There is nothing that will have such a dramatic impact on property values as green energy in the next 20 years or more. Getting your green energy right will determine the difference between making money or losing money.
“No Free solar panels”
There is nothing that will have such a dramatic impact on property values as green energy in the next 20 years or more. Getting your green energy right will determine the difference between making money or losing money.
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:
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.
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.
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.
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 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.
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!!
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 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.
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 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:
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.
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:
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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,
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.
It is time to revisit geothermal heat pumps, and the battle of renewable energy versus energy efficiency. It has been noted with some regularity on this blog that NYC Clean Heat, and its comrade in arms the NYSERDA MPP are destroying real estate values in NYC, and not contributing much to reducing GHG reductions. I was an early advocate for geothermal heat pumps as the single most strategic renewable technology for energy retrofits in NYC buildings, and in April of 2013, then Mayor Bloomberg finally commissioned a serious study of geothermal energy for New York. We had been advocates (with my consulting firm DaBX) since 2011 at least in our PlaNYC2020 report, and then hurricane Sandy did its bit to promote geothermal heat pumps. It is time now to demonstrate why not only does geothermal have “certain advantages,” but is actually the single most important strategic renewable energy technology in the city.
In general, if you are looking at any building, energy that you can generate on-site with renewable energy technology (Site Derived Renewable Energy, or SDRE) has numerous advantages. Most importantly, financially, if you analyze long-term (say 30 years) cash flows, thirty years of no cost energy often beats out the “savings” of 15-25% that are achieved by most energy efficiency overhauls. This pays for the heavy capital commitment up front.
A geothermal heat pump is 400% efficient: for every joule of energy it uses (electricity), it returns 4. To take the simplest application in a building, for Domestic Hot Water (DHW), it was traditionally provided by a coil in the boiler, and the efficiency of such systems is typically in the range of 45-75%, in particular because those boilers were oversized relative to the need for hot water, and the need for hot water is year round.
The NYSERDA MPP is built on a set of mistaken assumptions and foolish economics. It bundles a set of energy efficiency programs and incentivizes the building owner to deliver efficiency retrofits that score above (currently) 15% gain. It all but marginalizes renewable energy. It all results in owners trying to find the cheapest way to qualify for the incentives, and technologies are selected based on their marginal energy savings, just to get the incentives, in terms of advantaged financing etc. The program focuses on energy efficiency (EE), which always yields high returns at first, but suffers diminishing returns later, and it is biased against renewable energy (RE) projects, which are capital-intensive at first, but come with a “long tail” of free energy.
Here is the typical math for a geothermal heat pump in the DHW application – based on the assumption that the prices for the BTU inputs (oil, gas, electric) are all the same:
Again, this beautiful equation will evidently have different outcomes depending on the actual pricing of the different energy sources.
The conversion to natural gas under the NYC Clean Heat program, combined with the NYSERDA MPP has been neutral event for GHG-emissions because, while gas burns cleaner, the production and transportation losses of methane make it about as bad as coal for overall air quality, although within city limits there would be some reduction of smog.
Only very few buildings made the conversion to geothermal hot water systems, and when they did, these systems were most often wrongly designed, as just water heaters, and not with a view to pre-engineering whole building energy solutions, in which boilers might eventually be replaced with a solar thermal plant, at most with only a simple boiler for backup.
In most cases, conversions were from oil to gas, which reduced building resiliency, for we are now in a city that is wholly dependent on a single fuel, and if you watched the news tonight, one pipeline explosion could cause a tremendous amount of havoc, as they are finding out in the Mid West.
Energy efficiency programs mean that building owners are paying for making energy from the grid more economical, instead of investing in their properties and generating their own energy with (mostly) thermal technologies. Though finally geothermal heat pumps seem to be getting some more recognition, it is clear again that energy efficiency gets prioritized by current programs at the expense of renewable energy, and ultimately to the financial detriment of building owners.
The Baucus Energy Tax Reform Proposal, which has reduction of GHG-emissions as its focus, risks aggravating the very problem it is trying to cure. As drafted, for all its merit, and precedent-setting simplification, it would exclude an entire class of technology that offers more bang for the buck in GHG-reduction: all forms of thermal technology that can be deployed at the demand-side of the grid.
The proposal limits itself to addressing electricity generation, and production of transportation fuels. In other words, it limits itself to addressing the production of energy at the supply side of the grid, and thereby reinforces the grid model, at the very time that technologically we are capable of building microgrids, and net-zero or near-zero buildings (including retrofits), and because of the increasing demand for building resiliency, we should be stimulating more Site Derived Renewable Energy (SDRE), for that eliminates at least one energy conversion (from whatever to electricity), as well as the transport problem for either gas, or oil, or electricity.
The conversion to electricity goes with energy losses, as does its transportation, yet evidently it has redeeming value because of the ease of distribution, but the quiet revolution that is going on for the last decennia is the consistent growth and profitability of Net-Zero Energy Building (NZEB) construction. With natural gas it is already becoming an accepted fact that the production and transportation losses are so significant, that it is just as bad as coal on a system-wide basis.
The next frontier is Near-Zero Energy Retrofits, and in all cases the difference between mere energy efficiency (typically with a 20-30% reduction of energy bills), and any solution that maximizes the use of renewable energy technologies, both active and passive (Site Derived Renewable Energy – SDRE), is that projects can achieve 70/80/90% reductions in Green House Gas (GHG-emissions) with SDRE, and be absolutely economical. The extreme example is the Zenesis house, but in general Near-Zero Emissions is a tremendous achievement for existing construction, and any retrofit achieving over 50% GHG Emission Reduction should qualify.
The key technologies are thermal, both active and passive, including solar thermal and geothermal, and harvesting process heat from either the sun directly or from the ground with a ground source heat pump. The normal transportation losses with process heat do not apply if you are using the energy on-site, and you are saving energy conversions, plus you have an easy way of storing the energy in either high-temperature process heat storage or low temperature pre-heated Domestic Hot Water, as well as various other related, passive solutions. So the batteries are cheap, whereas with the centralized grid, and electricity in general, batteries are expensive, and very environmentally unfriendly.
The stated goal of technology neutrality would therefore not be achieved by this proposal, for the most efficient solutions, thermal technologies at the demand side, i.e. in buildings would be excluded from this tax treatment, whereas they would be big winners if the new technology neutral regime applied to them, since they produce far more bang for the buck than the grid-based alternatives. For example solar thermal is about 500% more efficient in converting the Sun’s energy, and if you add the benefit of the ease of storage for off-peak use, that advantage becomes even greater. Plus, by nature it does not produce the fluctuations on the grid that come from solar PV.
In short, this proposal would exclude the very technologies that offer the most bang for the buck (the words used in the proposal staff discussion documents), and the greatest reductions in GHG-emissions, as well as reduce demand on the grid, and improve building resiliency, all of which are highly desirable outcomes today. Especially greater resiliency is of extreme relevance for the coastal communities and many other areas, where the reliability of the grid is questionable. The current proposal would reinforce the centralized generating model at the exact time when the nation needs more decentralization.
Mere energy efficiency retrofits should probably be excluded from the tax incentives, for they are an indirect subsidy to the energy companies, not the building owners. Moreover, they are generally a solution with diminishing returns to property owners, not to energy companies. They typically achieve only 20-30% energy savings, and maybe the energy companies should sponsor them as customer retention programs. What should be included is Site Derived Renewable Energy (which may include energy efficiency upgrades). If these incentives are structured correctly, there will be a huge increase in building level renewable energy retrofits, with all the desirable outcomes noted above: greater resilience, reduced demand on the grid.
The staff discussions of the energy tax proposal reflect concern about verification for retrofits on the demand side of the grid. Verification does not need to be hard, for long term lenders have a similar interests. Requiring audited GHG-reductions based on clear standards are the answer, and the EPA’s Energy Star Portfolio Manager provides the framework.
There is a huge potential for GHG-reduction through on-site energy generation with renewable technology (SDRE), in the form of net-zero or near-zero construction and retrofits. Retrofits will obviously be the larger market. The more these solutions gain traction, the more demand will be removed from the grid and building resiliency will increase. As long as these proposed simplifications of the energy tax structure are limited to the supply-side of the grid, they will greatly impede the most promising technologies available, and they will aggravate the problem of technology neutrality which they are trying to solve. The most bang for the buck in GHG-reduction is on the demand side, with net-zero and near-zero construction and retrofits.
Senator Max Baucus (D-Mont), Chairman of the Senate Finance Committee proposed far-reaching energy tax reform. The principles are solid, to quote:
“It is time to bring our energy tax policy into the 21st century,” Senator Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale. We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”
Regrettably, as drafted, it is limited to electrical generation, and thereby it aggravates the problem of confusing incentives that get in the way of maximizing reductions in GHG-emissions. It effectively accomplishes the opposite of its stated goal mainly by locking out the thermal technologies that are so powerful on the demand side of the grid, and can hugely reduce electrical demand, and therefore reduce GHG-emissions.
In its present form it would leave out the huge potential shift in energy production from the supply side to the demand side of the grid, where thermal technologies have the greatest potential. In general, renewable energy generation facilitates a move towards more on-site generation, and thus alleviates the demand on the grid. I addressed this issue earlier in an open letter to President Obama proposing simplifications in energy tax and incentives, including eliminating incentives at the technology/component level, such as is now done with the Energy Star rating system.
We can only hope that the proposal be amended to include ALL ENERGY GENERATING technologies, as well as energy storage, and certain passive energy technologies, insulation, energy efficiency, etc. Careful drafting is in order as to what is in and what is out. At the extreme, some homes and buildings should arguably be scrapped altogether, if they are hopeless energy sinks. However, even if they were replaced with a net zero building, that should probably not be permitted as a tax write off in its entirety as intended in the proposal… or should it? (Think e.g. Zenesis House.)
For utility-scale projects that continue the old model of the grid, with centralized generation and mass distribution, electrical generation is the way to go, because electricity is easier to transport than process heat. Various technologies can come into play, and we have recently even seen solar thermal win some interesting applications, such as the Ivanpah project. For remote energy generation, the Baucus proposal levels the playing field in the only way that makes sense. But centralized energy generation is of decreasing importance, and the greater reductions in GHG-emissions can be achieved on the demand side of the grid, not on the supply side.
Building retrofits are different. They are on the demand side of the grid. According to DOE, buildings account for 39% of total energy consumption, and 72% of all electricity. If the incentives are leveled in the spirit of the Baucus Energy Tax Reform proposal but include ALL forms of energy generation as suggested above, HUGE changes are possible. Not only can more electricity be generated in buildings (solar, wind, hydro), but more electrical demand can be replaced with thermal technologies, such as geothermal and solar thermal, thereby reducing the need for remote production in the first place.
This shift is necessary both because of direct environmental reasons, such as GHG-reductions, but also because greater building resilience is becoming mandatory, and in many areas with weather related risks (such as the coastal zones), greater energy independence and micro-grids are becoming very necessary, and laws are already starting to encourage them. Here is where thermal technologies will shine, and need to be on a level playing field with the alternatives.
The advantage of thermal technology when it is implemented at the demand side of the grid is extensive:
Help is on the way from your friendly EPA. The Energy Star Portfolio Manager program is designed exactly to model building performance and plan energy retrofits with an eye to GHG-reduction, in short, the tools for a comprehensive revision of the incentives for ALL forms of energy generation are already in place. The proposed revisions of the energy tax could and should rely on this type of modeling, and it would seem proper if the EPA set the standards. With this type of support in place a simple incentive structure for GHG-reductions is all we would need.
As drafted. the Baucus proposal for energy tax reform is a step in the right direction, but it would accomplish the opposite of its stated goal by leaving out thermal technologies, and the sector that is capable of such dramatic GHG-reductions: building retrofits with on-site energy generation. We can only hope that the same simplification of incentives should be extended to all forms of energy generation, active, and passive, instead of applying to electricity generation alone.