Intelligent HVAC Control Systems Leverage Data for Improved Performance Article for Consulting Specifying Engineer By: Jared Malarsky, ARC Advisory Group More building owners and operators are paying attention to the long-term lifecycle costs of owning and operating their buildings, and are subsequently demanding HVAC solutions that allow them to perform the same sophisticated business analysis typically reserved for business applications. Their objective is to base operational decisions on real-time performance data to uncover hidden costs. Although efficient HVAC equipment helps, it cannot reduce costs by itself. This requires strategic and efficient management of building assets and building data, which is best accomplished with an intelligent HVAC control system. The systems being offered by major suppliers feature extensive wired and wireless sensor networks to gather data, web services to make transportation of and access to the data easier, more intelligent software that leverages this data to improve HVAC system operation, and the potential to make the data visible at senior management levels and integrate with enterprise systems.

Convenient and precise monitoring, control, and optimization of building operations require accurate, real time data and historical trends. These capabilities have existed in the manufacturing world for years, and it is partly the experience among business executives with initiatives such as enterprise resource planning, sustainability, and lean manufacturing that has led them to apply similar principles to building systems. The adoption of Web Services in the HVAC industry is an example of a significant innovation that is making access, monitoring, and control easier, more powerful, and more cost effective. The HVAC industry is increasingly adopting IT standards as a means of simplifying the management of building data. Now, internet-enabled thin client workstations, laptops, and even PDAs can be used to monitor and control a building or buildings.

In response to increasing interest in the HVAC controls market, ARC conducted a study to validate the trends and drivers affecting this market. ARCs report focuses on the intelligent control portion of HVAC systems such as controllers, software, and HMI, and excludes equipment such as chillers, fans, and sensors. This report looks at who the leading suppliers of HVAC control systems are, what challenges and opportunities are driving the market, and what the growth path is likely to be over a five-year forecast period. The market is broken down into segmentations including hardware, software, and services; world region; market sector or vertical; building size; and sales channel. Data for the report was gathered through interviews with senior executives of leading HVAC controls suppliers, secondary research, and from ARCs extensive database. Although the HVAC controls market is large and stable, it is nonetheless undergoing some significant changes, and our research identified some interesting issues. Lets take a look at a few of these.

System upgrades and replacement represent 28 and 25 per cent of revenue, respectively, and these numbers are higher when only looking at the developed markets of North America and Europe, owing to their enormous installed base. Traditionally, once a supplier succeeded in installing their proprietary system in a building, they could count on many years of steady replacement and

upgrade business. As todays building owners become more sophisticated, they value the flexibility of pursuing best-of-breed solutions. However, at the end of the day, most are cost-conscious and only want to replace or upgrade bad components, not the entire system. They also want to be able to connect multiple buildings together that may have systems from different suppliers. In this way, the installed base is driving the move toward open platforms and easy IT-based integration between newer systems and legacy systems.

With the shift to open, interoperable platforms, a dilemma crops up in the minds of suppliers; as the open systems that suppliers have reluctantly developed begin to allow existing customers to shop around when upgrading or replacing system components, it puts more pressure on suppliers to differentiate themselves in order to maintain the relationship with those customers. Suppliers have responded in part by continuing to innovate in their hardware. However, this will be less of a distinguishing characteristic going forward, since many of the controllers and associated hardware devices can be sourced cheaply as commodities from low-cost manufacturers in Asia. Service is where leading suppliers can best leverage their decades of experience and engineering resources, and this is where most suppliers are making their most concerted efforts to differentiate themselves.

Services account for nearly two-thirds of revenues for most leading suppliers, and this is the fastest growing revenue source relative to hardware and software. Most suppliers are expanding their direct service forces in a two-part strategy: first, they want to capture as much service revenue as possible; second, the complexity of their systems keeps increasing, so they want more control over the quality of the customer experience. The in-house training and specialized product expertise of direct supplier-employed staff is becoming more critical for installation, commissioning, and maintenance. There is still an enormous need for skilled technicians in this industry, and this remains one of the most interesting contradictions in the market; on the one hand, new systems feature improved interoperability, remote, real-time management over the internet, more user-friendly HMI, and enhanced optimization intelligence and automation; on the other hand, there is an increasing requirement for IT networking skills to make all of this work.

The HVAC industrys adoption of IT standards serves to simplify the management of building data; the operating system is located on a web server at a safe, central location, data is stored centrally on historians, and internet-enabled thin client workstations, laptops, and even PDAs can be used to monitor and control a building or buildings. The data and control commands are also packaged in a way that equipment and control systems from differing vendors are more likely to recognize.

Integrating HVAC systems without the use of IT standards has historically required costly customization, which hinders building owners as they acquire buildings with differing automation systems. When building data is repackaged using standardized Internet communication protocols, such as Ethernet, TCP/IP, SOAP, and XML, it reduces the amount of customization required and makes it possible to utilize existing internet infrastructure. However, the migration to IP-based systems requires: (1) the buy-in and support of the building IT department, because they control the

network; and (2) stronger IT skills on the part of the people who install, operate, and maintain these systems.

All controls suppliers who were interviewed agreed that, despite the many benefits of adopting IT standards in intelligent building systems, one of the remaining challenges is the need for the customers IT department to become involved in integrating the HVAC control system into the corporate IT network. A lack of mutual understanding between IT engineers and facilities managers is a common problem. This human factor needs to be addressed for a system to be implemented and operated effectively. Education, communication, and leadership at a senior level are the keys to overcoming this issue. This is relevant from both a sales and operations point of view, and numerous supplier executives explained that the customers CTO and CIO are becoming just as important in the bidding and implementation process as the traditional facilities manager.

The HVAC controls market is expected to continue growing at a compounded annual growth rate (CAGR) of nearly 4% over the next five years. The market exceeded $10 billion in 2006 and is forecasted to approach $13 billion in 2011. One of the key factors contributing to growth is the drive to upgrade and efficiently operate the aging facilities in the mature markets of North America and Europe. The education sector is currently the largest market for HVAC controls, accounting for nearly one third of leading suppliers business. Its 4.3 per cent annual growth rate is also the highest. Interestingly, there is a chicken-and-egg-type debate about the reasons for this; profit is not a primary objective for most schools and they have a reputation for tight operating budgets. It may seem counterintuitive to many people that they can afford advanced HVAC controls systems. Given their limited budgets, however, it could be argued that they cant afford not to invest in newer systems that offer savings from improved energy efficiency, operations, and maintenance. Viewed another way, most schools own their buildings and will operate them for a long time. The Department of Energy reports that HVAC consumes up to 40 per cent of energy in an average school building, and school leaders are well-aware of these long-term costs. Consequently, they look seriously at the Total Cost of Ownership (TCO) for an HVAC system in the context of reduced operating costs, and conclude that it is a worthwhile investment.

Finally, suppliers report that educational customers often buy systems for a network of buildings. This could consist of a public school system spread out across a town or city, or a university with dozens of buildings on a sprawling campus. Such schools are in a unique position to leverage the networking capabilities and multi-vendor interoperability of modern web-based control systems to consolidate many buildings onto a centralized control system. This reduces staffing levels and provides a single point of control. This is in stark contrast to the office building sector, where ARC has identified a disconnect between owners, who usually want to build the building as cheaply as possible, and tenants, who want a comfortable and convenient environment.

Energy management and optimization requires convenient access to detailed, real time system data. Wireless solutions are one way to achieve this, and are being offered by all the leading suppliers. In

spite of this, adoption levels in the market remain modest. On average, suppliers report that only about five per cent of the systems they sell use wireless to any significant degree. Nevertheless, some customers are employing wireless technology to expand the reach and density of sensor networks, a basic step toward efficiency. The labor costs for installing wireless devices are lower than for running cable, and wireless devices can be used where traditional cable methods would be impossible or prohibitively expensive. Additionally, wireless networks are easy to reconfigure and expand. Most current systems have automatic configuration features and technology that helps maintain clear signal paths, in spite of interference or signal obstacles. Although wireless technology is maturing, challenges to widespread adoption remain, including protocol standardization, battery life, reliability, and equipment cost.

Heating and cooling energy costs represent a major part of most commercial buildings operating cost. As energy prices rise, and the environmental impact of commercial buildings becomes a political and social issue, owners are increasingly looking for solutions that provide the monitoring and control features to optimize efficiency while maintaining comfort. Rising energy costs and high energy consumption not only affect a companys bottom line; environmentally friendly, or green, business practices are becoming a measure by which companies are judged by the public. In response to this, business leaders are increasingly working to enhance their corporate image by incorporating efficiency and sustainability into their business models. EPACT 2005 and Executive Order 13423 are examples of legislation which targets energy consumption in buildings. Some regulations offer financial incentives in the form of tax deductions for buildings that meet strict efficiency standards and use renewable energy sources, while other regulations restrict the materials, equipment, and design of certain buildings. The impact of these trends in legislation need to be taken into account when planning for product development, service programs, and employee training.

Third-party organizations that rank buildings according to criteria such as energy efficiency and environmental impact are growing in popularity. Companies that participate in programs such as the EPAs Energy Star Corporate Governance program and the United States Green Building Councils (USGBC) Leadership in Energy and Environmental Design (LEED) rating system achieve a triple win; they are decreasing operating costs, helping the environment, and earning public kudos.

Energy management solutions analyze an organizations energy profile and place certain buildings in a particular energy saving mode. For example, demand response is a program designed to allow an intelligent HVAC system to monitor energy usage, communicate with utilities, and select an energy conservation mode based on predetermined optimization profiles. This gives the utility more options for distributing its finite capacity, while the user is typically rewarded with lower rates. Likewise, opening up building data to integrated maintenance systems provides a source of quantifiable evidence based on real time asset condition monitoring to justify necessary maintenance activity.

In the education sector, many schools are leveraging the annual energy savings offered by high-efficiency systems to subsidize the cost of purchasing and installing such systems. Numerous suppliers are creating programs to help schools avoid the up-front cost, including favorable financing and equipment leasing. Of particular interest is the trend whereby suppliers and energy management specialists are offering performance contracts to schools and other types of users. These programs guarantee savings, which brings us back to the theme of services: energy management services is the fastest-growing segment in the HVAC services industry, both among leading controls suppliers and third-party service providers. Monitoring and optimization services strengthen the relationship between HVAC service providers and clients, which typically leads to further hardware and service revenues. End users benefit by outsourcing this responsibility to experts while they focus on their core competencies. Suppliers, systems integrators, and contractors should evaluate their capabilities in this area and anticipate the evolving needs of increasingly sophisticated, cost-conscious, and environmentally-friendly building owners.

Author InformationJared Malarsky is part of ARC Advisory Group's market research team, and will manage ARCs operations in China starting in 2008. Building Automation Systems (BAS) are one of his focus areas, and his regional focus is developments in building automation and manufacturing in the Far East, specifically China. Prior to joining ARC, Jared lived in Beijing, China for six years, where he was most recently involved in the general aviation segment of China's growing aerospace industry. Jared graduated from Cornell University with a BA in Government Studies and a concentration in International Relations, and speaks Mandarin Chinese. ARC recently published Jareds HVAC Control Systems Worldwide Outlook. This 100-page report provides an overview and analysis of the HVAC Controls market, the trends driving this market, the market share and profile of leading controls suppliers, and a five year forecast broken down by region, market segment, building type, and by hardware, software, and services. More information is available at www.arcweb.com/res/study. About ARC: Founded in 1986, ARC Advisory Group has grown to become the Thought Leader in Manufacturing and Supply Chain solutions. No matter how complex your business issues, our analysts have the expert industry knowledge and first-hand experience to help you find the best answer. The author can be reached at 781-471-1139 or by e-mail at jmalarsky@arcweb.com.