Harvard economist Robert Stavins recently published a study assessing the impact when US cities require their real estate owners to perform periodic energy analysis on their buildings. As Boston considers passing its own energy benchmarking ordinance, Stavin studied other existing programs and concluded “there is currently no real evidence that these mandatory programs lead to any changes whatsoever in energy use.’’
Then we read the fine print. The study, funded by the Greater Boston Real Estate Board, was neither peer reviewed nor academically published. Uh boy.
So let’s take a step back and consider the following timeframes:
NYC’s and San Francisco’s energy benchmarking programs only went live requiring reporting a year ago. Seattle, Philadelphia, Austin started since then and Washington DC and Minneapolis just launched in the last few months. (Which means Boston’s Green Ribbon Commission is actually late to the party in pushing to get this new policy passed.)
To convince a building owner to implement an energy efficiency upgrade takes our team an average of twelve months. Then we install the project a few months later. Then the savings need to materialize and be measured. A utility study which independently measured results could probably be delivered a year after that – then it could given to Professor Stavin’s team so they could draw their own conclusions.
Get the picture? It takes at least a few years for this sort of adoption to be fully measurable.
The report also asserts that similar programs in Europe have no academic studies validating such a policy’s impact.
But while many countries are implementing their own programs, like the US, most of these have also developed in the last few years. It may have been better to analyze the adoption in Australia, whose benchmarking ordinances were initially introduced in 1998, likely making it the world’s longest standing program? And back here in the US there are studies which counter his “too early to tell” opinion – check out the Georgia Tech study, the California PUC study or the Facilities Manager review.
Pushing it further, Larry Harman’s Boston Globe editorial suggested that the new policy would “aggravate” Boston’s real estate owners. He opined that the policy of forcing expensive energy audits for buildings that are generally older than the rest of the country, with fines for non-compliance, would just be unfair.
Yes, Boston’s built environment may be old, but in real estate reducing a building’s operating costs adds directly to the property’s income, which increases the value of that property. Massachusetts has some of the highest energy rates in the country and ranks number three (behind CA and NY) in providing tax-payer funded energy efficiency incentives. In our experience in doing work across the country the financial return for upgrading older buildings in Boston is probably one of the best in the US.
You can’t catalyze energy efficiency change if you don’t first measure and report energy consumption. Building energy benchmarking is only a first step, but it can change consumer psychology through new awareness, which in turn can drive behavior change and investment in energy efficiency. You either want to drive it or you don’t – which is the question Boston legislators can vote on next…
Economist’s normally search for the social drivers. Stavin’s colleagues down the hall in HBS’s Marketing department must have already analyzed the now famous Oberlin college dorm research study where dorm residents, given their own energy usage information, competed to reduce their consumption. And the consumer research which confirms the reduction impact when consumers are told how much energy they consume relative to their neighbors. Putting a ranking on a commercial building is the same bet. Australia’s NABERS system uses a one to five gold star rating and Energy Star uses scores from 1 to 100 – but either way, it gets the simple point across – you’re doing well or you’re not.
But Stavin comes at it from an economist’s viewpoint, not a consumer behavior angle – so let’s stick to the business and the financial implications.
So let’s consider a 250,000 square foot office building in Boston.
At an average value of $250 per foot, the building would be worth @ $62.5 million. Its annual real estate taxes might be $2 million, common area maintenance costs $2.5 million and utilities $1 million. Let’s assume the owners have @ 50% leverage and expect to make 15% on their equity or $4.7 million in earnings per year.
Running an Energy Star Portfolio Manager model on this building might cost $2k. A full blown energy assessment (likely subsidized for 50% of its cost by the utility) might be another $5 – $10k. (btw – energy audit costs are only going down, as we now see a number of new startups focused on providing high volume, low-cost energy audit tools.)
So over a five year period, if the owner runs an Energy Star model every year and performs one energy assessment, the added cost for Boston’s energy benchmarking ordinance would be approximately $15 – 20k.
A typical energy assessment for this sized building might identify HVAC and lighting upgrades which save 15% of the building’s utility costs ($150k). The investment would be $450k, but the utility would support a third of the project’s cost, producing a two-year payback on the owner’s net $300k investment. The study would likely identify no-cost behavior changes that save another 3% of the building’s energy costs ($30k).
Post the energy efficiency upgrade and behavior change savings the building now earns $4.9 million and is worth $2.4 million more using a Boston Class A cap rate of 7.5%. (Income taxes would also reduced using Federal EPAct accelerated depreciation, but that’s icing on the cake.)
So let’s recap:
Boston implements a new real estate policy and this owner is forced to spend @ $20k over five years to comply.
If the owner decides to invest nothing, the energy assessment alone will likely show a way to save $30k per year.
If the owner decides to invest in upgrades, the $320k investment over five years will add $180k in operating income each year, and increases the property’s value by over $ 2 million whenever they sell the building.
When you consider typical government compliance policies, does this one really seem that unfair?
Last week I participated in a day long energy efficiency finance workshop, hosted and co-produced by Bloomberg’s New Energy Finance Group and the Environmental Defense Fund. Held at Bloomberg’s hip and upbeat headquarters, it had the feel of an investor conference, although most people in the room had yet to make one….
The folks at EDF have been following this emerging market, having introduced a white paper last year, along with my friend Brad Copithorne’s effort to develop a new On Bill Repayment model that will start in California and hopefully work its way across the country in the coming 12-18 months.
The day was kicked off by Dan Doctoroff, Former Deputy Mayor of NYC, now CEO/President of Bloomberg. Dan talked about how PlaNYC (introduced while he was in the NYC administration) is driving NYC building efficiency performance tracking, while investing $800 million of taxpayer capital over the next decade. Although the original program was focused on reducing greenhouse gas emissions, the designers are modeling an attractive 17% annual return on the city’s investment.
The disconnect of NYC needing to make these investments using taxpayer capital was the basis for the conference. Since energy efficiency retrofits like these have strong long term returns, outside private, not taxpayer, capital should be running after this estimated $18-20 billion market.
Dan/Bloomberg’s view is what’s missing is not the capital nor investor interest, but the market data. His point is that new financing markets require measurable data in order to assess risk, track performance and provide liquidity. Bloomberg, founded years ago as the first company to aggregate data, pricing calculators and buyers/sellers of bonds, sees similar characteristics today in the energy efficiency finance market.
But missing data is not the only problem. Each sub-sector is so different that there will likely be unique financing packages for each. The investment which allows a homeowner in Maine to add insulation is very different than the one which pays for a new boiler in a commercial tower, owned by a real estate LLC, with a bank already breathing down its neck. Marshal Salant from Citigroup presented a very useful slide highlighting different energy efficiency finance techniques and their application to the four main sub-sectors: MUSH, residential, commercial and corporate/industrial.
So is the chicken or the egg? Does there need to be enough investment which has historically performed (and generated a stream of supporting data) before investors rush in? Or is there already enough data and it simply needs to be aggregated and distributed more widely?
The note on Marshal’s slide which said “Yes ?” about whether a financing technique would work may have best captured the day’s discussion.
There are two sides to a company’s energy profile – consumption of energy by its facility assets (HVAC, lighting, etc.) and it’s purchase of utility services (electricity, gas, etc.) In practice energy engineering teams (including ours) spend most of their time identifying opportunities for energy efficient equipment upgrades or behavior changes. Purchased utility services are usually taken as a given, with utility bills being studied for historical inflation rates, usage patterns and demand charges.
But the Enterprise Smart Grid framework highlights that to operate most efficiently companies need Visibility, Control and Management Integration for both of these elements. And here there’s a useful lesson to be taken from the information technology industry.
In the 1970′s corporations used time-sharing to access mainframe computing, paying on a per-minute, per-job basis – call it computing as a service. A decade later, microprocessor advances made it financially practical to bring PC and server computing in-house. By the late 90′s software as a service, using low cost Ethernet connected servers, made it equally attractive for companies to move their computing back out to the network, this time the Internet.
So over a thirty year period technology advances shifted the best economics for corporate IT from pay-for-service, to owning and back to pay-for-service.
Power stations (electricity as a service) predate corporate IT by almost a century, first being delivered in the late 1880′s. Like the mainframe model, utility providers centrally manage a high capital cost system (a generator) and deliver the service (electrons) over the network (the electrical grid) with customers paying as they go for what they consume. Generally they’ve had few alternatives to buying their electricity in this local utility pay-for-service model. Only a handful of the largest industrials have been able to cost justify installing and operating their own on-site primary generators. Also, in the last decade companies in deregulated markets have been able to hedge a portion of their electricity costs by purchasing third-party power generation.
With the latest solar PV technology advances (and renewable incentives) some have considered bringing a portion of their electricity generation back in-house. But with today’s average US cost of $0.11kWh, the math still points to pay-for-service (i.e. solar PPAs) and that only in four to five states in the country.
Steam as a service (Saas) is less well known, but has also been in existence for almost a century. The industry’s trade association (International District Energy Association) started in 1909. Universities and hospitals have run their own steam systems for a long time; with Harvard’s Blackstone plant having been in service since the late 1800′s. NYC’s ConEd network, operating since 1882, is the largest in the US.
As with electric utilities, the Saas model runs a centrally managed high capital cost system (a boiler or cogen plant) to deliver the service (Btus) over the network (physical steam piping.) Technology has not changed so rapidly in steam generation, with the latest large boilers moving from @ 70 to 80 percent efficient over the last 50 years. While 90% efficient systems are in development, their high cost likely make them impractical for quite some time.
The corporate alternative to Saas involves installing a large on-site steam boiler and retrofitting a building’s mechanical system. Where PV is renewable, solid state and overproduction can be sold back to the grid, financially modeling on-site steam is more complicated, including estimating future gas prices, a total maintainance cost for a lot of moving parts and a less clear excess steam utility sell back model. (For an reference point on the cost of running a 100-mile steam pipe network check out ConEd’s 2010 long-term investment plan)
Recently we performed an energy assessment on a 20-story New York City commercial building still using district steam from ConEd. Our analysis confirmed a three-year 40% increase in our customer’s cost of steam, this coming principally through newly assessed demand charges. So the bring it in-house payback model needed to forecast the future cost of ConEd steam versus the new boiler and retrofit cost, the future cost of gas at a 20% premium to ConEd’s high volume cost, the on-going maintenance costs, with the ConEd incentives which supported this retrofit. (Another reminder of why utility incentives needed to be decoupled)
The simple payback was 5 years. Which means NYC steam as a service has officially priced itself out of the market and we’ll be working with this customer to bring their “mainframe” in-house.
Another alternative for the largest corporate users is a pay-for-service delivered by a non-utility third party. Like solar PPAs for electricity, these vendors specialize in owning, operating and maintaining large traditional boilers, chillers, cogen and electric generator systems for single or multiple tenants, selling chilled/heated water, electricity or heat with long term purchase contracts. But these agreements do have their challenges – and don’t lend themselves towards a customer changing their mind after a few years.
In a world where utility rates and incentives are dynamic, energy costs are likely to be accelerating (after a three-year hiatus) and new energy technology development is being introduced, our engineers should expect to be performing more of this in-house vs. pay-for-service tradeoff analysis.
For years large ESCO’s (Johnson Controls, Siemens, Honeywell, etc.) have been performing Level Three Investment Grade Audits (IGAs), which are required for MUSH/Federal performance contracts. Their audits produce a detailed energy savings spreadsheet which makes it possible for a tax-exempt entity to issue bonds which pay for the retrofits, all leveraging the ESCO’s “guarantee” for the projected savings.
But while the corporate world is moving toward real-time management of energy consumption, traditional Level Two energy audits, producing 100+ page reports with graphs, spreadsheets and efficiency recommendations, remain a throwback to a time before the Internet. In our experience they rarely have a big impact.
Because from the moment the inch-thick document hits a facility manager’s desk it’s outdated. Read by just a few managers, the analysis is normally used only during next year’s corporate budgeting process, allocating capital for select projects to be implemented a year or more later. By then the company’s operating patterns, energy rates and utility incentives have changed, plus they’ve lost the savings during this 18-24 month span. Not exactly real-time energy management.
Obviously the approach is broken.
Instead of a snapshot audit, organizations should approach energy efficiency as a perpetual process, like they do with quality management. ISO9000, Six Sigma and TQM don’t look for product defects once a year. Quality is a management process and companies are always trying to get better - it’s the same with energy efficiency. Last month ISO published it’s 50001 energy management standard which provides a framework for the energy management process.
As part of the process, we recommend that all energy efficiency recommendations be posted to a corporate energy site, where a broader number of employees can review, offer suggestions and act on them. No-capital cost behavior change is a huge opportunity, so this site should also track and report current energy usage for each of the company’s facilities, with sub-metering for all major systems. This usage reporting establishes a public baseline and can be coupled with tracking efficiency projects. What better way to have a system for tracking future progress?
Start-ups like Retroficiency and IBlogix can even provide no truck roll Level 0 “pre-assessments” for sites where no initial on-site analysis has been performed. Their data analytics applications provide energy assessments using only utility bill information, weather patterns, the age of building and some basic building information – that can definitely jump-start the process.
For project capital companies should implement an energy efficiency “fund,” which sits outside the normal capital budgeting process. This would allow the company more rapid response to new utility incentive program or for projects with a 6 to 12 month simple payback. Harvard University uses something like this with its Green Campus Loan Fund. The fund should also include equipment that is nearing end of life where savings can pay for proactive replacement.
When asked by our customers, yes, our team will still deliver old fashioned energy audits - but we’re doing our best to convince them instead to take this new process based approach.
And since even the word audit makes people cringe, we’ve got to come up with a better name for it as well.
Jim Rogers from Duke Energy famously promotes efficiency as the “5th Fuel” in the world-wide portfolio of energy production. He echoes the consensus that renewable energy requires massive incentives to make it financially viable, while energy efficiency does not, and hence these opportunities should be more actively addressed.
The dirty little secret is that energy efficiency regularly requires incentives as well.
Though it may seem counterintuitive, many companies look for a five to ten year payback on their renewable energy investments, while they continue to apply “it better be under a three year payback or it won’t get done” for more traditional energy efficiency projects. Consequently, while EE projects have better returns, incentives are often still critical to getting these projects inside this payback hurdle.
Over the last twelve months, 70% of the EE projects Groom Energy implemented have been supported by some kind of financial incentive. Whether it’s a traditional motor or lighting upgrade with a utility rebate or a CHP system gaining Massachusetts’ Alternative Energy Credits, our engineers spend a lot of time trying to identify and secure the best incentives available for each customer project.
Each utility, state, city, county or municipality may have it’s own specific program. In California alone there are over 200 different efficiency incentives. Providing a bit of help on the identification front, the folks at DSIRE are doing their best to keep up, with an on-line database tracking thousands of renewable and energy efficiency incentive programs across the entire US.
Determining how to sure our customers will get the incentives can be just as painful. Some authorities take a prescriptive approach, allocating a specific $ incentive figure for each measure deployed. Others take a custom approach, applying a $ figure for the total energy saved or produced. Some burden projects with small $ incentives with detailed energy modeling and pre and post project measurement and verification.
While the complexity provides a distinct competitive advantage for those who have the IQ and fortitude to understand and maximize the incentive benefits, customers perceive much of this as additional risk. And with risk comes hesitation.
Because of this, some groups are pushing for a national approach to energy efficiency and renewables, a National Efficiency Standard. The Energy Future Coalition, in partnership with American Council for an Energy Efficient Economy (ACEEE), Natural Resources Defense Council, the Environmental Law and Policy Center, Environment Northeast, and the Sierra Club, have proposed an EERS that sets a 15% electricity and 10% natural gas savings target by 2020. Other approaches would equally value the benefit of a megawatt saved or produced. This would be similar to a REC which establishes value based on the projected performance of a renewable asset, but on a national scope. Others, differentiate between production and efficiency, rewarding each with it’s own specific incentive.
What most of these folks do agree on is that reducing the complexity and risk of the puzzle of incentives would deliver more impact than most other energy or carbon reduction initiative in the que. The question remains, who will lead the effort to drive it? The Department of Energy? The White House?
Today I attended the Clean Economy Network‘s first conference in Washington, DC, fittingly on the eve of President Obama’s State of the Union address.
The conference covered the latest cleantech policy and legislative debates, as presented by and to venture investors, entrepreneurs, policy makers, NGO and utility executives. The topics were broad ranging, from the EPA’s role in defining GHG rules, to the challenges with upgrading our electrical grid, to alternative fuel sources for the next generation of power plants and transportation systems. The speakers were candid about their views.
My favorite nuggets:
From panel speculating on the EPA:
- Don’t expect an attempt at carbon tax/cap-n-trade legislation from the EPA anytime soon. Even if the EPA thinks they have the authority, the fastest it has ever implemented anything is 18 months – and it is always followed by years of litigation.
- However, the EPA is getting dangerously close on attacking carbon, and if it comes to litigation, history tells us Congress will back off immediately as there is no win for politicians once this happens. The better hope is that the EPA’s direction catalyzes the House and Senate to finally pass climate legislation, BEFORE the EPA reaches this point of no return.
- The US’s current implied price of carbon (based on government and utility incentives) is $90/ton for wind, $400/ton for solar PV, $200/ton for ethanol fuel and $4,000 per ton for “cash for clunkers.”
- Consider history lesson where deregulation in railroads, wireline, wireless and cable TV all led to more competitive markets, where innovation ultimately drove greater efficiency. Energy markets are ready to have the same opportunity.
From Ray Mabus, the US Secretary of the Navy’s presentation:
- Secretary Mabus reminded the audience how controversial each fuel source change to the Navy’s fleet has been – going from wind to coal to oil to nuclear. In each shift there was significant tension about whether the new fuel source was reliable enough. Now as the Navy plans to introduce a clean fuel fleet with demonstrations next year he confirms that skepticism is increasing….
From John Woolard, CEO, BrightSource Energy’s presentation:
- John described the how the renewable energy legislation vacuum beyond 2016 is already impacting any new utility scale solar thermal power plant projects. Without long term legislation investors can’t make their decisions. While we’ve commented before on the need for predictable utility incentives for energy efficiency year to year, John’s observation really puts the long term need in perspective. The cleantech market requires long term visibility and predictability.
On this last nugget, and as I sit here listening to the State of the Union address, I’m left crossing my fingers that President Obama’s outward determination to address our “Sputnik moment” will lead him to drive US cleantech legislation which outlives his presidency and has a lifetime impact on the industry.
Today I’m attending the 27th annual NAESCO conference in Phoenix, AZ, a conference that serves as an annual checkpoint for the ESCO industry.
Yesterday’s panel, “Does the ESCO Business Model Version 2010 Still Get The Job Done?” featured a number of ESCO legends (senior executives with 20+ years of industry experience) and each openly discussed how the ESCO market is evolving, good and bad, and where things may be headed.
Four topics stuck out:
1. Is the Stimulus program finally done? Thank god…With their focus on performance contracts for tax-exempt MUSH (municipal, university, schools, hospitals) customers, ESCOs were slowed in 2009/2010 by the ARRA/Stimulus program, which tentatively assigned “free” grant capital to their customers. (We heard this last year as well) In practice customers paused on ESCO contract decisions while waiting to see if they would get a grant. One executive said this market stall cost his firm “$50-60 million in project bookings last year alone.”
2. Lobby like the Solar Industry. The solar lobby in Washington and around the country has successfully convinced several state PUC’s to mandate green energy production (i.e. you must buy solar PV), and gained huge solar PV specific ARRA dollars. One panelist commented that “although it makes no sense to put a solar array on an energy inefficient building,” his firm was recently forced to do exactly this as his customer was told by the DOE they “could only get money for a solar array” (which produced a 30-year return on investment). How about the DOE mandating an energy efficient building retrofit with a 10-year return?
3. Its a BIG market – if the capital is made available. According to the McKinsey estimate, there’s a $520 billion total available US market for energy efficiency upgrades. Retrofitting the whole market would generate $1.2 trillion in savings, or a $680 billion stimulus to the economy. Like the US Federal government stepped in for TARP or General Motors and will ultimately gain back their lendings through loan repayment and sale of GM stock in their IPO, a Federally delivered loan program for energy efficiency retrofits could be a massive catalyst.
4. We sell “stuff” because “our customers need stuff.” The ESCOs have a great model, enabling MUSH customers to replace their aging infrastructure. Their customers don’t buy energy savings (like C&I customers), they buy stuff. It just so happens they pay for this stuff with operating savings from their energy bills. MUSH customers have even less money today than a few years ago, but they do have the capacity to borrow through issuing tax exempt bonds. Which means they can pay for the stuff. Even in the rare case where a municipal customer goes bankrupt the ESCOs know that that the customer “will always be around.” And after the bankrupt municipal bonds get restructured? They’ll buy more stuff. What a wonderful model.
When non-engineers hear the term “building envelope” they typically think of drafty old homes with leaky windows and steam radiators overheating a bedroom while uninsulated parts of the house remain frigid. Cash for Caulkers (the currently proposed and stalled Federal legislation) epitomized the fix for this problem – create new green jobs by arming construction teams with caulk guns for sealing old windows and doors and insulation to stuff into hollow walls, saving taxpayers money and helping our economy.
When energy engineers hear the term building envelope they have a more measured reaction.
These engineers know that low-cost air sealing around windows and doors (ie. applying caulk) can often produce immediate financial payback. They also hear their customer’s misconception that installing new windows, doors or another layer of insulation must also have an immediate financial return. Thermal images of almost any facility visually display wasted energy leaving a building – and since energy is money, the presumption is it must be a great investment, right?
The reality is that the energy math, not the image, drives the investment calculation.
Long run-hour commercial buildings with relatively high cost of energy and good utility incentives can indeed see 5-10 year paybacks on building envelope retrofits. However, energy engineers know that these upgrades more typically have 10-30 year returns on investment, a long time compared to most other energy efficiency measures (HVAC controls, lighting or free behavior change savings.) Although new windows in your home make it feel tighter, the incremental energy cost savings can be minimal where you have low-cost natural gas powering your 10 year old 84% efficient boiler and you already turn down the heat when you head to work in the morning.
At our Halloween themed team meeting this past week Rob presented a whole-building assessment we had completed for a Ohio based customer. While his psycho-ward jumpsuit costume distracted us, he got everyone’s attention when we saw the projected energy savings for upgrading the site’s building envelope – a 4-year ROI!
The explanation was simple. This customer’s site is a freezer cold storage distribution facility.
Keeping a building freezing all year round is expensive (typically using between 1 and 3 kWh annually per cubic foot) and these high energy density facilities can see proportionally high returns for building envelope upgrades. While the cost of energy in Ohio is relatively low (in this case $0.07 per kWh) the Ohio state and utility incentives are strong and these particular upgrades are at a relatively low cost.
So even our energy engineers were impressed with this fast payback building envelope investment.
Beginning last year we conducted a series of DL test trials with our customers. Recently we exhibited at the IARW show as a “coming out” party, showing both the now shipping DL system and a short video from our first large installation at a yet-to-be-announced freezer cold storage facility.
Prior to our DL tests we had learned that operating managers had three general concerns about LED high wattage applications – (1) light level performance, (2) cost and (3) glare.
Digging into each…. Read the rest of this entry »