Crafting a Zero-Based Energy Budget

Preparing an operating budget based on hard numbers rather than wishful thinking is never easy. The task can be especially daunting for nuanced line items like a building’s energy usage. It’s tempting to take prior expenses, apply a blanket percentage increase and be done. But proper energy budgeting isn’t so simple.

A board’s first step is to consider the property’s explicit energy uses. Aside from the essentials of lighting and heat, consider daily needs such as hot water, elevators, in-unit cooking, and common areas and amenities. Even if a building relies on the same commodity for multiple functions (such as gas for heating and cooking), each purpose has its unique consumption profile and therefore is classified (and priced) differently by the utility.

Once you have a handle on your commodities and their purposes, the next step is to break out the underlying cost components. Electricity and natural gas accounts are charged for supply and delivery, each of which is priced differently based on season and market conditions. Expenses during times of peak usage can far exceed those from the rest of the year. Instead of forecasting an arbitrary increase to annual spending, a zero-based budget requires justification of where every single dollar goes, month by month.

Here is how to build a zero-based electricity budget for January 2021:

First, begin with a “base” cost of zero. Every dollar of expenses that is allocated to January will have an explicit purpose for the month, such as heating the common areas, illuminating the parking lot or running the elevators.

Second, estimate your monthly electricity consumption.

Third, add in line items that represent your supply cost, energy delivery cost and all applicable taxes.

Fourth, calculate your total anticipated energy expense for January. Apply footnotes to explain the methodology and calculations as needed.

Fifth, your January energy allocation should match your actual energy spending. Even if January expenses are higher or lower than anticipated, the variance will not affect your budgeted costs for February. Instead, February’s budget will also begin at a base of zero and be structured independently.

To maximize the accuracy of your energy forecasts, you need to ask the right questions. Consult with your on-site staff to assess the status of building systems, and determine which equipment might need upgrades or repairs. Gauge expected occupancy levels over the coming year. Talk to the finance team about the degree of conservatism they wish to see when estimating next year’s costs. Above all, rely on hard numbers – not wishful thinking – when budgeting for energy and other operating costs.

Alexander Zafran is a senior consultant and business development lead at Aurora Energy Advisors. If you’re interested in learning more about energy budgeting for your building, he can be reached at azafran@aeadvisorsllc.com.