Split incentives prevent energy efficiency progress at leased facilities
Joint tenant, technology vendor and landlord energy improvements
Better and more cost-effective energy-saving results for both parties through collaboration versus acting alone
Energy Reduction in Leased Spaces
Lennox International has set aggressive energy and environment goals under its Sustainability 2.0 corporate initiative and the Better Buildings, Better Plants Challenge. Initially, the company targeted its sustainability efforts at company-owned sites over leased spaces. However, in 2014 Lennox commissioned a study to investigate the potential benefits of energy efficiency in leased spaces. Surprisingly, the results showed that reducing energy use in leased spaces yields an even greater financial return and value than reducing energy in Lennox-owned buildings. To realize these benefits, Lennox International seized the opportunity to collaborate with landlords at its leased facilities.
Lennox International’s energy efficiency efforts are driven by its “Energy 2.0” goal. Between 2010 and 2015, Lennox achieved a 23% energy intensity reduction worldwide by implementing energy efficiency measures at its factories under its Energy 1.0 goal. This progress was achieved through measures that included compressed air system improvements, HVAC upgrades, efficient motors, and LED lighting. In 2015 Lennox rolled out its Energy 2.0 plan in which the company set another ambitious goal to achieve an additional 25% energy reduction in 10 years with a baseline of 2014. This is also the company’s target for all US owned and leased facilities under the Better Plants Challenge. The company plans to reduce energy consumption throughout its current portfolio of 150 leased distribution spaces, and will continue to do so for all future portfolio expansions. These efforts will also offset the expected increase in energy consumption from the company’s geographically expanding distribution network.
Lennox International has a dedicated budget for environmental sustainability to encourage sites globally to pursue capital projects for energy, water, and solid waste reductions. This sustainability fund has been in place since 2009 and is used to partially fund the leased building upgrades.
Leased distribution sites are encouraged to benchmark their energy performance against similar buildings using the U.S. Environmental Protection Agency’s ENERGY STAR® Portfolio Manager. Several leased regional distribution centers at Lennox International have been ENERGY STAR certified, meaning their energy performance is in the top 25% within their building class:
Lennox was motivated to upgrade their leased buildings because of the financial returns and relatively easy pathway for implementation:
Lennox International staff realized that the classic split incentive barrier has the potential to prevent energy efficiency progress at its leased spaces. As the tenant, Lennox paid the energy bills, but had limited incentive to invest in capital upgrades to buildings it did not own. Conversely, the building owners did not pay the monthly energy bills and therefore had no obvious motivation to invest in energy projects that would reduce those bills. Lennox determined it could overcome this barrier through collaboration with its landlords and a lighting technology provider. In this case, Lennox partners with GE’s lighting division – Current, powered by GE – to set lighting specifications for facilities and splits the costs of the upgrades with the landlord. One challenge in implementing this approach was the perception that the costs of lighting upgrades would be too high. With help from Current and NUS Consulting, Lennox has prepared financial and technical analyses that show landlords that the advantages of the lighting technology and the payback periods outweighed the costs.
Lennox’s energy team worked with Current to present the technical benefits of the project at an internal hands-on meeting. The meeting was attended by the company’s distribution executive team and internal real estate team, enabling executive buy-in and contributing to Lennox’s success with persuading 100% of the landlords it approached to take part in the project.
Sites were selected for energy efficiency upgrades by Lennox’s energy management staff. Current assessed each facility and created detailed layouts of the existing lighting to determine the minimum amount of lighting needed, considering factors such as the number of employees and the tasks performed. Lennox then negotiated leases with each landlord to include lighting as a line item. A good faith allowance was worked out where Lennox and the landlord split the costs for the upgrades. Negotiated terms and conditions included the leasehold improvement allowance from the landlord, the building’s age and market rate, available utility rebates, and any non-lighting energy efficiency measures (e.g. HVAC systems and dock door upgrades). Some landlords initially had reservations about LED technology, but through Current’s technical expertise, they came to understand that LED technology depreciates slowly. Lennox was able to build on existing good relationships with landlords, who took into account the potential of Lennox remaining on the property and re-signing its lease.
Lennox and Current collaborated to select lighting fixtures that provided the best lighting quality at an acceptable cost point. NUS Consulting then collected data and provided tools to monitor the effectiveness of each lighting project. Internal and external project-related reporting was completed in-house.
Lennox employs an initiative called ’60 Ideas in 60 Minutes®’, a quarterly round table that involves stakeholders from all sites within the Lennox portfolio. This initiative is one of the key ways that information on successful improvement projects is disseminated across all leased facilities. Each distribution center’s Operations Manager serves as an ‘energy champion’, embedding energy and sustainability practices into day-to-day operations and implementing energy savings projects.
Tools & Resources
NUS Consulting tracks monthly energy use for all project sites using a proprietary online software platform. The tool allows Lennox to track performance at locations where lighting and other system-specific projects have been implemented and allows the Energy Team to identify the largest energy consuming locations across its U.S. portfolio.
Details about Lennox International’s Sustainability 2.0 Initiative can be viewed here. An example of the output from their software platform is provided below:
NUS Consulting’s Energy Tracking Tool
Lennox tracks energy performance on an ongoing basis to verify that the savings associated with the lighting projects align with pre-implementation projections. One of the methods used to track these savings is calculating Energy Usage Intensity (EUI) (kWh/sq ft) for each location. EUI, along with other trends, is then used to gain insights, prioritize locations, and strategically improve Lennox’s energy performance.
Lennox Sites Ranked by Electricity Consumption
Lennox Sites Ranked by Electricity Consumption per Floor Area
By partnering with its landlords and with Current, powered by GE, Lennox successfully reduced electricity consumption in 2015 by 650,000 kWh at its leased locations.
This was achieved through energy projects that primarily upgraded lighting to LED fixtures, reducing lighting-related energy use by 60%. As more lighting projects continue to be completed, Lennox and GE are streamlining and speeding up the implementation process across sites. Lennox plans to standardize efficient LED lighting in lease language down the line.
There are currently no tools for this implementation model.