Swedish construction giant Skanska is proving that expensive green retrofitting can pay off

When in 2009 the owners of the Empire State building began publicising the merits of an ambitious $500m renovation plan to be paid for with savings from a “deep green retrofit”, little media attention at the time was given to Skanska, the Swedish construction firm that occupied the 32nd floor.

Two years earlier, Skanska’s New York team had been looking to relocate its US headquarters. As part of its relocation negotiations it struck a deal to take over the 2,260 square metres of space in the iconic 1930s skyscraper with great green ambitions – with the intention that any capital outlay would be paid for in operating cost savings over the 15-year lease.

Skanska had found a willing partner in the Empire State building to allow it to refurbish its new office space, but it would have to take on all the commercial and technical risks. This was in order to prove a point: making older buildings energy efficient as part of a comprehensive green retrofit is a sound business model that protects the environment while also reducing costs and maximising return on investment.

Using sophisticated energy modelling and estimating techniques, Skanska’s construction team set about renovating the company’s new home. It achieved a 57% reduction in energy consumption – and a reduction of 15-18% absenteeism compared with its previous office. The renovation costs would be recouped in as little as five years, a fast turnaround time that seemingly made such an interior renovation of the entire Empire State building a scalable possibility.

“By making the move to the iconic New York skyscraper Skanska saw an opportunity to act as both client and construction manager, in the process educating the design, construction, and real estate industries about the actual costs of undertaking a green renovation,” says Noel Morrin, senior vice-president for sustainability and green support at Skanska.

Renovation of the entire hundred-floor skyscraper was undertaken by another contractor, but only after Skanska had established an important roadmap for potential energy cost savings. “When the owners saw the results of our renovation to Leed CI Platinum standards they were quick to encourage other tenants to follow the Skanska example,” Morrin says.

Today, the Empire State building is one of the highest-profile examples of a successful deep green refurbishment. The project includes retrofitting all of the building’s 6,500 windows, as well as upgrades to the lighting, cold water and ventilation systems. Once all tenant spaces are upgraded by 2015, the building’s owners say they are confident they will save $4.4m a year, a reduction in operating expenses chiefly attributable to a 38% reduction of energy use.

Such deep energy retrofits – covering both technical equipment replacements and more costlier changes to the building envelope itself – enable the cost of the energy upgrade to get absorbed into the wider renovation costs. “That’s where we get the economy of scale,” Morrin says.

Over the past five years, Skanska and other green builders have racked up a number of impressive refurbishments demonstrating the viability of the model. Yet if there is a growing deep retrofit trend, it remains nascent, poorly understood and confined mostly to the commercial office sector. The “pay to save” model Skanska has helped pioneer – using energy efficiency upgrades and integrative design techniques to cover other renovation costs – has succeeded, but only to a limited extent.

Building innovation

Morrin concedes it’s still a “tough sell” and he points to market scepticism rightly focused on a green building sector that has not always delivered on its stated claims. To allay these fears, Skanska recently introduced a three-year energy performance guarantee whereby the company promises to reimburse any shortfalls in projected energy bill savings.

Sometimes called green performance contracting, this kind of offer has long been the exclusive purview of energy service companies – referred to as Escos – that typically put projects out to bid after first performing an in-depth analysis of the property.

It’s a unique offer from a construction company, but the larger picture, Morrin says, is the transformation of the construction contract model to include integrative design elements granting Skanska the opportunity to offer a “full-scale one-stop shop” renovation service, while keeping full control over the design process.

“It means a construction company can say ‘we have done the whole thing’, and therefore we have a better understanding of the risk, as well as a more robust guarantee,” Morrin says.

Two notable refurbishments include Österport 7, an office building in Malmö, Sweden, which reduced energy use by 34% at a cost of $200,000 recouped in two years. Skanska’s divisional head office at Hollywood House in Woking, UK, achieved a 56% reduction in energy use and gains in water reduction to be paid back over an estimated 13-year timeframe.

But payback times vary a great deal, and the case is not yet clear cut for choosing sustainable refurbishment over new-build, says Martin Hunt of the UK environmental non-profit Forum for the Future. “The decision has to be made on a case-by-case basis, considering whole-life costs rather than capital cost or short-term gains,” Hunt says.

Deep green refurbishments are a very difficult sell largely because of a pervading perception that energy efficiency is expensive, says Adrian Joyce, secretary-general of Renovate Europe, an industry-supported lobbying group pushing for energy efficiency legislation. “That’s because people use a very irrational economic model of looking at up-front costs as the only costs. They look much too little at the benefits that flow,” Joyce says. “If we can change the mindset – that this is not spending but investment – then we are going to begin to move the market along.”

With hospital design, for example, a growing body of evidence from the US suggests that green hospitals have a positive effect on the wellbeing of patients, staff and visitors.

Yet the UK focus remains on recovering cost savings from the operation of resource-efficient healthcare buildings, Hunt says. There are a range of potential reasons for this, including that it is not yet possible to capture a robust sample size that makes the business case for a change of approach; that it is difficult to factor these issues in to traditional cost models; that no one is sure how to address split incentives over who pays and who benefits; and there is difficulty proving the direct link between sustainable design and improved employee productivity.

Market traction

Since late 2009, Skanska has had in place a special unit dedicated to the green retrofit market. Green retrofits are now actively pursued or being sold in Sweden, Norway, Finland, the UK, Poland, Czech Republic and several major US cities.

The biggest uptake is with commercial property owners that see merit in life-cycle benefits such as improved rental rate, longer tenancies and enhanced brand image. Lower operating costs from energy savings – one of the seven life-cycle analysis benefits Skanska presents to its clients – rank at the top of the list in countering concerns over “up-front” costs. But an equally important factor is overall confidence in delivering on a project in its entirety.

“If we can get energy right, everything else flows from there,” Morrin says, noting that the cost of an energy savings upgrade may end up being only a small portion of the overall investment. “By offering a one-stop-shop, the customer feels more secure in the total refurb. And, because we get the whole deal, the risk for us is lessened so we can back up our work with the three-year EPG [energy performance guarantee].”

Skanska has completed roughly 90 sustainability case studies ranging from hospitals, schools and hotels, to prisons and commercial and residential property.

Only a portion are green retrofits and, indeed, the company attributes less than 1% of its revenue to such refurbishment projects. Nevertheless, in some business units as much as 60% of the company’s ongoing business can be reasonably classified as “green”, according to Skanska’s “colour palette” – a strategic framework accounting for environmental impact in things areas such as energy, carbon, materials and water.

Industry analysts say the advantage Skanska has in driving this market is its ability to invest its own money into the green refurbishment sector through a development business unit now accounting for 10% of the company’s overall $17bn annual revenues.

“Skanska is doing a good job,” says Tobias Krug of WWF Germany, “but this approach is working at the moment only for a very small number of … office buildings and commercial buildings located in prominent areas where investors or tenants are willing to pay extra money to get this green refurbishment.”

The legislation question

At the European level, there’s a great deal of hope pegged to energy performance legislation. So far this has been creeping forward since 2009 with only limited success primarily in France, the Netherlands and the UK, which have match-funding programmes in place.

For all new non-residential buildings in the post-2019 era, current EU legislation requires near-zero energy utilisation. The same will be required for residential buildings after 2021, but this will have very little impact on the renovation sector, Krug predicts. “I don’t see at the moment EU legislation as a great driver for more energy efficient buildings,” says Krug. “It’s better than nothing but it could be way more ambitious.”

This lack of ambition is especially harmful to the housing sector – where the energy bill as a low percentage of housing costs does not yet present an easily workable business case.

“The industry tries to sell it as being rather simple, but when you do a good renovation in the UK it costs €23,000 and in Europe you could look at upwards of €70,000,” says Sorcha Edwards, a project leader at Cecodhas Housing Europe, a network of social, cooperative and public housing federations working to improve access to financing opportunities for energy efficiency upgrades. “No energy bill is going to cover it.”

In the housing sector the business case needs to be broadened to the societal level, Edwards says, covering issues such as job creation. Since 2008, increased government subsidies in the Netherlands have enabled the Dutch government to introduce a so-called “housing cost guarantee” wherein landlords have some room to raise rents to repay for the investments.

Germany is also subsidising home energy upgrades through its KfW government-owned development bank. At the EU level the Beem-Up programme is aiming for 75% reductions in space heat energy consumption at three residential building sites in France, Sweden and the Netherlands.

Improved research methods and case studies will emerge to bolster a plausible business case, Morrin predicts. He cites as an example Skanska’s renovation work in Brogarden, Sweden, where passive house techniques have been applied to reduce average energy consumption from 216kW to 92 kW per square metre.

The project has since been adopted by the Beem-Up programme. Awareness raising and more baseline regulation are needed, Morrin adds, as well as continued work through the company’s own development business. “They are the bridgehead to promote to the market that this is for real,” he says.

A solid corporate history

Skanska was established in Malmö, Sweden in 1887 and started by manufacturing concrete products. It quickly diversified into a construction company and within 10 years the company received its first international order.

The company played an important role in developing Sweden’s infrastructure including roads, power plants, offices and housing. Growth in Sweden was followed by international expansion.

In the mid-1950s Skanska made a major move into international markets. During the next decades it entered South America, Africa and Asia and in 1971 the US market, where it now ranks among the largest in its sector.

The company was listed on the Stockholm Stock Exchange A-list in 1965. In 1984 the name “Skanska”, already in general use internationally, became the Group’s official name.

During the latter part of the 1990s, Skanska expanded substantially both organically and by acquisition. In mid-2004, Skanska decided to divest its Asian investments and sold its Indian subsidiary to the Thailand based construction firm Italian Thai Development Company.

Skanska operates in four business streams: construction, residential development, commercial development and infrastructure development. Currently, the company’s primary markets are the Nordic region, the US, UK, central Europe and Latin America.

The group’s operations are based on local business units. Generally, the firm has several thousand continuing projects. Skanska was ranked the 10th largest contractor in the world in 2008 and the 6th largest contractor in the US.

Skanska: fast facts

• The company primarily operates in Europe (Sweden, Norway, Finland, Poland, the Czech Republic, Slovakia, Hungary, the UK), the US and Latin America.
• It is headquartered in Solna, Sweden, and employs about 52,000 people.
• Skanska had sales of SEK 122.5 billion (£11.7bn) in 2011, operating income of SEK 9.1 billion (£868m) and forward orders of SEK 123.6 billion (£11.8bn).