Playing The Surge In Energy Efficient Buildings

By Aaron Levitt | May 28, 2012 AAA

With energy prices across the globe continuing to skyrocket in the face of rising demand, policy makers as well as the private sector have been looking for solutions to turn the tide of these higher costs. Increasing supplies, either through traditional hydrocarbon production or new renewable energy technologies, have been the go to method for many nations. As such, funds like the First Trust ISE-Revere Natural Gas ETF (ARCA:FCG) or the Market Vectors Solar Energy ETF (ARCA:KWT) have attracted much of the investors' attention. However, the idea of using our watts wisely rather than figuring out how to generate more power is catching on with the general public and law makers. For investors, the idea of energy efficiency could be more of a slam dunk for portfolios than additional generation capacity.

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The Growth in Smart Buildings
As the world grapples with high energy prices, the market for smarter, energy efficient buildings continues to grow as well. The bulk of our energy use here in the United States goes towards heating and cooling as well as lighting our real estate. Studies conducted by the U.S. Department of Energy concluded that buildings are responsible for roughly 68% of the nation's electricity demand and 40% of our natural gas requirements. With these facts firmly in tow, energy efficient real estate is becoming more important than ever in combating these rising costs.

Global cleantech think-tank, Pike Research estimates that the global market for energy efficient residential real estate will grow in size to reach an annual value of $84 billion by 2020. Both retrofits of older homes as well as new construction will drive the trend in the face of rising energy costs, increases in energy consumption and rising public concerns over higher levels of greenhouse gas emissions.
At the same time, Pike estimates that spending on commercial building energy efficiency measures will boom over the few years. By 2017, the market for commercial building energy efficiency products will leap by more than 50% and reach $103.5 billion. According to Pike, high-efficiency equipment such as HVAC units, lighting and smart building management software (BMS) will become more desirable for building owners and tenants over the coming years as energy cost savings will cover their initial investments. Both the BMS and HVAC markets are estimated to hit around $6 billion each over the next few years.

SEE: The Future Of Green Technology Investing

Bet on Efficiency
As a practical and easy to implement solution for weaning energy demand, investors should consider the efficiency sector as a portfolio addition. The PowerShares Cleantech (ARCA:PZD) tracks a wide range of cleantech ideals including pollution control and smart grid implementation. This includes a healthy weighting to firms with energy efficiency products like Power Integrations (Nasdaq:POWI) and Schneider Electric (OTCBB:SBGSY.PK). Overall, the exchange-traded fund (ETF) can be a good starting point for energy efficiency investors.

With heating and cooling demanding the bulk of a buildings energy use, companies that design and build advanced HVAC systems should continue to benefit. Ingersoll-Rand's (NYSE:IR) Trane unit produces high-efficiency products for both residential and commercial buildings across a variety of heating and cooling areas. The climate unit produced more than $8.2 billion in revenue last year. Likewise, both Johnson Controls (NYSE:JCI) and Honeywell (NYSE:HON) continue to see increased demand for their advanced HVAC products as well.

Controlling all of these advanced HVAC and lighting units will fall to the building management software firms. Pike estimates that global revenues from building energy management systems will see a CAGR of 14% until the end of the decade. Leading the pack in these software suites is tech stalwart IBM (NYSE:IBM). The firm recently won a government contract to develop and install its technology in 50 of the federal government's highest energy-consuming buildings.

SEE: Five Companies Leading The Green Charge

The Bottom Line
As energy costs continue to rise, so has interest in energy efficiency measures. With buildings commanding the bulk of the planets energy use, analysts at clean tech firm Pike Research predict the market for energy efficient real estate solutions will command the volume of spending in the sector. For investors, that spells opportunity. The previous picks, along with efficient lighting specialist TE Connectivity (NYSE:TEL), make ideal picks.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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