by H. Victor Seeman, BSc, MBA
Submeters allow tenants to pay only for the electricity they use. This user-pay system creates an incentive for tenants to conserve electricity and allows property owners/managers to both regain control of their electricity budget and save money.
If you're an owner or manager of a multi-unit residential building in Ontario, chances are good that you've heard quite a bit about electrical submetering (ESM) and the need to do it. Chances are also good that you may be confused by - or have no idea about - what's going on, why, and why now. This article is designed as a very basic Q & A primer to help give you a simple understanding of ESM and how it can help your business.
What is electrical submetering?
In this context, submeters are meters that measure individual electricity consumption in each residential and/or commercial unit of a multi-unit residential or commercial building. Submetering enables a user-pay system. Tenants are billed individually and pay only for the electricity they actually use in-suite (common area usage is still billed pro-rata and collected by the owner through monthly rent/condo fees).
What is the rationale for doing this?
Traditionally a multi-unit building had only one bulk electricity meter, so the only way to apportion costs fairly to residents was through a pro-rata flat fee, often based on bedroom count or square footage, rather than actual consumption. This fee was then included in the rent or condo fees; however, this method removed any financial incentive to conserve electricity. By moving to a user-pay system, consumers can directly receive the financial benefit of their own conservation efforts.
Sounds great in theory, but does it actually work?
Yes it does. From the consumer's perspective, studies have shown that when buildings switch to user-pay ESM, about 60% per cent of residents save money, about 20% pay the same amount, and the remaining 20% see their bills increase. Why? Because the 60% who conserved electricity by nature were cross-subsidizing the 20% who were NOT conserving it! However, the increases often last no more than the first few months, since the incentive to save starts to kick in. From the environmental perspective, total building electricity consumption drops substantially - from 10% to as much as 25% post-conversion.
Will saving the electricity in my building actually make a difference?
The Ontario government is counting on it. In Ontario, only about 20 per cent of the roughly 2.6 million condo, rental, and social housing units are submetered for electricity. The government is targeting a total reduction in demand of 6,300 megawatts and this initiative is expected to make a material contribution.
Why is this happening now?
Aside from the recent run-up in energy prices and the global "green" push for environmental responsibility, the Ontario government has passed several pieces of legislation. The Energy Conservation Responsibility Act 2006 included aggressive targets for both 2007 and 2010 for smart meter installations. Similarly, the Residential Tenancies Act 2006 contains Sections 137 and 138 that deal directly with the requirements for the submetering of rental apartments. Interestingly, whereas the Act was proclaimed into law in January 2007, Sections 137 and 138 were NOT proclaimed and therefore are NOT YET the law. Nevertheless, the direction is clear. That is why many landlords are opting to implement submetering now - while the processes and requirements are potentially more flexible.
Everybody else benefits - will I get to benefit too?
Absolutely - and here's how:
- You regain control of your electricity budget. You are no longer at the mercy of tenants with no sense of actual consumption, actual costs, and no incentive to save. If all tenants are submetered, your exposure to price and consumption fluctuation is only on the common elements, which is both a smaller percentage of the total and much more controllable;
- You avoid the need to seek above-guideline increases to compensate for large jumps in electricity bills;
- You get a revenue lift. In many rental buildings (but not all) our experience shows that the rent reduction required at turnover to compensate for converting from "hydro included" to "plus hydro" is less than the allocated rent abatement for hydro - and in some cases none at all. This brings more pure revenue to the bottom line and more value to the building through the cap rate multiples (in fact, virtually always in excess of the cost of the meters); and
- You are pursuing a legitimate "green" initiative, demonstrating your commitment to prudent environmental stewardship.
Is a smart meter the same as a submeter?
Not necessarily. All smart meters can be submeters, but not all submeters are smart meters. For example, some submeters are no more than an analog or digital re-creation of the "dial under glass" meters of old. In contrast, smart meters incorporate any number of additional capabilities. They include:
- Automated Meter Reading (AMR), which allows for remote meter reading (saving the cost of the meter reader);
- Interval Metering (IM), which keeps track of both how much and at what times the electricity is being used. This enables consumers to benefit from Time-Of-Use (TOU) electricity pricing, where non-peak electrical consumption is discounted;
- Demand response and management controls, including for example, the ability to adjust thermostats remotely.
- Perhaps the greatest benefit of a smart meter is that residents can log into their personalized account on the Web and see various usage reports, including - potentially - consumption in near-real-time. This empowers them by giving them the information necessary to make intelligent consumption choices that suit their lifestyle.
I don't want to bother my residents with the mess and inconvenience of in-suite work. Now what?
The good news is you likely won't have to. Just as computers have become smaller and more sophisticated, so too have smart submeters. In most cases the smart submeters can be installed in the hydro closets in the hallways, so the only in-suite activity required is a 2 minute test at the end of installation. Typically, in any given suite, power is only down for 4 to 8 hours.
Can I install submeters in a building with electric heat?
Not only can you - you must! The greatest benefits and savings accrue to buildings with electric heat. The only difference is that the heating equipment is likely on 240 volts, rather than the 120 volts for "lights and plugs". In that case it would necessitate two meters per suite, rather than one.
I really want this, but can I afford it?
The good news is that it likely costs much less than you think - around $395 or less per meter ($4.95 or less /month). Besides, it is often the case that an ESM firm’s monthly Administration Fee plus Meter Lease Fee is still equal to or less than an LDC’s monthly Administration Fee alone. As expected, most reputable ESM firms have various financing options available and will work with you to meet your specific needs.
How do I get resident buy-in?
If this is confusing to real estate professionals, how much more so to individual residents. As well, some residents may see this initiative as nothing more than a cash-grab by landlords/condo-boards; therefore, good communications is critical. These two key success factors will help ensure a smooth implementation:
- Choose the right ESM partner that can help educate your residents about submetering by providing information, orientation sessions and ongoing support to owners/condo-boards, property managers and residents alike; and
- In the case of rentals, introduce "hydro extra" pricing in stages. The first stage involves introducing it only upon suite turnover and not on existing tenants. The second stage involves soliciting voluntary sign-up among existing tenants (since 60% save money). The last stage involves converting those who have not yet signed voluntarily.
Paying up-front but waiting for suite turnover could kill my financials!
Not necessarily. Even though submeter installation generally needs to be completed on the whole building at one time, a number of firms have an option that, aside from a nominal fee, billing and meter rental fees do not commence until suite turnover, i.e. the metering company carries that cost. This will actually bullet-proof your bottom line.
Will my building qualify? What's the next step?
A reputable ESM firm will send out - at no cost to you - a trained technician to do an initial site survey and determine if and how a smart submeter installation would take place. The good news is that in most cases buildings can be converted to ESM.