New York’s new Green Bank is another chance to start getting renewable energy right. This initiative appears to be driven by the concern that existing programs are not producing adequate development of renewable energy resources. No one however seems to have noticed that existing programs, both at the federal level (tax credits), and at the state level (NYSERDA programs, etc.), for the most part are effectively designed to prevent the widespread adoption of renewable energy.
Marginalizing Renewable Energy
Typically, existing programs, such as the NYSERDA MPP tend to marginalize renewable energy solutions for retrofits simply because they prioritize energy efficiency over green house gas reduction, and because they encourage small incremental change over the radical change to renewable energy infrastructure. The cardinal issue here is that technologies are evaluated serially in terms of their marginal energy savings, and the fundamental question of what type of infrastructure do we even want is not being asked. Analytically, energy efficiency fixes will win the day with this approach, and it seems to become simply a matter of which ones to pick.
The trap in this approach is that you unthinkingly start tinkering with a bad system, and you maybe throwing good money after bad, if there is an alternative that makes more financial sense. Therefore the property owner first needs to develop a long-term energy plan, and prioritize energy investments purely on the basis of how much they improve the value of his property. What currently takes place is paid for by property owners, but it serves the interests of the utility industry, not the owners of the property, and it sacrifices long-term property appreciation for short-term efficiency gains.
An unintended consequence of the approach of evaluating options based on marginal energy savings, is that cheap energy efficiency solutions will always win the day initially, and beat out the more expensive renewable energy options, That serves the energy companies, who are trying to achieve certain demand reductions, but economically it is most often to the detriment of property owners because it destroys the potential of long-term asset appreciation with renewable energy. A nefarious side effect is that a property becomes committed to the path of energy efficiency, which has diminishing returns, so the future is a dead-end. With renewable energy there is always an upside for you can frequently do follow-up improvements that will further enhance the value of the renewable energy option, producing synergies and compounding financial returns.
We need to go back to square one, but do it in a way that harmonizes with the normal aging and replacement cycle of major plant, typically the boiler of HVAC system. A 30 year capital budget for the building should be developed to evaluate the options. If this were done, the adoption of renewable energy solutions would be progressing way faster than is now the case. Simply put, thirty years of no energy bills will most often beat the typical 20-30% reduction in energy use that is now often achieved by these retrofit projects, as long as it is feasible in your property.
Underwriting Standards can make all the difference
The opportunity that arises with the new Green Bank is for establishing underwriting standards that would avoid all these problems. It would be very simple to demand as part of the underwriting requirements for loans that properties produce a model for green house gas reduction based on the EPA’s ENERGY STAR portfolio manager, and combine that with a 30 year capital budget that shows how the project produces asset appreciation. Suddenly, the old approach of energy efficiency would look paltry by comparison, limited only by whats economically feasible in a building because of its features and location etc. Moreover, any investments in energy efficiency of the building now will produce compound returns to assets. Most importantly, in most cases one might now choose different types of energy efficiency measures at least in many cases. So the two paths are mutually exclusive both from a financial standpoint and an engineering standpoint.
Open Letter to Governor Cuomo: the Green Bank and Underwriting Standards
My recent Open Letter to Governor Cuomo raises these issues in a systematic way. From a standpoint of governance of what could become a major and very influential economic institution, the adoption of sound underwriting standards will have a decisive influence on:
- The speed of reductions in Green House Gas emissions
- A speed-up in recovery of real estate values
- Development of a sound secondary market for paper based on such lending
The last point is possibly the most important one financially, because by setting the tone through its underwriting standards, the uncertainties of valuing paper for energy retrofits could be cleared up, and it should be noted that both NYSERDA and the Commonwealth of Pennsylvania have experienced difficulties in placements, which in my view is attributable only to the absence of a rational financial/economic base for valuing papers that represent “20-30% energy savings over last year.” That just does not cut it when on the margin it’s net-zero construction that is the only real growth sector in markets nationwide, not to mention world-wide.
Indirectly, the Green Bank could therefore eventually have an influence on mortgage underwriting standards as well, and set the tone for PACE programs, which should abandon their disastrous focus on energy efficiency, and focus on the twin objectives of asset appreciation and reductions in green house gas emissions. The biggest reductions will come from retrofitting all types of clean energy, solar panels, wind energy, geothermal heat pumps, and other forms of heat exchange and recovery, and hydro power. Passive construction methods also have their role to play.
The Green Bank of New York could wield historic influence through prudent underwriting standards and shift renewable energy retrofits into high gear, to accelerate reductions in Green House Gas emissions, and help shore up property values, building resiliency, and economic competitiveness.