Commission, compared with a non-day lighting store, a day lighting store positively and significantly linked to as much as 40% higher retail sales.


Reduced Regulatory Costs: U.S. government mandates on companies to reduce air emissions began with electric utilities but are expected to extend to commercial and industrial facilities. Different states also come up laws. New York City’s boldest measure mandates energy audits in buildings larger than 50,000 square feet once every decade and require retrofits that are deemed cost effective. Empire State Building has launched a massive renovation to reduce energy consumption by nearly 40 percent and will turn profitable in less than five years. Companies according to their own conditions to reduce competitors occupy a superior competitive position.


Other Benefits: EMS benefits both building tenants and building owners. EMS reduces risks and costs from equipment and process failures, and increases energy security and reliability. Additionally, companies known for proactive environmental policies stand to gain reputational advantages among customers, employees, regulators, the media and others.


Profit Potential of Software-based EMS

Michael Porter's Five Forces Model can be used to evaluate the profit potential for software-based EMS in the energy efficiency industry. This framework draws upon industrial organization economics to derive five forces that determine the competitive intensity, and therefore attractiveness, of a market which to a certain extent means profit potential of a market.


Threat of new entrants

EMS software has high barriers to entry, because it is a complex and integrated system comprising of hardware, software, services, business strategies, and industrial trend analysis, along with new products, and new technologies. This is particularly true for software-based EMS, because its development requires substantial amount of capital and human resources, which gives competitive edge for software-based EMS in the energy efficiency industry.


Threat of substitute products or services

Competition in the energy management market goes intense. But software-based EMS is a sophisticated system tailored to meet specific requirements of its end-users. This makes  switching costs quite high and the threat of substitute services similar to EMS rather low.


Bargaining power of customers (buyers)

Customers have strong bargaining power over EMS providers because of the intense competition in energy efficiency industry. Considering high switching costs of EMS, customers make choice prudently. Providing high-standard products and services at reasonable prices do help to gain customers.


Bargaining power of suppliers

Software-based EMS has various suppliers mainly including manufacturers of energy efficiency equipment and human capital providers (indoor and/or outdoor experts). Suppliers with new technologies or products and suppliers with abundant experience or creative ideas in the energy efficiency industry usually have higher bargaining power than those without.


Intensity of competitive rivalry

Competition in energy management systems market is fierce due to its strong return on investment with low maintenance costs. According to the report from Pike Research, the investment in Buildings EMS market will increase from $900 million annually in 2010 to $2.4 billion annually by 2016, with a compound annual growth rate of 17.4%. The benefits of BEMS will create a growing market opportunity for a variety of industries, ranging from traditional building companies and energy service companies to the expanded influence of IT vendors on facilities management.