REPORT FROM THE U.S.—Utility costs are one of the most volatile components of a hotel’s profit-and-loss statement. Factors ranging from weather to supply-chain issues to government action can contribute to significant swings in utility costs. Hotel company executives say a combination of monitoring and controlling usage are the keys to keeping costs in check.
“It’s a multi-pronged approach,” said Mark Wolman, principal of Waterford Hotel Group. “From the buy side we have consultants constantly pricing the commodities, but we’re also vigilant in monitoring usage on the property level.”
An analysis of hotel utility data across the United States by STR Analytics, sister company of Hotel News Now, shows relative stability in most categories of hotel utility costs. On an annual cost-per-available-room basis, utility costs rose $106 from 2013 to 2014, or 5%. Electricity, the largest utility cost category, was up 4.5% during the period, while natural gas costs increased 9.8%.
Hotel company executives said there are some regional variances in changes in utility costs. According to Waterford CFO David Rebich, costs have remained stable in the Southeast and Midwest.
“In the Northeast, there has been a strain on supply, which has caused price increases in the past couple of years,” he said. Waterford operates 27 hotels, 20 of which are in New England. “It’s primarily due to the natural gas pipeline supply. Even though the price of natural gas has gone down, the lack of availability in the Northeast has caused prices for electricity to go up in the region.”
Rebich believes shortages will exist for the next two or three years until new supply lines are introduced in the region.
Monitor and control
Red Lion Hotels Corporation takes preemptive steps to keep utility costs in line, said Richard Gleave, VP of real estate, design and construction. The Spokane, Washington-based operator and franchisor partners with a utility consulting firm to keep tabs on potential rate hikes in the communities in which Red Lion operates.
“Based on our company history, they monitor the charges and manage the bill-paying for our hotels,” he said. “In many cases, it’s doing the simple things, like making sure we’re being billed appropriately. They compare our bills to historical usage to make sure the numbers are right.”
The consultant provides Gleave with running 12-month comparisons of how properties are using energy compared to what’s been budgeted and to historical levels of usage. The service is available to Red Lion franchised properties for a fee.
“Over the past four years, we’ve decreased our utility usage through these programs and in being thoughtful about equipment replacement,” Gleave said. “During that time, we’ve reduced our consumption by 10%. The improvements have been steady and incremental over the past few years.”
For some properties, Waterford locks in utility prices on one- or two-year contracts, Wolman said. At times, the executives will extend the contracts if costs are forecast to rise.
He said the company also seeks out and takes advantage of incentives offered by utility companies to improve the energy efficiency of its hotels.
“It’s a double-edged sword for us,” he said. “Connecticut probably has the highest energy costs, but on the flip side we have taken full advantage of rebates available to enhance our equipment and to save money.”
Energy-efficient equipment
Improvements in the efficiency of systems and equipment placed in hotels have helped hoteliers keep utility consumption under control.
“In general, our equipment is much more efficient than it was yesteryear, as are controls and integration systems,” said George Jordan, senior VP of operations for Chicago-based Oxford Hotels and Resorts. “Heat exchangers make a big difference in both enhanced guest comfort and lowered expenses. And, of course, we use brokers to buy the best-priced energy and hedge our bets when necessary.”
Wolman said there are plenty of easy-to-implement changes hoteliers can make to save money on utilities.
“The immediate low-hanging fruit are light bulbs,” he said. “When you convert to LED lights, you create better light than compact fluorescents and get a long-term—10 to 15 years—warranty on the bulbs. You have lower maintenance costs because you’re not replacing the bulbs very often, and the lighting is better.”
And Wolman said by taking advantage of available subsidies your net cost of the bulbs could be zero. He said company executives now are looking at energy-efficient alternatives for lighting in hotel hallways and garages.
He said it pays to survey properties to find opportunities to retrofit or replace equipment that’s not efficient. In the kitchen, the company has added sensors to help regulate the intake of fresh air into equipment and run fans at lower speeds. In other instances, variable frequency drives are installed to allow equipment and fans to run at alternative speeds.
At Red Lion, Gleave’s team has inventoried the building systems in each of the company’s hotels to identify the energy efficiency of each piece of equipment and what, when needed, could replace it and operate more efficiently.
“When we do need a replacement we’ve already looked at energy-efficient replacement products, and they have become our spec,” he said. “So when something breaks down in the future, we have a ready list of equipment we can pull from.”
In the future, Gleave said he will look at laundry systems and cooling towers and other equipment related to heating and cooling as items that can be upgraded with better efficiency.
Wolman cautions hoteliers to consider potential payback periods when deciding on equipment and system replacements.
“Sometimes the payback might be five, six or seven years, but we only will do a program if the payback is less than that,” he said. “If we look out two or three years, it is worth doing; otherwise, we hold off and wait for the next advancement. This is a good balance in that you get a good return immediately—in two or three years you get your money back—but you’re poised for the next move.”
While hoteliers can take steps to control utility usage and costs, some factors are out of their control.
“For us specifically, the biggest variable is Mother Nature,” said Jordan of Oxford Hotels. “Either a very warm or very cold winter makes budgeting a challenge. Let’s see what the predicted El Niño outcome is for this winter.”