Explaining Budget Variances

A budget variance is the difference between the amount you budgeted for and the actual amount spent.  When preparing energy budgets, it is practically impossible to be “right on the money;” therefore resulting in a budget surplus or deficit. The main goal is to keep these margins slim, especially since energy is one of the leading expenses for buildings. So many factors can affect your utility budgets, which can result in higher than hoped variances; however, they are definitely explainable.

The most obvious factor one may look at when explaining their energy variance is usage. Some scenarios where usage could be affected are:

• Was there more or less electricity, steam, gas, or water used than budgeted? Energy consumption is extremely volatile and a lot can happen between the time a budget was created and the month one is reporting. For example, if a tenant who is a “high energy user” lease expires, and it wasn’t incorporated into the budget, it could have a great effect. The same could happen if a new tenant moved into the building.
• Were there any energy efficiency projects implemented throughout the year? Something as simple as replacing old bulbs with LED lights may decrease electricity consumption. If projected savings weren’t integrated into the budget, one may be looking at a budget surplus.
• Has the chief engineer made any significant operational changes that may have affected the usage or demand?

These are all factors one needs to think about when observing actual versus budgeted usage.

Another key element when looking at usage variances is weather. However, only when the data is normalized, is it possible to quantify consumption variables due to weather extremities. It is important though to look at heating and cooling degree days especially in the summer and winter months. Electricity is sure to rise in the hot summer months when using air conditioning to cool down the building, while gas or steam is being generated in the cold winter months to heat the building.

However, even if the energy consumption projections are on target, if accurate rates were not projected, then high variances are likely.

• Was the most recent tariff of your local distribution company used when preparing the budget? The Public Service Commission may have issued a rate case that you were initially unaware of.
• When preparing the budget, did you know what your supply rate structure was going to be for electricity and/or gas the following year? If you had signed a contract for a fixed rate with your electricity service company, you would think that the actual rate would be right on target. However, legislative changes may have been included that could have increased your costs. If you aren’t in a fixed supply deal, unpredictable market prices could easily cause wild variances.

For more information on how to budget for the recent effect of the Tax Cuts and Jobs Act of 2018 on utility expenses, read on here: https://watchwire.ai/tax-cuts-jobs-act-impact-con-edison-rates/

There are many components that should be incorporated in preparing energy budgets and ultimately, the more factors implemented, the easier it is to explain budget variances. EnergyWatch utilizes our expertise of the energy market, utility tariffs, consumption, and real estate to forecast your electric, natural gas, steam, fuel oil, water/sewer, chilled water, and hot water budgets for the future.  Our budgeting algorithm accounts for factors such as occupancy, weather, energy conservation measures, and capital projects, regulatory changes, and more, to account for budget variances and provide a data-driven, defensible energy budget for your building(s).  Contact us to learn more about how we can help simplify your budgeting process.