How is Energy Efficiency Like Dry Cleaning?


According to an AIA study, between 2006 and 2009, municipalities with green building programs increased by 50%.  Many programs sponsored by municipalities, states, utilities and the federal government are designed to promote energy efficiency and green construction. 

Although green building has increased exponentially, only a small segment of companies have done energy efficient upgrades to their facilities. Why isn’t every business looking to take advantage of incentive programs and the low cost of labor generated by the depression in the construction industry to green their facilities and implement energy efficiency measures?

My answer is that energy to businesses is like dry cleaning to lawyers.  Every lawyer needs clean suits, so the dry cleaning bill is part of the household budget.  Most people who use dry cleaners do not really know what happens at the dry cleaner  to get their clothes clean, or what the cost of the actual dry cleaning process is.  It is very difficult to get comparative prices for dry cleaning, so it takes research to find out whether you are paying your dry cleaner too much or could get a better deal elsewhere.  Switching from the dry cleaner you’ve always gone to requires figuring out which new dry cleaner to go to, new hours, etc., all with little guarantee that the cost and service will be as good or better than the dry cleaner they currently use.  And, at the end of the day, the potential savings from switching dry cleaners relative to the entire household burget is marginal.  In the presence of all of the transaction costs and with no particular event to motivate change, most people conclude that it is simply not worth the effort.  

Energy is very similar.  All businesses use energy and pay energy bills.  Few really understand where energy comes from and how it is priced.  Switching to more energy efficient systems, net meters, etc. requires committing corporate resources to figuring out which ones to invest in and believing that the energy efficiency measures will have a positive impact on energy usage.  And, at the end of the day, the potential savings from more energy efficient facilities relative to the entire corporate budget is, in most cases, marginal.  In the presence of all of the transaction costs and with no particular event to motivate change, most companies conclude that it is simply not worth the effort.

To each actor, the savings are small, but in the aggregate, incremental saving in building energy usage would have a significant impact on greenhouse gas emissions and fossil fuel use.  The dry cleaning example starkly highlights the disconnect between the individual benefit and the group benefit.  According to the ABA, there are 46,276 active lawyers in Pennsylvania.  Let’s say each lawyer dry cleans one suit per week on average. 

 

Per Household  
Lawyers 1
Weeks 52
# of Suits cleaned per week 1
Cost of suit cleaning  $10.00
Total suits 52
Total annual cost of suit cleaning $520.00
10% cost reduction $9.00
Total revised annual cost of suit cleaning $468.00
Total Annual Suit Cleaning Savings $52.00
   
Pennsylvania Aggregate  
Lawyers 46,276
Weeks 52
# of Suits cleaned per week 1
Cost of suit cleaning  $10.00
Total suits 2406352
Total annual cost of suit cleaning $24,063,520.00
10% cost reduction $9.00
Total revised annual cost of suit cleaning $21,657,168.00
Total Annual Suit Cleaning Savings $2,406,352.00

Most households are not going to bother with the high transaction costs of switching dry cleaners for a total savings of $52.00 per year, which in the scope of the whole household budget is a rounding error, but $2.5 million in annual savings for lawyers overall is real money. 

Likewise, potential aggregate building energy efficiency savings in 2030 has been estimated at nearly $170 billion. But for an average business, the cost savings are negligable as a percentage of overall corporate spending.  For example, according to a Washington State study, the average annual small business energy costs attributable to buildings was about $5000. Even a 10% reduction in building energy costs would only result in a $500 annual savings. Another study puts the potential savings somewhat higher, at $2800.00, but most small businesses would still conclude that energy efficient upgrades are not worth the institutional investment.       

So how do you change the individual corporate decision making process with respect to energy efficiency? 

The ultimate answer is to internalize the environmental and health costs of energy into energy prices, so the cost to the individual corporation and the percent of their overall budget attributable to energy is higher.  In other words, raise the price of energy.   

In the absence of energy price changes, which is not a politically palatable solution right now, there are still things that can be done to incentivize energy efficient construction:

  • Reduce transaction costs
  • Increase price transparency
  • Provide uniform metrics for quantifying savings
  • Construct motivating events 
  • Incentivize aggregators

I will address these five interim solutions in later posts, but I would love to hear feedback from the GBLB community on other ideas for motivating energy efficient construction.



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