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  Rising Energy Costs Cause Concern 
in the Lodging Industry
By Eric S. Pateman Consulting & Valuation Analyst HVS International - Vancouver / March 2001

Energy costs are rising dramatically all across North America and are having a negative effect on hotels profits.  The energy crisis is not only affecting hotels, but every person in North America; rising energy bills, higher air travel and increasing automobile costs are being passed on to the consumer through price increases, new taxes and whatever other means companies can find to recoup some of the increases.    
 

Profitability vs. 
Price Relationship 
If Energy Prices Increase 15 Percent, a Hotel's 
Profitability Would Decline:
Limited-Service 1.6%
Full-Service 1.4%
Resort 1.3%
All-Suite 1.1%
Convention 1.4%
If Energy Prices Increase 25 Percent, a Hotel's 
Profitability Would Decline: 
Limited-Service 2.6% 2.6%
Full-Service 2.4% 2.4%
Resort 2.2% 2.2%
All-Suite 1.8% 1.8%
Convention 2.4% 2.4%
Source: Hospitality Research Group 
 
Some Canadian provinces, such as Alberta, have seen increases of as much as 100 percent in the price of natural gas alone.  This price increase correlates to simple economics: demand is greater than supply.  Major banks and the Canadian government are forecasting continued high-energy prices for at least the next six months due to a short supply of fuel and this years cold winter. Increases in hotel utility bills are being forecast at different rates across the continent, but with rising gas, oil, electricity and water prices in most cities, owners and managers should brace for the worst. 

Effective energy management has long-term benefits in the hotel industry, where an estimated $5 billion is spent annually on utilities. According to Elizabeth Lauer, senior technology strategist with HVS Technology Strategies, limited-service hotel operators have stabilized energy expenses in the past at rates ranging from 3% to 5% of gross revenue. Typical full-service properties report that energy expenses, as a percentage of revenue, tend to fall between 4% and 6%. An informal review of more recent operating statements by HVS reveals a trend of rising costs attributed to increased demand for fuel nationwide. Of greatest concern were a handful of historic, luxury, and/or urban properties, which are bracing themselves for an energy expense level closer to 10% of gross revenue in the near future. 

Historically, the hotel industry has been complacent about energy costs, categorizing them as an uncontrollable operating expense. However, today due to rising fuel costs and an increasing environmental awareness, hotel operators need to take a closer look at energy management companies and the benefits they can provide. When looking at energy management companies, hoteliers have to remember that their focus is their patrons, who do not want to be denied the comforts and convenience they expect during their stay at their choice of lodging facility. Guests want to control the room temperature; the have the ability to take a hot shower 24 hours a day; to have access to round-the-clock room service and instant access to restaurants, business centers, conference rooms, as well as  recreation facilities. The primary goal of hotel owners and managers must be to deliver these amenities to their patrons.

What are hotels doing?

Marriott International, Inc. was the first company to sign on to a long-term energy contract when their procurement arm, The Marketplace by Marriott, signed with PGE Energy Services in July 1999.   The five-year alliance affected approximately 130 of Marriott’s properties in California.  According to PGE energy services, the electricity discounts and facility improvements together are expected to lower each property’s energy costs by as much as 30%. 

The Alberta Hotel Association signed an agreement with EPCOR Utilities Inc., one of Alberta’s largest energy companies.  The agreement has allowed the association to purchase bulk power and pass it onto their members.  The negotiated price of bulk power has meant a significant savings to those Alberta hotels, which chose to sign into the deal with the association (approximately 75% of the association’s 430 members).  Currently in Alberta, the average power rate according to Jim Hansen, the President and CEO of the Alberta Hotel Association, is between 15.6 and 22.7 cents per Kwh of electricity, while his members are paying less than 2 cents.  A natural gas program will be offered in the spring and Mr. Hansen states he has every intention of signing a three to five year agreement to offer a stable rate to his members.  However, with gas prices still at record levels, it is yet to be seen what kind of rate can be bought in a large capacity.

Starwood Hotels and Resorts Worldwide Inc. signed an energy agreement with Enron Energy Services in September 2000.  The ten-year agreement covers all Starwood properties including the Westin. Sheraton, St. Regis, Luxury Collection, Four Points and W hotels in North America and is valued in excess of $1-billion over the ten -year period.  As part of the agreement, Enron will supply or procure electricity and natural gas for the properties and manage energy infrastructure through energy related projects.  The goal is to provide price stability to Starwood’s hotels.  According to Robert F. Cotter, Starwood’s Chief Operating Officer, Starwood anticipates reduced energy costs of approximately $200 million over the ten years.  “While conventional wisdom in the hotel industry has always been that you don’t invest dollars where the public won’t see it, in this case the capital investment is transparent to the guest, but clearly has a compelling financial return and significant environmental benefits.”   Starwood has also recently begun implementing an energy tax on its properties in California to help cover the rising costs.

Canadian hoteliers across the country are bracing themselves for energy price increases, which could cause over a million dollar increase in operating costs at some of the country’s largest properties.  Danny Crowell, general manager of the Hotel MacDonald in Edmonton, estimated higher energy bills will cost his property an extra $1.0 million this year.   Alberta seems to be the province that is going to be hardest hit by rising energy prices.  Ron Sidnick, general manager of the Coast Terrace Inn in Edmonton believes he could see an increase as high as 250 percent over last year’s rates.  Grant McCurdy, general manager of Edmonton’s Sheraton Grande said the hotel’s natural gas bill more than doubled in December to $27,000, from $13,000 a year ago. 
Frank Naboulsi, general manager of the Palliser Hotel in Calgary remains optimistic, due to his company’s efforts in implementing an energy plan a few years ago; however, he is still expecting a significant increase and gas and electric bills, although he expects it won’t be as bad as some properties. Randy Zupanski, the general manager of the Sheraton Eau Claire in Calgary is budgeting for an increase in gas prices up to 100% and electricity prices of 20%.  In terms of his property’s bottom line, he feels it will cause a 2-3 percent jump in utility costs.  The Sheraton Eau Claire is planning a lighting retrofit sometime this year in an effort to reduce costs.

In Ontario, Gordon Langford, general manager of the Holiday Inn in Burlington says he expects energy increases of 20-30% in his province; however, he feels that the property will fair better than most because of a cost savings system he had installed two years ago by the Darmac Resource Group.  The energy savings program by Darmac saved the Holiday Inn 23.5 percent in its first year (approx. $20,000).  

Glenn Squires, vice president of Pacrim Developments based in Halifax, Nova Scotia says that Atlantic Canada electricity prices are more stable than the west; however, he is predicting similar increases in oil, fuel and gas.  Pacrim manages 1,600 rooms across the country and is expecting an increase of $300,000 to $400,000 in 2001 with a 1-2% rise in overall utility expenses for his properties.  

What Do I Start?

The best opportunity areas for energy efficiency improvements in hotels sector are lighting, heating and cooling systems followed by refrigeration, motors, elevators, and laundry.  Housekeeping practices are another way hotels can effectively start to reduce their energy costs. Room attendants should be taught to turn off lights, along with turning down heating or cooling units, when a room is cleaned. If the room is unoccupied, the HVAC unit should be turned off.  Employees are the most important aspect of any energy management program. If employees feel that management is genuinely concerned with environmental initiatives in addition to saving costs, employees will likely give a concerted effort to control costs in all areas, including those not regulated by technology systems. 

Hotel operators generally feel that the areas of the hotels that cost them the most money are the guestrooms. In limited-service properties this may be the case, but full-service hotels with added meeting space need to focus on the larger rooms for big savings.  According to Tray Hartmann, manager of sales and field operations for Smart Systems International, "We have installed energy-management systems in conference rooms and meeting rooms, and the payback comes in a matter of months because those rooms are so oversized. Conference rooms and meeting rooms have 10 times the amount of heating and air conditioning needs of a typical hotel room. The savings offered in those large rooms is a huge opportunity." A 300-room hotel with one large conference room can undo all the savings achieved in guestrooms in a very short time by not minding the temperature in the larger room. "If a hotel leaves one [heating, ventilation or air conditioning] system on for one week, it can negate the energy savings achieved in all 300 guestrooms for one month."    Because of this, energy management companies are focusing on installing systems such as infared detectors, motion sensors and CO2 sensors in these large rooms to make sure they are being heated and cooled efficiently.

The first step to energy conservation is to take a close look at your property and to work with your staff on ways that they can help conserve energy.  The next step is to contact an energy management company such as Johnson Controls, Honeywell, Embridge, Darmac Resource Group, Hotelite or one of the many others.  The quotation, “Time is Money” has never been more applicable, as the longer hotels wait, the more money they lose.  The energy crisis may pass this year, but due to the high-energy consumption society that we live in, energy shortages will inevitably continue to be an issue in the future.

Other Sources:
Cool Technology - Hot Issue, Lodging Magazine, October 2000
Hotel Online Press Release, July 12, 1999
Enron Press Release, September 6, 2000
Hotels step up energy-saving efforts as power, gas bills soar The Edmonton Journal, Larry Johnsrude, January 9, 2001
Big Rooms, Big Savings, Hotel and Motel Management, Bruce Adams, December 11, 2000



Eric S. Pateman, AHCIMA – is a Consultant and Valuation Analyst with HVS International’s Vancouver, Canada office.  Eric is a graduate of  the Dubrulle International Culinary & Hotel Institute of Canada.  In addition, Eric is also currently taking his MBA from Oxford Brookes University in England.  Eric has been with HVS for approximately 6 months after spending the last two years consulting for a hotel in England.  Since joining HVS, Eric has worked in major markets such as Portland, Chicago, Calgary, Toronto, Edmonton and Lake Tahoe.  Reach Eric at [email protected]
###
Contact:
HVS International 
4235 Prospect Road
North Vancouver, BC V7N 3L6
(604) 988-9743, ext. 23
(604) 988-4625 FAX
http://www.hvsinternational.com

Also See Hotel Internet Service: Where To Start / Eric S. Pateman, HVS / Oct 2000 


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