Fortune Teller Pic

Over the years I’ve noticed that most real estate managers lack confidence in their ability to forecast utility expenses. This is understandable because there are so many factors that impact utility usage and resulting costs:

Impact of Weather – It’s impossible to predict a Polar Vortex or long atypical stretch of hot and humid weather. However, the degree (pun intended) to which Mother Nature affects the heating and cooling cost vary greatly from building to building.

Commodity Costs of Utilities – The average cost of a kWh (kilowatt hour) of electricity and a Therm of  natural gas continues to rise every year.

Changes in Building Usage – Few buildings remain entirely static from year to year. Changes in vacancy, density of occupants, and fluctuations in how busy your tenants are impact how your building consumes energy.

At the end of the day most of us recognize that forecasts, by definition, are rarely spot-on. But I’m an advocate for having an approach to utility cost forecasting that is a little more thoughtful than taking last year’s actuals costs and adding an arbitrary percentage.

Here are 4 steps you can use to more accurately forecast energy costs in your buildings for 2018:

Step 1 – Compile 12-18 months of electric and natural gas costs for each building.

Step 2 – Get a perspective of the weather patterns over that period –  I recommend using monthly Heating Degree (HDD) and Cooling Degree(CDD)  Days. A great resource for this information is www.degreedays.net.  Then you can develop multipliers based on deviations from the previous 24 months.

Step 3 – Establish Multipliers

Determine a commodity cost multiplier – For 2018 forecasting I’ve been using 5% for electric, 2% for natural gas

CDD Multiplier (to be applied to electrical cost) based on evaluating the last 24 months

HDD Multiplier ( to be applied to natural gas costs) based on evaluating the last 24 months

Also include an occupancy multiplier if more than a 15% increase has occurred. Apply to the months where you anticipate increased occupancy. Do not deduct if there was an occupancy decrease (if interested I can explain the thought behind this)

Step 4 –

Historical monthly electrical costs over the previous calendar year

X

Commodity Cost multiplier

X

CDD multiplier (for electric) or HDD multiplier (for natural gas)

X

Occupancy increase multiplier (if applicable)

=

Estimated monthly electrical for your 2018 Forecast*

*Repeat this process using historical monthly natural gas costs.

Now if that seems too time consuming you may consider helping our team at Energy Guy LLC as we get a steady diet of working with local Real Estate managers to save them time and frustration when working on their 2018 Budgets.

 

Just give us a call.

Sustainably,

Stephen (your Energy Guy)

(952)836-7389