EPA Energy Star Home Energy Yardstick: a dangerous toy

Recently I explored the EPA’s Energy Star Home Energy Yardstick to see if it could help some people get a handle on their home energy problems, and the conclusion is it offers a few useful features, but mostly it is detrimental to your financial health. In some ways it really is worse than useless, for financially it will with certainty steer people completely wrong.

Home Energy Yardstick will give you some useful information, by showing you where your home is on a relative scale of energy efficiency, and therefore the potential for improvement. It might give you some ideas of what to look for, but it does nothing to help you sort through the economic priorities of how to create an optimal energy retrofit for your property. That failure sets people up to go about upgrading their property in totally helter-skelter fashion, and lose tons of money in the process.

One of the periodic criticisms of the Energy Star® program has been that it’s being abused by vendors, by misreporting the performance of products in order to get the qualification. That is bad enough, but the Home Energy Yardstick program systematically steers people the wrong way, and lacks critically important features that could make it useful, specifically:

  • It focuses on energy efficiency, which tends to lead to a decision path of least cost incremental energy savings, which produces diminishing returns and is a financial death trap.
  • It focuses on widgets, not on plans, and it focuses on costs, not value.
  • It does not capture the holistic, “systems” view of the problem and the potential solutions. The problem and the solution are 4-dimensional, not three. It should be mandatory first to create a 30 year NPV calculation to analyze the value of various energy improvements from an investment standpoint.

The unintended consequence of the model that this program effectively  fosters an unwitting collusion of equipment vendors, energy companies and finance companies, all using this information against property owners, and in the process they are stripping equity from property owners, by ensuring completely suboptimal outcomes from an energy and environmental standpoint. If guaranteed failure were the mission, this would be the way to do it.

Energy Star is a sort of “Good Housekeeping” seal of approval for a sales program of any number of energy efficiency products and services that provide partial “solutions” but never add up to a solution for the real problem, except they’ll keep the property owner paying forever, and allow politicians to always claim progress, while they can rest comfortably in the knowledge that we’ll never get there, so next year they can still claim the same thing, ad infinitum, while consumer spend themselves silly on “Energy Star” products. Energy efficiency is one of those feel good ideas that is accepted without further examination, but falls apart if you ever take a serious look at it, for it makes the problem worse, not better.

Widgets over systems

By focusing on widgets over systems and plans, the illusion is created that you can just “buy” energy efficiency on an incremental basis,  as an add-on, without any plan. You give daddy an Energy Star rated shaver for Xmas, and ma gets an energy star rated hair dryer, and soon all will be well, except it does not work that way.

As in any crime, you look for means, opportunity and motive, and in this case, various vendors of energy efficiency related products and services need a gullible public that keeps on buying their bunkum. Energy companies use incentives to retain customers in order to serve their shareholders well. Finance companies live from commissions on the loans they write, so more sales is better, never mind if it makes financial sense for the property owners. Meanwhile, mathematically energy efficiency is a death trap because of diminishing returns.

The only thing that makes sense from an investment point of view, and needs to have priority in any retrofit plan is maximal Site Derived Renewable Energy (SDRE). SDRE alone materially reduces GHG-emissions, and adds value if it can be financed from energy savings well within its economic life, so that the property owner (investor) enjoys the benefit of a long tail of no energy bills.

Your Energy Star credit card

Various supposedly “green” finance programs make things worse. They propose typically “self-liquidating” financing, preferably with “no money down,” to lure you in. The vendors of efficiency equipment have refined their marketing pitches to a fine art, to focus on sales that are easy and frictionless, and can be justified by “energy savings,”
so they pick high value projects first. “Self-liquidating” and “zero money down,” are the catch phrases, which should warn you of incoming torpedoes.

PACE financing is still in some sort of limbo, and it should be as long as it is abused for the purpose of financing energy efficiency, if far more valuable SDRE projects are available.

Your energy company to the rescue

It is in the nature of energy companies that they make money by selling more energy, To them “energy efficiency” is something that helps them retain customers, moreover our society seems to tolerate a “greenwash,” as if “energy efficiency” of a fossil fuel system is “green,” even though the opposite is true. Where is the FTC when you need them? Many if not most energy companies have programs to help their customers become more energy-efficient, and energy providers are happy to offer you financial incentives, in order to retain you as a customer longer.

One of the more hopeful initiatives is the enabling of co-investments of energy companies with customers, which could help with SDRE projects. When done wisely, energy companies can make a return two ways: in financial terms, and in improved utilization of their assets. In NY the public service commission is now looking into this under the REV initiative. That double payoff should facilitate a reasonable deal being offered to consumers.

Where’s the plan?

A building, a home, any property is a system, and moreover it is a four-dimensional system – it lives for decades. It contains mechanical systems that may need replacing at several points during its life span. Roofs may need to be replaced, windows added, and siding replaced, insulation added, etc.

Only renewable energy (SDRE) will materially reduce GHG-emissions, but it will also replace energy bills… it will move energy from liabilities to assets, and in many, many cases you will end up with a capital improvement that is paid for in under 10 years, but eliminates a big portion of your energy bills for 30 years (or more).

Thus there are two dimensions to an energy plan for a property:

  • one is about the source of the energy, which is a make or buy decision, i.e. generate your own energy with SDRE, or buy your energy (electric, gas, oil).
  • the second part is about passive measures, and energy efficiency. It should be noted that many decisions in this area will be different if you use more SDRE vs. fossil fuels. The fossil fuel path and the SDRE path are not interchangeable, which makes it imperative to plan ahead, lest you design yourself into a corner.

In short, a long-term energy plan is needed for two reasons, one because there are engineering interdependencies, that will impact on your decisions, and two is to truly understand the economic value you are creating on a life-cycle basis. These decisions have an effect for sometimes 20-30 years, and ultimately the life of the property. That tankless hot water heater may be a great idea if your only option is heating with oil, but if you can do geothermal or solar thermal, you need a domestic hot water store to harvest energy, and that same tankless hot water heater would be a horrible waste of money.

The emperor’s new clothes, energy efficiency?

The pursuit of “energy efficiency” means that you do not think about the long-term energy strategy for your property, but you plunge in and start making what you already have more efficient, which means you may be throwing good money after bad, if in fact there were economical options of switching a good part of your energy requirements to renewable on-site generation.

In principle, if this approach were valid, you would proceed in the way of least cost/most benefit, and simply do the highest return projects first. This fails because of diminishing returns, and it fails again, because you may be designing yourself into a corner if you lock yourself out of some of the most valuable projects, but don’t realize it, because you started from the wrong premise and without a plan.

Whole house, holistic energy planning

When you start looking at your property as a system, and start looking at the long-term issue of energy, your first stop should be a financial model of the situation, for the default model should be that you want to switch to renewables as much as possible, while financing it with the energy costs you displace, and helped with any applicable incentives, tax abatements, etc.

A good energy audit will give you your options, and the Home Energy Yard Stick may give you a hint for where to look. However, you don’t want to fall prey to the vendors who will all pitch you on their systems, and never do you want to get yourself locked in to any vendor just because they do a “free” energy audit.

The basic framework becomes how to add the most value to your property. This is very different from the lowest cost approach of energy efficiency. The long-term value of your property should guide your decisions.

Conclusion: SDRE should come first

Energy Efficiency does not exist in isolation, but only in the context of the chosen generating technology: fossil fuels or on-site renewable energy, and the Home Energy Yardstick does not help sorting this out, which can lead to costly mistakes.

SDRE is first priority when we pursue property value adding strategies, energy efficiency is only complementary, and the Energy Star rating system detract the attention to components instead of the whole property.

 

 

What Energy Efficiency Said to Renewable Energy

The tortoise of energy efficiency (EE) always makes sure that we never get more than half-way there, and tries to convince Achilles that by the time he catches up, the tortoise will be ahead again, and he’ll never win, when in fact the reverse is the case. Renewable energy (RE) in the broadest sense is Achilles, who only by fallacious logic could fail to outrun the tortoise of energy efficiency. The truth is, only renewable energy can reduce GHG-emissions in a permanent way, EE creates at best a temporary reduction, at the cost of extending the use, thereby ensuring an overall increase, wherever renewable energy would have been an option. Notice how politicians like to claim we’re half-way there towards some climate change objective, and at the same time they endorse policies (energy efficiency), which positively guarantee that “half-way there” is as far as we will ever get.

As noted in my comments on the Draft 2014 NYS energy plan,  if we want to achieve 50% GHG-reductions by 2030, let alone 80% reductions by 2050, we cannot afford to do a single project that does not at least get us a 50% GHG reduction. To continue doing “energy efficiency” projects will allow the tortoise of energy efficiency to waste Achilles’ time with his logical conundrums. Projects that reduce GHGs by 15-25% are the norm in energy efficiency land and won’t cut it. Every single project has to produce over 50% GHG-reduction, and that means that aside from the analytical problems of energy efficiency as an end in itself, we are now entering a time when we simply cannot afford to bother with it anymore, and serious investment in renewable energy should begin.

Lewis Carroll and Energy Efficiency

In short, it’s very much like Lewis Carroll’s story, What the Tortoise said to Achilles, the only way for the tortoise to win against Achilles is by keeping him wrapped around the axle with philosophical paradoxes, going all the way back to Zeno’s paradox. The tortoise argues Achilles can never catch up. The same logic drives the adoption of energy efficiency as policy. It makes no sense, but everyone believes we’ll always be halfway there before renewable energy catches up. Except we’ll never get beyond halfway there.

George Orwell and Energy Efficiency

It gets truly Orwellian when we get to newspeak like “the Fifth Fuel” (Amory Lovins), and “Negawatts,” and to top it all off the  energy efficiency “Ministry of Truth” is the EDF’s “Investor Confidence Project.” Their masthead says: “Enabling Markets for Energy Efficiency Investment,” and a little further on they claim they want to deliver “investor ready energy efficiency projects,” a complete non-sequitur. Like any other confidence man, it all starts with some variation of: “I’ll be very honest with you.” And nobody seems to notice that the only reason for all these extra assurances about proper “energy efficiency” projects, is the fact that it is not at all an investable asset, for the simple reason of diminishing returns. So never mind how many bells and whistles you add in order to provide “investor confidence,” anyone who understands the basic financial/economic reasons for diminishing returns on investments in “energy efficiency” would run for the hills.

Obviously, if you own the plant or the building, you want to run it as efficiently as possible, regardless if it runs on fossil fuels or on renewable energy, but that is an operational savings, not a capital investment, unless it is part of the original installation. Energy efficiency, in spite of popular myth and various rationalizations, does not generate electricity, and it is not–in its own right–an investable asset, in spite of all rationalizations to the contrary. Yet a whole industry has grown up around this fallacy. This is the sub-prime sector of the environmental business.

Incrementalism and energy efficiency

Along with the thinking of “energy savings” comes the financial fallacy of the payback period of the equipment based on marginal energy savings, which is a meaningless approach since the only thing that matters is how the equipment adds value to your building, which may be quite a different issue if you take all factors into account. This whole mistaken logic is reinforced by programs like Energy Star, and widget-level incentives.

The incremental approach of energy efficiency and “energy savings” is a paradise for the sellers of widgets, for property owners end up spending money like drunken sailors and the model guarantees they’ll never get there. This is not investment, this is squandering money on a losing proposition in the strictest mathematical sense: diminishing returns. Energy efficiency spending always starts out with some window caulking, and some screwy light bulbs, and progresses to bigger and bigger projects, until finally it culminates in the latest absurdity, the solar PPA.

In the end, the energy efficiency approach leads to a dead-end and then property owners become desperate enough to try some solar PV and “save” a bit on electricity. It seems to be the lowest cost renewable option. Here in the North East, the proportions of electricity to heat & hot water might be in the range of 30% versus 70%, and property owners are now backed into a corner where saving 10% on those 30%, which is their electrical bill, seems like a good deal. In short, they will pay good money to lower their energy bills by 3%. If they do get a PPA, they’ll be paying for it for 20 years, and not only that they will give up most of their usable roof space, without realizing that if they had done a proper plan, they might have gotten a solar thermal installation instead, which could have wiped out most of their heating/cooling and hot water, and reduced their electrical bills at the same time. Solar thermal gives you 5 to 8 times more energy per square area than solar PV.

“Green Finance,” wolf in sheep’s clothing

If the business of finance is: Who has equity that we can steal today? Then “green finance” is a winner. It delivers extortionate finance solutions under the beneficent guise of  being “green.” Currently, what goes for “green” finance is Asset Backed Lending on the basis of marginal energy savings, and therefore it drives least cost quick payback equipment sales. The commercial pressure is for solutions that can be offered on this basis as “self-liquidating” propositions.

The net result of this is cherry picking of the clean energy retrofit potential of a property. If you were to look at a whole property, the process of converting to renewable energy is only profitable if it is undertaken as a comprehensive retrofit plan. If the property has been cannibalized by various partial “energy efficiency” solutions, this will undermine a renewable energy retrofit in several ways. It will undermine liquidity, and financial carrying capacity of the property, and from an engineering point of view, ill-conceived partial solutions are likely to get in the way of a more profound clean energy retrofit. Write-offs will result, and this is how the tortoise would win against Achilles. The incrementalism of energy efficiency derails the real solutions of renewable energy.

Profitable Renewable Energy Retrofits

Once you look at properties as an energy investment, it is immediately clear that on-site clean energy generation moves energy from liabilities to assets. Furthermore, if you can integrate multiple technologies in a property, very often legitimate synergies can be accomplished which offer compound returns. In terms of payback, it may mean that two components which by themselves have 7 and 8 year paybacks, suddenly combine to offer a 6 year payback. For example, geothermal heat pumps offer 400% efficiency because they extract free BTUs from the subsoil by heat exchange, but they require some electricity to run. But if you can generate your own electricity with wind, sun or water, you suddenly have a virtuous circle, including storage in the form of pre-heated hot water. These compound returns with renewable energy make it a proper investment, as opposed to the diminishing returns of energy efficiency.

Regressive non-profits in renewable energy

Sadly, the non-profit sector which should be leading the way, is mostly regressive, with NRDC and EDF completely buying into the usurpation of the green objectives by energy efficiency, and oblivious to the fact that they have made themselves into a customer retention program for the fossil fuel industry. The Sierra club is only marginally better, hawking solar leases or PPAs, which are soon to be the sub-prime scandal of the green business.

And then there’s always Property Assessed Clean Energy (PACE), which is a smart way to finance the big capital bulge of renewable energy conversions, but the movement has been completely hi-jacked by the energy efficiency cult. This results in the classical problem of financing short term fixes with long term money, but it gets worse, because in its confrontation with the GSEs the PACE camp, barely snatched defeat from the jaws of victory, by hitching their case to energy efficiency, which misses the central point of PACE, namely that with an on-site clean energy retrofit, you are moving energy from liabilities to assets, and therefore this type of an investment permanently raises property values. And of course you’ll do it as efficiently as possible, but that’s entirely secondary. The decision is always between fossil fuels and renewables.

Renewable energy retrofits and Green Underwriting 2.0

Only renewable energy can permanently displace fossil fuels, and energy efficiency is a stalling tactic. For evident reasons, we must shift towards more renewable energy retrofits. That’s where the great GHG-reductions are, and that’s also where asset appreciation is, thus the economic justification, and the legitimate finance opportunity in which the asset appreciation accrues to its owners, instead of being ripped off by the financiers, as in the case of energy efficiency “investments,” which benefits widget manufacturers and energy companies, not property owners. Green finance needs to grow up.

What will tie it all together is a proper green underwriting standard, which incorporates a target of at least 50% GHG-reduction, along with the correct economic analysis of a whole property from the standpoint of make-or-buy (energy), and focused on asset appreciation by generating as much onsite renewable energy as possible, energy efficiency should bring up the rear.

Improving Real Estate Value with Clean Energy

Real estate value can be enhanced with clean energy, while improving building resiliency at the same time.  Prioritizing energy savings tends to reduce resiliency: you are investing more money in being increasingly dependent on the given energy source. The economic magic lies in the fact that energy generated on-site with clean energy technology moves energy from liabilities to assets permanently, and creates a degree of independence from the grid. After that installation is paid for… no more bills for at least that amount of energy. Even partial energy independence can save you a lot of hassles in the next storm or the next blackout.

Recently, I had a chance to listen to some presentations about infrastructure projects, in the context of the Rebuild by Design competition, focused on resilient rebuilding in the aftermath of Hurricane Sandy, which reinforced how value creation is central to problem solving in this area. This observation has a parallel in energy policy. We are entering a paradigm shift from cost containment in the form of energy savings, to productive investment in the form of renewable energy.

Value, not cost

One of the speakers at the event mentioned above, Marcel Ham, of IMG/Rebel, speaking about the financing of such projects, emphasized that nothing gets resolved as long as people are focused on cost. What makes financing solutions possible is focusing on value. This is a core concept, and not only for infrastructure projects and large public/private partnerships, for it explains the failings of a few decades of energy policy, when everyone is talking about energy savings, and nobody seems to realize that you can’t save yourself rich.

When you focus on cost reduction, you negotiate yourself into a corner every time, because energy savings, cost containment, is a game of diminishing returns. In other words, focusing on cost reinforces the problem, while focusing on value allows solutions to emerge. The best I can figure it, the problem started with oil crises of the last century, when the discussion centered very much on the notion that a dollar spent on reducing demand gave us more bang for the buck than a dollar spent on increasing supply (building another power plant). Then brilliant rationalizations emerged, like Amory Lovins with his “fifth fuel,” and later the introduction of the concept of “negawatt.” All of these were attempted rationalizations to make “investment” in energy efficiency palatable, and no-one appreciated that it simply extended the time horizon, and made the problem more intractable. Certainly, now that the environmental (climate change) aspect is ever more important, it is increasingly clear that the only thing that will do is reducing our carbon footprint, and that involves switching to renewable energy. The money spent making it more economical to continue CO2 emissions, is a write-off if it has not paid for itself already.

The bottomless pit of energy savings

From my experience as a home owner (19 years), I learned in retrospect how costly it is to serially make decisions about “energy efficiency,” and “energy savings.” Despite popular mythology to the contrary, “energy efficiency” is not an asset class, and not an investment proposition in itself. It is an operational savings. Energy savings is also a secondary objective, not a primary one, as is readily evident from the fact that if you compare a fossil fuel system with a clean energy system, energy efficiency is present in both solutions. However, while some of the “energy savings” measures may be the same in both solutions, some of them will be significantly different, therefore, if you start on the fossil fuel track, it is not easy to switch over to clean energy. Conversely, you need to think ahead about where you want to end up, and that includes deciding the timing for replacing major infrastructure, typically boilers, A/C, water heaters, and the like, along with elements of the building envelope etc. The value-destruction trap of energy savings is to the benefit of energy providers (customer retention) and the sellers of various gadgets and products that can “save” energy, not the buyers of them. Simply put, “savings” is a limit function, which is technology dependent, but at any given state of technology, there is a limit, and, in the case of burning fossil fuels, you can never do better than extract 100% of the energy value of your fuel. Very likely it is uneconomical to achieve that much, and you will be faced with rapidly climbing cost, and rapidly diminishing returns for subsequent investments. One of my favorite examples in NY is always the NYSERDA MPP program, which sets a band of incentives that can be achieved above a certain level of “savings.” This method forces building owners to bundle multiple energy savings strategies, whereas some would seem uneconomical if undertaken serially,  and in practice it results in massive capital destruction, and ensures suboptimal and even regressive outcomes. Owners are simply gaming the system, and try to score the maximum incentives for the least amount of investment, and in the process commit their property to the path of diminishing returns that is “energy efficiency.” There are armies of would be “energy efficiency” consultants to help them do this.

Successful transitions to Clean Energy are holistic

Simply put, the owner of a property has a financial interest in maximizing the value of that property over time. As a society, we have an interest in minimizing green house gas emissions. Unfortunately, various government programs and incentives have a tendency of being counterproductive and regressive, but the market is inexorably moving towards a time when net-zero construction becomes the norm. Therefore, the job of the property owner is to maximize building value by minimizing fossil fuel use, and to pay for the conversion largely from energy savings, so as to end up as close to net-zero as they can. Ideally the first step in a conversion should make the property 50% or better energy independent. The closer you can come to net-zero (i.e “near” zero), the better the assurance of retaining the value of the property. The more energy bills buildings have, the more their values will be depressed as net-zero becomes increasingly normative. I would venture to guess that buildings that do not generate at least 50% of their own energy will see their values deeply depressed 10 or 20 years from now. And, if your building cannot make that conversion, you might as well start of selling it now. The principal mechanism of why the transition to clean energy is constructive towards building values, is because on site clean energy generation moves energy from liabilities to assets.

Resiliency, clean energy and real estate values

As an important side issue, building resiliency goes up with every implementation of on-site clean energy generation. This is the principal reason New York City’s “NYC Clean Heat” program has been so extremely regressive, and has produced massive capital destruction. By diverting the attention to fuel switching, just at a time when the transition to clean energy was indicated, capital was diverted to unproductive purposes, and the resilience of the city as a whole was disastrously imperiled as a result of becoming over dependent on a single fuel, when the opportunity existed to diversify energy sources with renewable energy.

Debunking “the fifth fuel,” “negawatts”

These popular terms, starting from Amory Lovins’ coining of the phrase “the fifth fuel,” meaning energy savings, and energy efficiency, and later enriched by the hilarious concept of “negawatts,” have created an analytical distortion that has permeated policy making at all levels, not to mention world-wide, but which lacks any solid theoretical foundation. In fact it is a pre-determined financial and environmental disaster, and it entrenches the problem more, and certainly does nothing to solve it. Delaying the sinking of the Titanic by five minutes is hardly a worthwhile investment.

“Energy Efficiency” loans, along with solar PV PPAs/leases are likely the subprime scandals of green finance. They extract value, but they don’t add value, because they are typically justified on a least cost for marginal energy savings selection by payback period, and produce suboptimal decisions for the property and society at large. This is especially painful in the case of PACE finance, which was designed for marshalling the capital investments needed to switch to clean energy (hence the name: Property Assessed Clean Energy), but instead it is squandered on same-old, same-old “energy savings” projects that add no real value.

Clean Energy, paid for by energy savings, enhances real estate value

If we know the problem is GHG-emissions, and clean energy reduces or eliminates GHG-emissions, while energy savings reduces emissions nominally but lowers the cost of continuing emissions, so that it aggravates the problem in the long run… clearly the only rational priority is figuring out how we can upgrade our buildings to the maximum extent to clean energy. Interestingly, clean energy investments because they are an enhancement to the fixed building stock, move energy from liabilities to assets, and should be evaluated properly based on a thirty year capital budgeting analysis of the property as an energy asset. Once we use this methodology all investment priorities change, because three decades of no energy bills provide powerful financing ability for the required capital investment up front. The appropriate finance tools are increasingly available, such as PACE financing, even if PACE is often times misused to finance energy efficiency projects. Minimizing GHG-emissions, by maximizing on site clean energy generation, while paying for it from energy savings, should be the new policy goal. Property owners ignore this at their own risk, because on the margin, in new construction, net-zero is becoming the norm.

Conclusion

In conclusion, there are two problems that are holding up the show for the transition to a clean energy economy:

  • Prioritizing energy savings when only on-site clean energy generation will make a difference in GHG reductions (as well as create greater resiliency in buildings).
  • Making decisions based on marginal energy savings and payback of the equipment, instead of based on a 30 capital budget for energy for the property, which would immediately reveal the asset-enhancing value of clean energy by moving energy from liabilities to assets.

The clean energy future will forever be put off, if we continue to prioritize energy savings, but on site clean energy generation will reduce GHG-emissions and enhance real estate values.

New York’s 2014 Energy Plan – GHG-reductions ahead

Green Finance reform should be the central focus of our climate change efforts, for under proper analysis reducing Greenhouse gas (GHG) emissions goes hand in hand with improving property values. The 2014 New York State Draft Energy Plan indicates a paradigm shift. The stated benchmark objectives are:

  • 50% GHG emissions reduction by 2030
  • 80% GHG emissions reduction by 2050

There is only one way to get anywhere close to that, and that is with massive adoption of renewable energy (RE), and in particular Site Derived Renewable Energy (SDRE), and green finance needs to catch up. Typical energy efficiency (EE) projects have been all the rage, tend to be in the range of 15-25% improvement. We will now need to focus on projects of 50% GHG emissions reduction and higher, otherwise we are dragging down the numbers. It also means we should focus on the demand side, for you can only go so far on the supply side, and green power generation is not an overwhelming case yet, but on the demand side, the economics are very powerful. It will just take time to develop the right opportunities. The draft 2014 NY State Energy Plan is an auspicious beginning for this paradigm change.

GHG reductions goals can only lead to more SDRE

I published my comments to the draft energy proposal on Scribd, here: http://www.scribd.com/doc/215947311/2014-Energy-Plan-Comments

The good news is that the commitment to these GHG emissions reduction goals forces a radical change towards renewable energy.

50+% GHG emissions reduction: change happens on the margin

  1. Change happens on the margin
  2. We have limited means. (Think bringing $10 or $20 billion to a trillion dollar problem).
  3. Therefore on the margin projects with better than 50% reductions in GHG emissions compete against projects with 15-25% “energy savings” and nominally GHG reductions in the same range. We should ignore the fallacy that natural gas reduces GHG emissions. Therefore we should furthermore only entertain SDRE projects with over 50% GHG-reductions.
  4. Once we model a retrofit on the basis of a 30 Year cash flow model, it will be clear that there are plenty of SDRE projects that can achieve the 50+% GHG reductions target, and there is tremendous potential for sound projects that will be financially superior to EE projects. EE investment projects have been typically evaluated on component-level payback from marginal energy savings, sometimes in a bundled approach like NYSERDA’s MPP. However, under a proper cash flow analysis, the long tail of 30 years of no energy bills will in many cases overcome the initial capital hurdle. Proper finance can do the rest.

Again, if we want to make progress towards these New York State energy goals, we cannot afford EE projects, but only SDRE retrofits. And, we cannot do it without reforming what now goes for green finance, and develop a more robust green finance 2.0.

The case for energy efficiency as a goal in its own right has been thoroughly discredited, and we’ll be in the business of teaching old dogs new tricks. Building owners and many “consultants” in energy efficiency have been trained to look for opportunities for marginal energy savings. The approach has been helter-skelter, and a seemingly more systematic approach like NYSERDA’s MPP just hides the problem and makes it worse. Many savvy building owners have always known that energy efficiency does not add up. It does not – simply because of diminishing returns. No matter how much you spend, you never get “there,” and nobody knows where “there” is anyway. The new paradigm is: Green finance achieves GHG reductions with SDRE investments paid for by energy savings.

There is an unstated assumption in the current policies that focus on energy efficiency. That assumption is that you can always switch tracks later, and implement renewable solutions. This is not true, because in any given property, you will have often designed yourself into a corner you cannot get out of without writing off a good part of the work you have done in the name of EE. So the switch often becomes prohibitive if you did not plan ahead. Hence the need for proper planning first, and that means a 30 year technology plan for SDRE for any property.

From components to whole building projects

The other major change must be to always look at whole buildings, or even blocks, districts, communities, regions, etc. A holistic approach is a must, and overall GHG reductions are the goal. For the time being this is made harder because incentives are still at the component level, not at the building level. Component level incentives cause accountants to engineer energy systems, with disastrous results. The Baucus tax proposal has the right idea of one single incentive, based on GHG reductions, but, as drafted, it leaves out the demand side, which is the most important part. The idea is right but should be extended to the demand side.

Green Finance reform

Green finance in one part is the financing of major capital projects, and that is proceeding apace. What today goes for “green finance” for energy retrofits is completely compromised by the over emphasis on Energy Efficiency, and in most cases just a rebranded form of ABL (Asset-Backed Lending), against energy savings, all of which goes back to Amory Lovins’ idea of the “fifth fuel,” and the subsequent mythological creation of the “negawatt,” leading us to think that “energy savings” is an investable asset. This approach is like painting lipstick on a pig, and in the extreme it takes forms like EDF’s “Investor Confidence Project,” which encapsulates these easily falsifiable, and unfounded assumptions that EE is somehow additive towards the solution into a seemingly impressive framework that unfortunately rests on a false assumption.

PACE financing compounds the problem even further by misusing the beautiful investor protections it provides on EE projects, and thereby undermining its own long term relevance. And PACE will become irrelevant if it does not refocus to over 50% GHG-reductions, and that means SDRE projects. The name PACE means Property Assessed Clean Energy, and its potential is now being wasted on EE projects, which merely serve to prolong the agony.

The over-emphasis on energy efficiency is completely self-destructive, and analytically unsound, it lacks a basis in fact, both economically, financially, and environmentally. It is already being falsified in the market place by net zero construction, but for retrofits, as soon as there are significant securitizations of 50% and above GHG reduction financings, the EE investment craze will come to an ignominious end. The typical 15-25% “energy savings” from EE projects, which come with diminishing returns, i.e. no follow-on strategy, will inevitably make way for the 50+% GHG reduction projects which will offer compound returns, and an ever improving follow-on strategy, not to mention asset appreciation of the underlying property with every energy price hike.

The time has come for green energy finance reform. Once the analytics of Energy Efficiency are properly understood, the nomenclature “green finance” should be limited to SDRE projects with over 50% GHG reduction, and never for EE projects which are a financial and environmental dead end, and in effect an indirect subsidy to the carbon fuel industry. This shift automatically entails a new focus on maximizing asset values for building owners.

Education

Along with all of this, there is a massive need for education, and objective and independent information. While I was finishing up this blog, my partner, Bruce Lorentzen, EE, wrote to me as follows:

Last week  I was a judge of faculty and student research projects at Univ. of Bridgeport.  I was amazed that a professor with a PHD was presenting a study on microgrids and he was a proponent of PV.  This was alarming in that he had within his research, heat storage.  I challenged him on why he was wasting precious land and rooftops and only being 15% efficient.  He then admitted that perhaps solar thermal was better.  I then offered that with 400% efficient heat pumps, he had the opportunity to reduce pollution by at least 75% whereas PV only reduces by 15%.  We must educate the educators!!

Conclusion

Energy Efficiency is not a proxy for GHG reductions, and should not be a policy goal. It is an indirect subsidy to carbon fuel, and achieves the opposite of what we want. The new paradigm for green finance is achieving GHG reductions with SDRE investments paid for by energy savings.

The Self-destruction of PACE finance

The PACE idea is powerful: Property Assessed Clean Energy. It was recognized that the switch to clean energy for existing buildings was going to be capital-intensive, and PACE financing was designed to enable projects with longer paybacks, by providing longer term financing. Lenders were given the assurance of low risk because collection was done through property taxes. For the property owner, there was the advantage that the building could be sold with the existing PACE finance being assumed by the new owners – it did not need to be refinanced. But then the energy efficiency lobby kicked in by co-opting the moniker “clean energy.” I am not sure of the exact historical circumstances, but the fossil fuel business has a vested interest in selling energy efficiency as a functional equivalent to “clean energy,” and calling themselves “green.” It is not, but PACE organizations bought into this fallacious argument.

GSE Trouble

Fannie and Freddie did not like PACE one bit, because it would get seniority over existing mortgages. In the end, a compromise was reached, limiting PACE financing to 10% of the assessed value. The PACE team could only barely show some positive impact of Energy Efficiency on home value, but they produced a study that seemed to confirm the relationship. Apparently unbeknownst to them (believe it or not), energy efficiency and clean energy are not the same thing. Energy Efficiency is pointless as a primary objective, from financial, economic and environmental points of view, not to mention it is pointless with respect to building property values, for it produces diminishing returns. Only renewable energy will reduce GHG-emissions, and only renewable energy is an investment, because it moves energy from liabilities to assets.

The choice is between fossil fuels or renewable energy, and whatever system you choose, you want to make it as efficient as is economically feasible. The choice is not, not ever, between energy efficiency and renewable energy. If the PACE folks had focused on Clean Energy as the name implies they would have convinced Fannie and Freddie hands down to not only allow PACE (with restrictions), but to promote renewable energy retrofits with PACE finance as constructive to asset values. The only thing holding it back was the absence of an effective underwriting policy. With our (see www.dabxdemandsidesolutions.com) Green Underwriting 2.0 initiative, we have proposed an alternative that focuses on projects with in excess of 50% GHG-reduction, which would help building values, increase resilience, and could only be done with various types of renewable energy solutions, because they offer compound returns, particularly if more than one type can be implemented.

Energy Efficiency: the lightbulb moment

Energy Efficiency is the prevailing religion, but it is financially disastrous and environmentally regressive. It buys short-term gains with long-term financing, and creates a temporary lift which masks the fact that the underlying problem gets worse. If our problem is emitting green house gases (GHGs), then the solution cannot be to make it cheaper to burn more GHGs, and thereby expand the market, and encourage people to keep on emitting them for longer periods of time. Doing so, the problem becomes more entrenched. The solution must be to switch to renewable energy as fast as possible. And the way you do that in a capitalist system is focusing on the low hanging fruit, meaning the most profitable projects, not with soviet-style 20 year plans that never work. Energy efficiency is pointless, and causes capital destruction because of diminishing returns.

A simple lightbulb can demonstrate the point:

  • We used to use a 60 Watt bulb that cost $1
  • We then switched to a 14 Watt CFL that cost $2 (actually a four pack at Home Depot today has them as low as $1.25). This savings was 46 Watts or 77%. At $0.35 per kWh, we saved $0.0161 per hour, and paid for it in 62 hours.
  • Now we are considering a switch to LEDs, which in the same range go for $15 at the moment. The incremental savings is 6 Watt, or 43% against the CFL, but only an incremental 10% against the original incandescent. At the same electrical rate we save $0.021 per hour, and pay for it in 3095 hours (8.5 years at 2 hrs a day).

In short, the first “energy-saving step” books impressive results for a small incremental marginal expenditure, and it makes obvious sense. The next step is financially absurd, because of the math of diminishing returns. Our further incremental investment buys us only a 10% savings off the original base consumption of 60 Watts. In dollars, it cost us $1 to save 46 Watts in step one, or $0.02 per watt saved. But in step two the price is $2.17 per watt saved. This is typical in energy efficiency spending, the first step or steps look good, but there is no economically viable follow-on. Many, if not most, government programs incentivize the first few steps of energy efficiency (my preferred example in NY is the NYSERDA MPP program), and leave the property owner stranded in a cul-de-sac, with no alternative but some day writing off most of what they did.

PACE finance for EE: Painting lipstick on a pig

Renewable energy (Solar, Wind, Geothermal, Hydro, etc.) moves energy from liability to asset, and moreover if we can combine multiple technologies, or appropriate energy efficiencies, we can produce compound returns. Energy efficiency reduces, but does not eliminate a liability, but it can be made irrelevant easily, among others by the following:

  • Growth in net-zero and near zero properties in the market, making the typical 15-25% efficiency “savings” all but irrelevant.
  • A few energy price hikes, or even if energy prices were to stay stable, the delivery cost of the grid may continue to increase (in NYC ca 65% of the bill).
  • Growing numbers of similar properties go the renewable route, and achieve 50-90% GHG-reductions, making the 15-25% reductions look paltry.
  • Any form of carbon taxation in the future. (Note e.g. that adaptation of the Baucus energy tax reform if it includes the demand side, like well it should, would indirectly have the same effect)

Energy efficiency is a limit function, and environmentally it is dubious, it produces a short-term gain, but a long-term increase in CO2 emissions. The problem becomes more entrenched, instead of coming closer to a solution. Financially, Energy Efficiency is a secondary issue, and operational savings, not a capital decision. The real choice is fossil fuels or renewable energy. And all the elements that make PACE financing attractive to investors are wasted, if they are used to dress-up energy efficiency loans. It’s like putting lipstick on a pig.

PACE and EE: mismatched maturities

From a pure financial standpoint, the four points listed above, of how and why an “energy efficiency” investment can go sour very easily, all are variations on the theme that the financial value of the “investment” could evaporate easily, meaning that the effective ability to pay may be threatened over time. And thus it’s the mismatch of short-term investments with long-term maturities which is the most pressing issue here.

PACE, as it was clearly intended and as its name implies, was meant to finance permanent capital improvements with long-term money, so that energy retrofits with longish paybacks could get done. Mostly the asset backed approach for the equipment does not tend to out too far. If PACE financing is wasted on energy efficiency projects, it will self-destruct sooner rather than later. PACE should be limited to projects with a principal focus on renewable energy, that clearly move energy from liability to asset, and therefore improve the underlying value of the property. That will ensure the viability of the project, if it is otherwise designed right. Typical projects should achieve 50% or better GHG-reductions. If this is not done, PACE finance has every potential of becoming the next sub-prime scandal, right along with solar PPAs.

Conclusion

PACE finance is a brilliant solution that is being misapplied by purposing it for short-term energy efficiency projects rather than long-term renewable energy projects.

Energy Efficiency – Killing Us Softly

St. Patrick’s day reminded me that it is high time we learn to tell the real green from the fake stuff, beginning with energy efficiency, which has been unjustly conflated with sustainability, when in fact it does the opposite: it increases carbon emissions over time, except at a slower rate. It’s high time the FTC should start taking on green washing, beginning with such seriously misleading names as the ConEdison Greenteam. The fact is that, when energy efficiency is pursued without further qualification, and it is applied to systems that are 95% driven by fossil fuels, we are shooting ourselves in the foot with a bazooka. Making a bad system better will solve nothing, except making fossil fuels viable longer, instead of finding a real solution. The fact is, efficiency applies equally to fossil fuel-based systems or renewable energy systems, but only renewable energy systems can reduce GHG-emissions. So we are reminded once again, that it does not pay to major in a minor, or, in the words of the incomparable computer scientist Donald Knuth:

Premature optimization is the root of all evil.

http://www.youtube.com/watch?v=9jI87RXJPfA&feature=share

Let me count the ways

In no particular order, but with some attempt at logical grouping, here come all the reasons, with some links to other posts on this site or other sites where appropriate. A completely logical and progressive ordering is not feasible due to the interdependence of many of the items listed here.

  1. The obvious issue is that energy efficiency makes economic sense (to the extent that it is optimal) whether fossil fuel or renewable energy is used. Therefore, it is a secondary objective in an optimal design, not a primary one. The payback for efficiency comes from reduced energy bills in the future in the case of fossil fuels, or reduced capital expenditures in the present in the case of renewable energy (less installed capacity needed). Another way to state this is that energy efficiency does not generate energy: it is not an alternative method to generate energy.
  2. Historically, the conflation of energy efficiency with “green” energy or sustainability, goes back to the energy crises of the 1970’s. It was then thought, probably correctly, that the marginal dollar spent on reducing demand was more effective than investing it in increasing supply. The concept was enshrined by the thinking of Amory Lovins, who made the confusion complete by treating energy efficiency as the “fifth fuel.” This type of thinking resulted in policy making that treats energy efficiency and renewable energy as interchangeable and complementary, or even additive, which most often is not the case, because different decisions would be made about energy efficiency in a fossil fuel infrastructure than in a renewable energy system. In truth, energy efficiency is not even an investment, it’s a mere operational savings, and financially it should be treated accordingly. Renewable energy is truly an investment, a make versus buy decision, a permanent price hedge, and it improves building resilience, and adds value to the asset.
  3. Then there is the famous Jevons paradox, which in effect states that increased efficiency increases demand, and therefore does no such thing as conserving energy. Jevons was speaking about coal, and by and large his predictions came true, and are equally relevant today about oil and gas.
  4. It gets better (or worse, depending on your point of view). Steve Hallett, in The Efficiency Trap, takes his perspective from biological/systems thinking, and notes not only that greater efficiency lowers the cost of the energy input and stimulates demand, but there are often knock-on effects. For example not only did we fly more as flying became more efficient, but we also built more airports, etc. The end result is that energy efficiency “improvements” make the problem worse, not better, and we have plenty of historical examples to show this. At the other end, exploration costs are going up all the time, so that the massive carbon deposits we theoretically still have are becoming less and less economical to exploit (even aside from the GHG-emissions question). In short, energy efficiency keeps carbon energy more economical for a longer period of time, and therefore increases GHG-emissions over time, which is the opposite of what we want. Hallett’s conclusion is simply that the road to hell is paved with efficiency. In his words: “Efficiency promises to conserve, but actually consumes. Efficiency is a trap.”
  5. The Jevons paradox and the efficiency trap are bad enough on a macro level, but on an individual project basis we see that if we do our economics right you cannot save yourself rich: energy efficiency yields diminishing returns whereas renewable energy generated on-site can bring compound returns. The truth quickly becomes evident if proper capital budgeting is done for the energy infrastructure of a building (home). Thus, within a given building retrofit, energy efficiency (of the fossil fuel-based infrastructure) competes against renewable energy. As long as payback of the equipment from marginal savings is used for decisions, energy efficiency will initially always seem to outperform renewable energy, but when 30-year cash flow analysis is used, renewable options often prove more attractive. Compound returns can be achieved from engineering synergies by integrating several technologies.
  6. On the margin it is already clear that net-zero building is the healthiest construction sector, and has been so for several decades, regardless of economic cycles, and in downturns these buildings have kept their value better than other buildings. Since in the larger economic sense the rate of change at the margin drives valuation, it should be clear that fossil fuel buildings are going to continue to lose value at an accelerating rate.
  7. Therefore, any older buildings worth preserving should switch to renewable energy and attempt to become net-zero or near-zero, and buildings that cannot make the switch to renewable energy will be the slums of the future, and ultimately headed for demolition. Along those lines the current fashion (think NYC Clean Heat) of switching fuels mostly from coal and heavy fuel to natural gas, amounts to capital destruction. The same applies for energy efficiency initiatives such as New York’s Local Law 84/87/88: these measures constitute majoring in a minor, and therefore guarantee failure in the form of strongly suboptimal outcomes, including, at the extremes, the preservation of some buildings that should be demolished, and the failure to convert other buildings to renewable energy when they have the potential.
  8. A systems approach is needed, and almost all policies and incentives have been targeted at the technology (widgets) level, not the system level. The smallest system, the economic atom of real estate is a single property (house, building), and above that are neighborhoods, towns, cities, regions, states, countries, and eventually the whole world. In some cases regional planning can be very effective, but we should engage everyone from the smallest economic unit of a single property on up. Incentivizing specific technologies leads to market distortions and bad engineering. Solar PPA‘s are a case in point. At 17% efficiency, Solar PV should be the last choice, as solar thermal is 98% efficient (or arguably more, because process heat is easy to store for intra-day usage, which gives you higher returns than selling your kWh’s back to the grid or using expensive chemical batteries).
    Incentives for individual widgets reinforce a bad financial habit of evaluating options based on the payback of the equipment from energy savings, which flies in the face of optimal design on the level of the property as a whole. The Baucus energy tax proposal focuses on overall GHG-reductions, but so far addresses only the supply side of the grid. Clearly, the demand side should be included due to the huge potential for generating energy on-site with renewable energy.
  9. Green finance, so-called, has been a mixed bag of various flavors of asset backed lending, justified by the fact that it is theoretically “low risk” because it offers what are deemed to be largely self-liquidating propositions, based on energy savings. This is a complete fallacy, and energy efficiency loans and solar PPAs may be the subprime loan scandal of future years. In many cases it is the ease of finance, ease of installation (solar PV!), and Wall Street greed, fueled by misplaced incentives, which are fleecing property owners of their equity, locking them into a suboptimal solution. They waste their roof space, and borrowing capacity when with the same space, using solar thermal (98% efficient), they could have easily provided complete HVAC, reduced GHG-emissions by over 50% while homes and buildings become much more valuable in the process.
  10. Securitization of energy efficiency loan portfolios has already encountered some headwinds, and these issues will only become more evident as analysts learn to understand the absence of a sound economic foundation. The typical 15-25% “energy savings,” is easily wiped out by both energy price hikes (the winter of 2014 gave us a taste of that!), and by comparable buildings going the renewable route and eliminating 50-90% of their energy bills, and GHG-emissions. (See #6 above).
  11. The combination of technology-level incentives (such as tax incentives based on Energy Star ratings), and decision making based on marginal payback of equipment, and partial solutions, lead to either the wrong decisions from a whole building level, in some cases such that they lock buildings out of other, superior solutions, or else they risk “cherry picking” a whole building solution – which benefits the financiers who want to write “easy loans,” but rob the building owners of the potential to add value.
  12. Policies which limp on the dueling concepts of Energy Efficiency and Renewable Energy recall the roulette player who puts equal amounts of black and red. Treating Energy Efficiency as an alternative to Renewable Energy, or as a proxy for GHG-reductions ensures policy failure.

New York State Energy Plan

The review period for the 2014 Draft New York State Energy Plan is still open, and I have supplied my comments along the lines indicated here. On the whole, the plan has the laudable objective of 50% GHG-reductions by 2030 and 80% by 2050, but otherwise continues the errors that have ensured past policy failure by including energy efficiency and fuel switching in the options. Both of these options are environmentally counterproductive, and ensure minor GHG-reductions in the short term at best, and of course, if we want to achieve the objective of 50% GHG-reduction by 2030 and 80% by 2050, we should focus only on projects that can achieve over 50% GHG reduction. Therefore, neither fuel switching nor energy efficiency should be in the plan.

Letting the market take care of energy efficiency

There is huge potential for renewable energy retrofits that can produce 50% or better GHG-reductions right away, and more later, and in ways that make economic sense today, if property owners make use of the right decision-making models. The EPA provides the Energy Star Portfolio Manager to assess projects on a whole building basis, and the resulting models should be evaluated based on a 30-year CAPM cash flow analysis. This will quickly show that many renewable options that seemed expensive are actually economical based on the long tail of zero energy bills, while the 15-25% “energy savings”  from energy efficiency upgrades will quickly be found wanting, unless some of them can be integrated to directly increase the payoff from renewable energy options.

In short, competitive pressures will become more effective if policies and incentives support renewable energy first, and leave it to fossil fuel companies and their customers to work out arrangements for energy efficiency wherever it is economically justifiable.

Conclusion

We are now experiencing a paradigm shift from the fossil-fuel era to the renewable era, and there is huge potential for quantum improvements, even on a building retrofit basis. The major impediment to GHG-reductions is not technology but proper financial analysis along with incentives and programs that reinforce the wrong decisions. In short, as in any other paradigm change, it is our thinking that gets in the way, but that can be corrected. Once you get it, it’s obvious. The 2014 New York State Energy Plan should focus on Renewable Energy, and leave Energy Efficiency to the market.

 

Renewable Energy, the Star of the Show

Renewable Energy has been the step-child of energy policy, which has been dominated by Energy Efficiency (EE). This emphasis on EE is really a relic of the energy crises of the last century, when it was thought the cost of energy and energy independence were the issue, and not so much the environmental dimension. Times have changed. Reducing Green House Gas emissions (GHG-emissions) now has taken center stage. Renewable Energy (RE) is the only path that will get us the reduction in GHG-emissions which are now generally seen as a priority. The simple truth is that Energy Efficiency is not a generating technology, it only improves the performance of whatever system you have, be it based on fossil fuels, or based on renewable energy, therefore, it is equally applicable to both. The only real choice is between Fossil Fuels (FF) and Renewable Energy (RE), and RE is what we want, not more FF, or for our addiction to FF to last longer.

In the public dialog, and in public policy, EE is mostly treated as an end in itself, which results in policies that achieve the opposite of what we want to achieve, assuming that a reduction of GHG-emissions is really our goal. The reason for this is simple. Our existing systems are overwhelmingly based on Fossil Fuels, and if you improve them with EE, you are throwing good money after bad by making FF economically more attractive. If we make fossil fuels cheaper to use, people will use more of them and will use them for a longer time, which is strongly regressive for climate risk. If the government is subsidizing EE without further qualification, they are subsidizing the fossil fuel industry, which is the opposite of what they want to do.

The only rational policy towards GHG-reductions is one that minimizes GHG-emissions through Renewable Energy, and leaves it to the Fossil Fuel industry and their customers to make their systems as efficient as possible. It is not rational to subsidize Fossil Fuels indirectly by subsidizing Energy Efficiency without qualification.

Renewable Energy Failure in NYC

Despite many signature projects that demonstrate what’s possible, New York City overall has fallen into the trap of prioritizing EE, hand in hand with state programs like NYSERDA, as well as various federal programs. Even worse, the NYC Clean Heat program diverted a large portion of the housing stock to natural gas for heat, in a laudable attempt to reduce particulates emissions and GHG-emissions, but by doing so missed the opportunity to begin the serious conversion to RE, which would have produced quantum advances in reducing GHG-emissions. As we now know, the switch from coal to gas, and from heavy fuels to gas, yield no reductions in GHG-emissions, except a displacement. So nominally NYC wins a little in the short run, but in the long run it is meaningless.

Typical EE projects yield 15-25% reductions in energy costs, mostly “savings” on fossil fuel bills, and these seem easily justifiable, however in many cases we are missing the opportunity for radical conversions to RE, which could easily produce over 50% reductions in GHG-emissions, and be financially successful for building owners, far more so than the EE projects that are now the norm. If proper capital budgeting were utilized throughout, it would become quickly apparent that in many cases integrated RE solutions for buildings have superior long-term economics, and PACE financing is a readily available vehicle to address the heavy up-front capital investment required for these projects. Simply put, every RE component we can retrofit in a building comes with a lifetime of no energy bills equivalent to the amount of energy it provides.

In the winter of 2014 New Yorkers paid the price for the massive shift to natural gas. Electricity in January 2012 was 7 cents/kWh (ConEd), in 2013 it was 13 cents and in 2014 it was 22 cents. Winter normally had low electric rates, now it has some of the highest rates of the year. New York City has become massively, recklessly and unnecessarily dependent on a single fuel: natural gas. Building resilience has been made infinitely worse as a result, while at the same time we’re spending money on improving building resilience. The single biggest thing we could do for building resilience is to stop converting buildings to natural gas, and encourage them to switch to renewable energy instead.

It’s all economics and finance

The problem is not technology, there are more options every single day, The big things that are holding us back are practicing proper economic and financial analysis, to understand how rewarding RE retrofits really are. Thirty years worth of free energy will beat out 15-25% energy savings in most projects, especially if there are integration opportunities that produce legitimate engineering synergies which compound the returns from individual technologies. That geothermal heat pump combined with a wind turbine, or solar PV, becomes an energy harvesting system, and hot water storage tanks are cheaper and more environmentally friendly than batteries.

The primary importance of economics and finance is driven home forcefully by the fact that the 2014 Draft New York State Energy Plan cites the inroads of solar PV on Long Island as a success.  This is a success that is driven by Asset Backed Lending/Leasing based on marginal energy savings, and achieves shallow results, compared to what could be done if financial analysis were done right, and projects were engineered for the long-term. If property owners were to use proper capital budgeting techniques and did 30 year models, there is no way that 17% efficient solar PV should win over 98% efficient solar thermal installations. People are saving 10% on their electric bill, when with the same roof space they could do central HVAC and Domestic Hot Water for their entire property. This approach is more work, so it does not get done, but we as a society lose. Property owners who sign for these solar panels in most cases miss an opportunity for a major value enhancement to their properties.

C40Cities needs to prioritize renewable energy

I have submitted an Open Letter to C40Cities in hopes that this group will start addressing these issues, and not have the rest of the world repeat the mistakes that were made in New York. Appearances always deceive, and this case is no different: in the short run some reductions in GHG-reductions were realized, but because it all came from EE and from fuel switching, it merely extends the reign of fossil fuel and is therefore regressive with respect to climate risk in the long run.

Will New York become a leader in renewable energy?

Recently, I submitted an open letter to Governor Andrew Cuomo pertaining to the Green Bank. The Green Bank initiative could be coming at the right time for Mayor de Blasio, who has an interesting challenge. To his eternal credit, Mayor Bloomberg got climate change and energy policy the attention it deserved, but some key programs have been counterproductive, even if that is not widely recognized as yet. I have documented these issues with an open letter to Mayor de Blasio. Further clues are in my letter to C40Cities. Clearly, there is a big opportunity for the de Blasio administration to change course with some of the programs that have us going backwards instead of forwards. The opportunity for New York City to become a leader in this area is certainly there. Our infrastructure lends itself to rapid progress, but it will require the necessary regulatory changes to enable such developments, for besides bad financial analysis, regulatory hurdles are the principal brake on a breakthrough to clean energy.

Conclusion: Lasting Reductions in GHG-emissions from Renewable Energy

It is time to break the stranglehold of the fossil fuel era by pursuing renewable energy breakthroughs that are well within reach, but often ignored, because EE seemed “cheaper” and “easier.” Heretofore, we did not realize that the short-term reductions in GHG-emissions from Energy Efficiency would ensure long-term losses. Therefore, the time has now come to focus on creating the breakthroughs in renewable energy with projects that achieve in excess of 50% reductions in GHG-emissions, and New York City can certainly become a leader in the context of the C40Cities, much to the benefit of its citizens.

NYC Energy Efficiency Paralysis – Open Letter to Mayor de Blasio

Energy Efficiency (aka EE) is the most confusing issue in the entire green dialog. It is about time that the FTC took action against anyone claiming that energy efficiency is green all by itself. It depends. If you make a fossil-fuel-based system more efficient, arguably you are reducing GHG-emissions somewhat, but that is seriously deceptive: you are simply extending the competitiveness of fossil-fuels, which is the opposite of what we want to achieve, if reducing GHG-emissions is the objective. If reducing GHG-emissions is what we want, that should be the focus, and Site Derived Renewable Energy (SDRE) is the only real answer.

Most programs nationwide are still stuck in the 1970’s energy crisis. At that time, it was thought the issue was simply energy economics, which could be addressed by cleverly realizing that a dollar spent on reducing demand had more of an effect than a dollar spent on increasing supply. The environmental dimension, Green House Gas-emissions was not really on the radar yet. Also, there were not as many building-mounted renewable technologies available as there are today. But efficiency of fossil fuel systems has overstayed its welcome, and is not a major concern for a “green” future. Local Laws 84/87/88 need an overhaul for shifting the focus to SDRE, based on proper capital budgeting for energy infrastructure, not incremental spending on marginal efficiency of fossil fuel-based systems, which leads to capital destruction, not building appreciation–as explained in many ways on this blog.

PlaNYC was a Breakthrough of Sorts

PlaNYC was a breakthrough in beginning to take these issues seriously, but it was heavily compromised by the old efficiency paradigm, and ended up putting marginal energy savings front and center. At some point particulates emissions from #6 and #4 oil became another bad proxy for GHG-reductions. This was merely another diversion from the real issue, and the NYC Clean Heat program was the result, causing a rapid shift to natural gas, resulting in an ominous city-wide dependence on a single fuel. Moreover, by the time of this writing it is accepted wisdom that natural gas is about as polluting as coal, when you add in the losses of methane in production and transportation.

Renewable Energy in NYC under Mayor de Blasio?

We can only hope so. The time has come. I come from the school of hard knocks, having learned as a home owner that I unthinkingly spent myself silly on energy efficiency for two decades, without accomplishing anything. At long last, in recent years I finally began to think about the problem more seriously, and since then the issues have become clear to me. NYC has another chance with another administration. Will we move to the new paradigm? I decided that at the very least I should throw in a suggestion or two in the form of an Open Letter to Mayor Bill de Blasio.

Alternatives to PLaNYC: Pushing Renewable Energy

The open letter to Mayor de Blasio focuses primarily on the NYC Clean Heat program, and the very deleterious spate of natural gas conversions it has brought about. It touches upon the mistaken economics that have driven other elements of PlaNYC, such as Local Law 84 (actually, both LL84 and LL87). These regulations simply push efficiency, and thereby assure the opposite of what they would accomplish: they serve to extend the rule of fossil-fuels with marginal energy savings, and have building owners fritter away capital on incremental improvements, instead of investing it in SDRE.

Energy efficiency is mostly about guilt-free shopping, which is why manufacturers love the Energy Star label, but it does nothing to solve the GHG-emissions problem. Instead, it makes it more intractable by making fossil fuels economical longer. Below I am providing a series of explanatory notes to the Open Letter, some additional comments, and some references that may be helpful.

Notes and References for Open Letter

  1. NYC Clean Heat is regressive: By now even the Sierra club is coming back from its advocacy for natural gas over coal (remember Bloomberg donated $50mln for that campaign in 2011?). The evidence is overwhelming that switching to natural gas is regressive for climate change. So converting buildings from #6 and #4 oil to natural gas was a subsidy to the gas industry, and capital destruction for the owners of buildings. SDRE retrofits could have given building values a serious boost, instead of just some small time energy savings at best.
  2. The DaBX PlaNYC2020 report was an alternative plan to maximize Site Derived Renewable Energy, and make real reductions in GHG-emissions. We focused on NYC’s old line C- and D-class apartment buildings, all in all some 15,000 buildings, a large percentage of which might be able to do such retrofits. We pointed out that these conversions should be done over 5-10 years to maximize the value of existing plant. We emphasized proper capital budgeting techniques to make the right long-term economic decisions.
  3. The Urban Green Council later made a more general case with their 90 by 50 report describing generalized solutions across all major building types in the city. The report reinforced the important point that the optimal way of implementing retrofits is over time, by leveraging the economic life-cycle of building energy infrastructure components. Forcing everything to be done at once makes projects uneconomical. The report emphasizes generating renewable energy on site as well, but fails to understand the deleterious economics that result from the focus on marginal energy savings.
  4. Geothermal energy is strategically important. It is in fact the single most powerful SDRE option for energy retrofits in NYC. New York’s bedrock is an ideal substrate, and with 400% efficiency, nothing beats it: 1 joule of energy in (electrical) yields 4 joule output (heat). At a minimum, buildings can do a Domestic Hot Water solution, but the design needs to be optimized for harvesting of energy, either from time of use metering, or from wind turbines or solar PV. Whenever feasible, it should be part of energy retrofits because of the energy storage capability. In exceptional cases (if there are sufficient grounds), it may be able to provide the total BTU load for buildings. Remember insulation helps too!
  5. Solar thermal is a hands down winner at 98% efficiency, and no PV should ever be considered (17% efficiency) if you can do solar thermal at all. The point of generating electricity is that it can be easily transported, but when generating renewable energy on site, you don’t have a transportation problem, and retrofitting is becoming easier all the time, although on balance a thermal retrofit is harder than PV. There are many ways conversions can be done towards integrated HVAC even in older buildings, given today’s hydronic air handlers, etc. With the forecasts of 3x more 90 degree days in summer by 2050, the time is now to start planning that transition, for buildings that don’t offer centralized HVAC will be marked for demolition sooner or later. The old model based on window air conditioners is past its prime.
  6. Hydronic heat is more energy efficient. Yet with the NYC Clean Heat program, in most cases, buildings have just switched from oil to gas, and continue to heat with steam. What is needed is a thorough understanding of the economics of conversion to hydronic systems, which in turn ties in with the potential for solar thermal and geothermal. Here is a report from NYSERDA, documenting up to 40% energy savings by switching from steam to hydronic systems.
  7. Building mounted wind turbines are coming of age and typically offer more bang for the buck than solar PV, if the building has the right location to use wind energy. Then, there are hybrid solar PV/Thermal (PVT) systems which leverage the best of both solar technologies. In other words, SDRE, Site Derived Renewable Energy, is becoming increasingly realistic for retrofits, especially when considering that in a building you can harvest thermal energy in a variety of ways, as pre-heated hot water from geothermal or as high temperature process heat from solar thermal. All such designs solve the biggest problem of renewables, energy storage. Within a building, bridging the daily cycles does not need to be a problem.
  8. Along the fourth dimension: timing is everything. One of the ways NYC Clean Heat is very regressive, is because it once more ignores the factor of time, and aims for a one time conversion for a short-term goal, which moreover now proves elusive, once we realized that the environmental benefit of natural gas is nil. The tie-in of this program with the NYSERDA MPP reinforces that short-term orientation. Long-term building economics dictate that you should generally not replace things before their time. What should be done is long-term planning for an SDRE retrofit, so that at every step of the way, you can pre-engineer the next steps. Both our DaBx PlaNYC2020 and the UGC 90 by 50 report advocate this longitudinal approach, but you need to make the plan first, otherwise you will be designing yourself into a corner.
  9. Exemptions from NYC Clean Heat. Once it is understood that far greater advances in the reduction of GHG-emissions are possible with onsite renewable energy, the city should encourage exemptions on that basis, and give buildings 10 or 20 years to comply, provided they start out with a project that yields at least 30-50% reductions in GHG-emissions. Anything above 30% GHG-reductions can generally not be done with energy efficiency alone. The beauty is, that if it’s planned right, SDRE will yield superior building economics, and thus increase building values, so that building preservation is ensured with SDRE conversions.
  10. Building resiliency is a central point. In the new flood zones, building resilience is mandatory, and in a much more profound way than discussed here. Resilience is a value that ensures buildings can stay at least partially functional in an outage. The switch to natural gas has undermined building resilience in a disastrous way, and it should be reversed as soon as possible.
  11. The disaster of becoming overly dependent on natural gas was amply demonstrated in the winter of 2014. Not only were heating bills going up, but more and more electricity is generated with natural gas also, and while january in the past was normally the low season for electrical rates, in 2014 rates were at an all-time high. For my own apartment the ConEdison (spot/variable) rates were ca 7 cents/kWh in 2012, 13 cents in 2013, and 22 cents in 2014.
  12. NYC did not have any pipeline ruptures in 2014, as happened in the Midwest. But the city has a very constrained gas distribution system, depending on a few major pipelines, and there are no backup storage facilities (off-shore LNG anyone?). New York production of natural gas is also coming to a stand-still because of environmental concerns.
  13. PACE financing is the obvious means that is in place already, and NYC will need it. It is politically a worthwhile project to support as long as it is tied to projects that accomplish at least 30-50% GHG-reductions initially. Once owners have the taste, and make proper long-term capital plans for energy, the potential for building appreciation is enormous. For at every level, if you can generate your own energy on site, that investment in SDRE is a permanent energy price hedge. 50% is really the optimal point to strive for in the initial project, since then the building is “over the hump” with dependence on fossil fuels.

Converting PlaNYC from communism to capitalism

PlaNYC as is, as well as other similar plans everywhere, operate in the central-planning style of the infamous 20 year plans of the former Soviet Union, which were designed to fail, as I’ve argued here. The mistake is to take the macro view of “energy efficiency” and then ram it down to the micro level with laws and incentives, instead of to engage the economic self-interest of property owners. Property owners should be in the business of maximizing property values, and government- the public interest- should incentivize reductions in GHG-emissions. Energy efficiency is not a proxy for GHG-reductions. Energy efficiency of fossil fuel systems makes GHG-emissions more intractable, so if we subsidize it, we indirectly subsidize the fossil fuel industry.

The energy benchmarking and audits of LL84/87 are a positive. The requirements to tinker with marginal efficiency improvements without totally rethinking the system is regressive, and bad policy. The market might take care of it – or at least need a lot less help than we’re spending now on making building owners do things they don’t want to do. Net zero construction has been healthier than any other area of construction for many decades, net zero or near zero buildings keep their values better than anything. Once we get building owners to perform serious renewable retrofits, the economics will force others to comply, or die. The simple fact is that with today’s technology, 80-90% reductions are possible in many existing buildings, if the buildings follow a deliberate renewable retrofit strategy–the 90 by 50 report from Urban Green Council demonstrates the point. The first project should be in the 30-50% (GHG-reductions) range, and that is more than any energy efficiency project can do. Competitively, the pressure will be on.

Conclusion: Renewable Energy over “Energy Efficiency”

Once more, energy efficiency tends to mean making fossil fuel systems more efficient, and that is not a worthwhile goal for public support. PACE finance is an option that will enable the massive capital investments needed, to facilitate moving energy from liabilities to assets by means of SDRE. The focus needs to shift from energy efficiency of fossil fuel systems to site derived renewable energy and the city can exceed the parameters of PlaNYC completely if it does so.

 

The Energy Efficiency Trap and GHG-reductions

Energy efficiency as a single objective is a trap, because it prevents us from pursuing renewable energy and truly make inroads against GHG-emissions. Any user of energy, and that’s all of us, would want his systems to be efficient. But if your energy systems are 80-90% based on fossil fuels, and you subsidize energy efficiency without further qualification, you are subsidizing the fossil fuel industry. Allegedly this is not what we’re trying to do, but it is what we are doing, and the shareholders of ConEdison, Exxon/Mobil, Shell OIl, BP and others thank you very much for your support. I’m doing it for them here, because they seldom acknowledge all of these subsidies. But, energy efficiency grants and other financial subsidies should stop, if anybody, it’s the carbon energy industry who should offer financial incentives to their customers to become more efficient, as a matter of customer retention.

There are in fact two columns to the energy decision for a property, which in an existing building amount to either the status quo, which usually means fossil fuel based, and the alternative being predominantly renewable energy based, with the ideal case being net zero. Regardless of which strategy you pursue you want to be efficient. The difference is that with energy from the grid your payback from efficiency comes from reduced energy bills in the future, whereas with renewable energy, the payback is a reduction in the installed capacity you need in the first place.

The Energy Efficiency Trap

In his recent book, The Efficiency Trap, Prof. Steve Hallett gives a vivid and in-depth analysis of the problem that the pursuit of efficiency achieves the opposite of what we want to achieve, namely making carbon energy cheaper, so we use more of it, and use it longer, when the point was finding an alternative. Hallett goes well beyond the Jevons paradox, which says that demand goes up as efficiency improves, and MORE THAN offsets the efficiency gains. Hallet’s outlook is based on natural cycles – his background is botany and he thinks in biological cycles of development – and the picture he paints is none too encouraging, as the world is still stuck in the confusion that energy efficiency is green. It isn’t. It is very, very brown, if not actually black, and certainly bleak.

Diminishing returns from energy efficiency

The behavioral analysis offered by Steve Hallett is important to understand first. Analytically, there is also the simple economical fact of diminishing returns from successive investments in energy efficiency, so it is an absolute dead-end from an investment point as well. This fact becomes really problematic very quickly because you tend to make different decisions about efficiency in the two columns, although some will be shared between the two. The end result is that you need to decide first things first, and that means a make or buy decision between carbon energy or renewable energy. Economically, this is a make or buy decision, since renewable energy moves energy from liability to asset, and it is capital-intensive up front. In more cases than people think however, 30 years of free energy beats “investments” in energy that offer a 10-25% reduction of your bills.

The compound returns of renewable energy retrofits

Not only does energy efficiency come with diminishing returns, renewable energy offers potential for valuable engineering synergies, and therefore compound returns. The example in a typical apartment building is the geothermal DHW system I discussed in my last post. A smart replacement strategy would be to provide the hot water in such a building with a geothermal system, probably with a natural gas second stage heat. You are giving the boiler another few years of useful life, but when it goes you can then switch to a solar thermal system, which can replace that gas backup heat for the hot water, and provide HVAC for the whole building as well. In the interim, when the time is right you could generate your electrical requirements in part or in whole from either a building mounted wind turbine or from solar PV (that could be via a hybrid thermal/PV system), and then your geothermal pre-heat could act as your own energy storage, giving you higher returns than selling back to the grid.

How the green movement was hi-jacked by energy efficiency

With the big oil price shocks going back to the 1970’s, the logic was developed that said a dollar invested in reducing demand for energy had higher returns than increasing supply. Later, when global warming and GHG-reductions became an increasingly important issue, the carbon energy industry latched on to the idea that energy efficiency theoretically also would reduce GHG-emissions. Not only is this not true because of the effects of the efficiency trap and the financial fact of diminishing returns on investment, It also provides a very short-sighted strategy whereby carbon energy competes with renewable energy, so we continue to make the wrong decisions.

Energy efficiency and bad business planning

For the most part, building owners seem to evaluate their energy options based on payback of equipment based on marginal energy savings, and as a result the more capital-intensive projects never get done. As a business planning tool, payback may give me a good view of the potential of one technology or another, but unless I am doing a 30 year cash-flow model of my property, I will not catch the potential for engineering synergies, and the long term cash flow effects of free energy. And unless I consciously model the two alternatives, I will make the wrong decisions about energy efficiency. Another example: if our building can generate its own electricity, and switch to electric cooking, an enormous amount of indoor air pollution can be eliminated, and we can specify tighter windows, and use some heat-recovery ventilation. If you went down the energy efficiency road, the best you might have done is specify a tankless gas hot water heater,

Conclusion

Global climate change policies need to change. Serious progress with Greenhouse gas reduction will depend on prioritizing renewable energy, and dropping the confusion with energy efficiency as an “alternative energy strategy,” when instead energy efficiency only preserves the status quo.

 

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