Open Letter To C40: Finance and Economics of Energy Retrofits

February 27, 2014
Open Letter to C40: Finance and economics of energy retrofits Reducing Green House Gas emissions is now the primary focus regarding climate change !uildings"thus the urban en#ironment in particular"are responsible for 40$ of emissions %&'(), and therefore represent a huge opportunity for impro#ement The only strategy that will work is prioritizing retrofits that maximize Site Derived Renewable Energy (SDRE), and an prod! e over "#$ red! tions in %&% emissions' Energy Effi ien y (EE) is not an energy so!r e and at best a se ondary ob(e tive be a!se it applies e)!ally to *ossil *!el+based (**) systems as to SDRE' *ote+ ,his paper is *ew -or. and &'/centric, but most points can be generali0ed where appropriate
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Reducing GHG-emissions with Renewable Energy

1n the &'(, buildings produce about 40$ of GHG/emissions, and offer ma2or opportunity for Renewable 3nergy %R3) ,his is well understood in new construction, as can be seen from the consistent growth of net/0ero, near/0ero, or net/positi#e construction 1t is not yet well understood in retrofits, yet many, buildings are suitable, and the potential is still being generally o#erloo.ed For *ew -or. 4ity, 5la*-4 put energy and climate change on the agenda 1n a report we issued in 2011 the 67a!8 5la*-420209, we suggested strategies for '7R3 retrofits of *ew -or. 4ity:s thousands of old/line apartment buildings, and demonstrated ways of achie#ing 70 to ;0$ GHG/reduction 1n 201< the &rban Green 4ouncil issued their 6;0 by =09 report, targeting ;0$ GHG/ reduction by 20=0, which generali0ed the approach to all ma2or building types in *ew -or. 4ity ,hese radical retrofit approaches focus on le#eraging multiple ways to generate energy on/site, which means acti#e and passi#e renewable technologies, combined with thermal impro#ements, insulation, etc , and through integration of multiple technologies a con#ersion plan can be de#eloped, phasing/in the retrofit process gradually in line with the replacement cycles for e8isting infrastructure Government should incentivize GHG-reductions, and property owners should maximize property values, or extends the useful economic life of buildings. (ll incenti#es at the technology le#el should ideally be phased out, as they merely muddy the decision, and lead to bad design 1n the &'(, the !aucus energy ta8 proposal introduces this logic, although it is fatally flawed %for now>) because it limits itself to the supply side of the grid/?electricity generation and production of transportation fuels @e can only hope it will be e8panded to include the demand side, because with '7R3 more energy generation will be mo#ing to the demand side, so the meaning of the grid is changing 1n short, a property owner needs a long/term plan that ta.es into account the replacement times for boilers, windows, roofs etc and to gradually con#ert the building from consuming energy, to generating its own @ithout a plan, the property owner would ris. ma.ing decisions that he will regret later ,he payoff comes when integration creates legitimate engineering synergies, e g a geothermal hot water or HA(4 system doubles as energy storage for your wind turbine or solar 5A, so two pieces of eBuipment that might ha#e a se#en and a si8
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year paybac. indi#idually, together might ha#e a fi#e year paybac. ,he basic modeling strategy can use such tools as the 35(:s 3nergy 'tar 5ortfolio manager, which shows the integrated effect, complete with GHG/reduction, and energy sa#ings @ith the resulting cash flow model, those synergies can be readily seen !y focusing on a <0 year capital budget, it becomes e#ident that '7R3 solutions win because <0 years of free energy beats 1=/2=$ of energy sa#ings, as long as adeBuate financing is a#ailable 1f the retrofit is designed right, financing options such as 5(43 bonds will facilitate paying for retrofits from energy sa#ings '7R3 is capital intensi#e, but it mo#es energy from liabilities to assets, and increases building #alues 1n the long term, building preser#ation will go hand in hand with successful '7R3 retrofits 4on#ersely, buildings that remain on fossil/fuel will continue to lose #alue with e#ery energy price hi.e or en#ironmental penalty ,hey are the slums of the future and ultimately destined for demolition
Why Energy Efficiency is not an objective by itself

,he biggest fallacy of the green mo#ement has been the practice of treating 3nergy 3fficiency as a goal in itself, and as an alternati#e to Renewable 3nergy 3nergy 3fficiency is not an energy source 3nergy 3fficiency is about the efficiency of Fossil Fuel based systems, which is what we are wanting to mo#e away from 1t should be wor.ed out between the energy companies and their customers, not with public money Energy Efficiency is equally relevant in both cases either in a fossil fuel-based building infrastructure, or in a building with !"#E, but the specific EE technology choices will be different in the fossilfuel or the #E cases, so the two strategies are generally neither interchangeable, nor always complimentary, but mutually exclusive. 1n short, the alternati#es are fossil/fuel %subscription energy) #ersus R3, which means it is a ma.e or buy decision, where renewable energy implies generating the energy, and buying the eBuipment to do so on/site %'ite 7eri#ed Renewable 3nergy"'7R3) 4urrent policy framewor.s suggest that the alternati#e choices are 33 #ersus R3, but in truth that obfuscates the fact that the choice is between Fossil Fuels %FF) #ersus Renewable 3nergy 3nergy 3fficiency is important in either case EE in a fossil-fuel infrastructure is not worthy of subsidy from a macro $policy level% because it competes with !"#E, and is an indirect subsidy of the fossil-
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fuel industry, not to mention regressive with respect to GHG-reduction. 1n the short run, it would reduce GHG emissions, but it would e8tend our dependence on fossil/fuels, and thus maintain GHG/emissions in the long run &herefore, EE if applied to 'ossil 'uel-based systems will not ultimately reduce GHG emissions, as it results in a long-term extension paid for by a short term reduction. (t the micro level of each property, EE as a strategy is an investment trap for owners, because it features strongly diminishing returns. !avings is a limit function only so much can be saved. EE is not an in#estment, but operational sa#ings at best, and is a financial dead end because of the problem of diminishing returns, and therefore erodes building #alues in the long run ,he typically small 6sa#ings9 of 1=/2=$ can get erased by 2ust a few energy price hi.es, or become irrele#ant o#er time when compared to other properties with '7R3 and 70, C0, or ;0$ reduction in GHG/emissions, and a near complete elimination of energy bills *ewer construction that may be net/0ero or near/0ero, also wipes out the #alue of fossil/fuel dri#en buildings, regardless if they sa#ed 1= or 2=$ o#er last year
Why thermal technologies carry the day in retrofits

1f you need to transport energy long distance, electricity is superb, because you only ha#e about <$ transportation losses !y comparison, thermal energy can hardly be transported long distance Howe#er, within buildings the transportation issue is immaterial, as heat can be stored %e g hot water), which allows energy har#esting ,his is where thermal solutions shine because they are more efficient and they allow storage 3#ery con#ersion loses energy, for e8ample the con#ersion from solar rays to electricity is currently 17$ efficient, and then, if you use that electricity to heat water, you lose efficiency again %although a good heater could be ;0/;=$ efficient ) !ut 'olar ,hermal is ;C$ efficient today, and if you are generating on/ site, the ad#antage of electricity for transportation is irrele#ant ,herefore solar thermal water heaters carry the day, and allow you to store energy for later use ? energy har#esting brings higher returns than selling bac. to the grid 5eople thin. their HA(4 system is electric, and they buy 'olar 5A panels !ut the real demand is not electricity but !,&s for heating or cooling ,herefore it would be smarter to forget the 10$ cost sa#ings from solar 5A, and switch to
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solar thermal HA(4 ne8t time the system wears out (lternati#ely, geothermal might be a good choice, because it yields four times the energy it consumes
Stop bashing the grid

,here are legitimate cases where the grid is dysfunctional"in local micro grids, and in flood 0ones, where resilience reBuires complete independence (s more and more '7R3 is installed, other areas should become more resilient also and retain some functionality in blac.outs or natural disasters ,he focus on 33 has been an inheritance from the oil crises in the 1;70:s when the conclusion was reached that the incremental dollar buys more demand reduction %by increased efficiency) than incremental supply %the *1D!- syndrome pertains to power plants ? nobody wants one in their bac. yard) ,oday, we ha#e a lot of options for '7R3 which did not pre#iously e8ist, and the payoff is in ma8imal use of '7R3 ,he grid retains its #alue as a bac.up, and as the way to distribute energy ,he grid is much maligned these days by all the solar homesteaders who want to use it as a storage facility, and preferably not pay for the pri#ilege, or e#en ma.e money off it ,he electrical grid is indispensable, and will remain so for a long time to come, but its function is changing and the sooner we catch up to that fact, the better off we will all be !esides the e#olution of the smart grid, regulators and consumers should get used to the fact that the economics are changing, and that regulators cannot ta.e re#enue away from the grid, and e8pect the grid to function in the long run 1ntelligent energy design howe#er should in#ol#e capacity planning with the grid operators and utilities 'ome buildings are going to become energy generators ,here will be opportunities to ma8imi0e utili0ation of the grid which is economically constructi#e
Bring bac the invisible hand

*ot to say the mar.et may not need a hand sometime, but you can:t push the ri#er, so massi#e central planning, 2ust li.e the infamous 'o#iet central planning system, will usually fail ,he economic interests of building owners should be engaged to ensure proper results
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!y focusing on simply incenti#i0ing GHG/reductions %the desired effect), it is up to property owners to achie#e that in the best way possible (s stated abo#e, building owners should ma8imi0e the #alues of their buildings 1n *ew -or., 5la*-4 put energy and climate change on the agenda, but some of its components, such as *-4 4lean Heat and Focal Faws C4GC7GCC accomplished little or nothing, or e#en lead to outright capital destruction, and are regressi#e for GHG/reduction %see+ http+GGthin.progress orgGclimateG2014G02G1;G<2;EC<1Gnatural/gas/climate/ benefitGH) 1t is now widely understood that natural gas is worse than oil or coal from a GHG standpoint, and *ew -or. has become disastrously dependent on *atural Gas, thereby greatly decreasing resilience 1n the winter of 2014 citi0ens paid for this foolishness with outrageous electrical rates, on top of high heating bills %,enants don:t pay the heating bills, but they are paying for the foolishness anyway, because electrical rates are now dri#en by natural gas Ianuary traditionally has the lowest electrical rates of the year, this was still the case in 2012, when the 4on3dison rates in Ianuary were 7 centsG.@h, but in 201< it was 1< centsG.@h, and by 2014 it was up to 22 cents) 1n short, *-4 4lean Heat 7i#erted oil buildings to gas, for no en#ironmental gain, and great economic cost, both in terms of rates, and for the loss of resilience %by eliminating di#ersity of energy sources), and it collided with electricity generation, which also switched to gas at the same time (t the same time frac.ing is increasingly under pressure, e#en aside from the disastrous effect of methane losses during production and distribution !uildings should be encouraged to switch to '7R3, instead of substituting one fossil fuel for another Jwners might do that opportunistically, but that does not necessarily deser#e public financial support @hat would help is to sponsor con#ersion pro2ects to demonstrate the feasibility and the #alue of '7R3 con#ersions 3#entually, the mar.et will ta.e o#er, because the #alues of '7R3 buildings will be much more resilient, as sophisticated in#estors already .now ,here is a 2ob to be done with enabling regulation to ma.e '7R3 con#ersions possible %the familiar 6split incenti#e9 between landlords and tenants comes to mind) Regulations reBuiring the pro#ision of heat and hot water only should change, for with '7R3 there is #ast efficiency to be gained from central HA(4, and landlords should be able to charge for (G4 on a !,& basis, to support the con#ersions @indow air conditioners will be unwor.able if by 20=0 we ha#e <
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times the number of ;0KF days each summer, as is now predicted, plus, central HA(4 facilitates tighter windows and heat e8change #entilation 1f buildings can generate enough electricity, owners could switch to electrical coo.ing and eliminate a #ery bad source of indoor air pollution 1n short, 6;0 by =09 is feasible, but only if we start planning for it today, and support it through policy immediately (nd approaches of switching o#er to R3 should minimi0e cost by ma8imi0ing the proper seBuencing and staging of retrofits to coincide with replacement cycles %boilers, roofs, windows, etc ) ,hus it is better not to waste resources on switching from oil to gas when the burnerGboiler still has economic life left in it !etter to do a con#ersion to solar thermal HA(4 when the end/of/life arri#es for the boiler 1n the interim, a geothermal hot water system and other impro#ements could be implemented
!inancial reality" EE securiti#ations are troubled

!oth the 4ommonwealth of 5ennsyl#ania and *ew -or.:s *-'3R7( ha#e e8perienced difficulty in placing portfolios of 33 loans in the secondary mar.et 33 lending is doomed because it undermines building economics ,he short term gain in disposable cash is nullified by the e#entual loss of #alue in the property '7R3 lending %with 5(43 bonds or otherwise) could be far more successful with the right underwriting policies 'erial in#estments based on asset bac.ed financing and marginal energy sa#ings face diminishing returns ,hey also cherry pic. the economics of more comprehensi#e '7R3 con#ersion pro2ects, or owners shoot themsel#es in the foot with 33 pro2ects that later on may pro#e to be suboptimal or outright wrong in an '7R3/retrofit ,he emphasis needs to be on <0 year capital budgets for energy for entire properties, which ma8imi0e building #alue andGor economic life, and minimi0e GHG/reductions
$onclusion" for GHG-reductions% focus on S&RE not EE

,he focus on 33 was happily coopted by the fossil/fuel industry, but, properly considered, it is a total green wash 'rom a policy standpoint, !ite "erived #enewable Energy is the only real way towards reducing GHG remissions. Energy Efficiency $of existing 'ossil 'uel systems% as a priority is a bad proxy for GHG-reductions, because it produces short term gain, but undermines GHG-reductions in the longer run.
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,he most producti#e strategy therefore is to ma8 out on R3 opportunities now, and rapidly reduce total GHG/emissions from building stoc. 1ncenti#i0e actual GHG/reductions Fet fossil/fuel companies and their customers wor. out the most efficient systems possible, for the competiti#e pressures from R3 retrofits with high GHG/reductions as well as net 0ero and near 0ero new construction will put fossil/fuels on the defensi#e 'ubsidi0ing 3nergy 3fficiency in Fossil Fuel buildings creates a subsidy for the fossil/fuel industry, and achie#es the opposite of what is intended 44 by 4 0, 2014, Rogier Fentener #an Alissingen ( copy of this letter will be published on 'cribd

Open Letter To C40: Finance and Economics of Energy Retrofits

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Open Letter To C40: Finance and Economics of Energy Retrofits

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February 27, 2014

Reducing GHG-emissions with Renewable Energy

Why Energy Efficiency is not an objective by itself

Why thermal technologies carry the day in retrofits

Stop bashing the grid

Bring bac the invisible hand

!inancial reality" EE securiti#ations are troubled

$onclusion" for GHG-reductions% focus on S&RE not EE

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