Friday, June 18, 2010

Do You Want The Problem or Would You Rather Have The Solution?

The other night I attended a presentation on the new 2010 NYC Energy Code for buildings, and of course it is all wonderful progress, and woven into the presentations were plenty of interesting examples of buildings making quantum breakthroughs, though the emphasis remains on new construction, such as the NY Times building, which seems to be wonderful, and whereas the electrical code requires a capacity of 3 Watts/SqFt, the new energy code will stipulate a design spec of 1 Watt/SqFt, but the Times building accomplishes .36 Watt SqFt. So some people do get it.

Of course, since we have more old buildings than new, as buildings have a nasty habit of lasting a century or so, what will be really interesting will be to see how many retrofits will really achieve these kinds of quantum breakthroughs, helped along no doubt by various incentives, in a time when building new is going to be less frequent. For the occasion of this presentation a couple of fresh cans of energy consultants were of course opened up and paraded around to add their wisdom to the mix, while owners reps were quietly figuring out the lowest cost route to meeting the new mandates, which will ensure further capital destruction by incrementalism. Meeting the standards at the lowest cost will doom building owners to failure. More than likely most owners will follow that route for the first twenty years or so, and some are going to see their portfolio values plummet. And there is an army of consultants ready to help them achieve this. The money is in creating the quantum breakthroughs.

Standards, and codes like this one, are minimum design specs, which raise the threshold, but thankfully leave us free to exceed them, and that will hopefully become the real competition. Particularly because the new rules force all the energy data into the open, a feature that may be more important than any of the specific requirements. The energy profile of buildings now becomes a significant feature, and will be quickly reflected in the value of buildings. Which would you rather have, the building with 200 apartments using $500/unit/year in fossil fuels for the owners account, or the building of 200 apartments using $2,000/unit/year that's next to it? Or a million SqFt at .36 Watts or at 3.0 Watts/SqFt? Come and see the new slums, they'll be determined by energy intensity more so than location.

The secret will lie in creating quantum breakthroughs, by focusing on the solution not the problem. And the solution means building level production of energy as the primary mindset, so that the grid, (electric, gas), or oil are relegated to a complimentary and/or backup role, not a primary role. The technology to do it is increasingly available. Energy is becoming a technology business, and a capital asset of buildings. Energy efficiency may make sense for standards like these, but the real focus will be energy as a capital asset, energy as a value proposition and even a profit center. Assuming that owning and operating a building is driven by a profit motive, the question is not the lowest cost to meet the standard, but how much value can I add to a building with an optimally value-enhancing energy infrastructure, which should easily exceed the mandated standards.

The real breakthroughs however will come in the outer boroughs, and the suburbs, not in Manhattan, because there are fewer limitations of all kinds, which typically plague built-up areas, from lack of space, to shade from a neigboring building, and other physical restrictions. Therefore watch the values of real estate start to shift towards the outer boroughs in the next 10-20 years. Very few new LEED Platinum buildings will be commissioned in this period, and retrofits will be where the action is.

In short, if energy efficiency is mistaken for a design goal, not a minimum standard, we are reinforcing the problem. Energy efficiency is a second order parameter. If we focus on energy independence and creating value from energy, the optimal level of energy efficiency that will follow from those design goals will inevitably exceed those design standards (please do check to make sure), because there is money in it. The focus on efficiency as a primary goal reinforces the problem, and maintains our co-dependent relationship with the subscription model of energy. Because of diminishing returns, energy efficiency becomes a capital sink, and creates a metastatic cancer which blocks energy independence. Shifting radically to energy as a value proposition and an important intra-marginal investment in my building is a quantum shift, truly a paradigm shift, and this is where the money is. Energy now becomes a positive value, and whatever we can achieve now means we are focusing on the glass being half full, instead of being half empty, never mind the consolation that we may be draining it more slowly. It is not about a beautiful certificate from your local utility attesting to the energy efficiency, actual building values will be the only real parameter that counts.

Monday, June 7, 2010

Strictly Kosher Renewable Energy Planning for Building Owners

The unfortunate reality is that most building owners large and small, if they buy into renewable energy at all, focus on the technology, not their building(s), and they are getting hosed financially, and even if it is a tax-deductible hosing, which is only a small consolation in the end. The single biggest failure of renewable energy is faulty analysis of the building level energy economics and engineering.

Vendors obviously and understandably focus on their technologies, which all of them in good faith or otherwise, believe to be a solution - no scratch that - THE solution. Equally obviously none of them are, for if there were any one solution, our energy problems would be over. Governments compound the problem by providing various incentives and programs to stimulate the development of renewable solutions but which generally suffer from various unspoken assumptions, and often inadvertently such programs produce unintended consequences which actually sabotage an economically viable renewable energy economy.

The way the market functions is this: the assumption is that we can never stop burning fossil fuels, so the de facto point of departure for most incentive programs, is that within the subscription model of energy (fossil fuels) the best we can hope for is reduce energy consumption, and become "energy efficient." Some programs even offer certificates you can hang on your wall or on your building, testifying to how efficient a customer you are for your local utility or oil company. These incentive programs in themselves work very well some of the time, but as part of the unintended consequences they in fact create a treadmill of capital destruction, in which cumulative energy efficiency investments run smack into the wall of deminishing returns, for contrary to the popular belief, energy efficiency is NOT additive, and does not lead to energy independence. We simply become more economically sustainable energy junkies, and the economies we achieved will soon be undermined by the relentlessly rising energy prices.

Nevertheless the majority of the market dances to the pied piper of energy efficiency, and never looks to energy independence let alone energy production and making money with energy. Yet this is what is vitally needed: a paradigm shift from energy consumption to energy production, and a concomitant change in investment outlook.

Vendors also make the problem worse, because they typically present their equipment as if they were free-standing investments, and try to compete on the shortest payback, helped by ever popular government incentives and other goodies, so that if you have only $50K to spend you'll pick the project with the fastest payback. In many cases you'll lock yourself out of the best energy strategies, and if you ever do find out, you'll end up investing the same dollar two or three times over. My favorite example these days is the "high-efficiency" Energy Star-rated tankless hot water heater. Of course it is very efficient in burning fossil fuels, but that's only relevant if burning fossil fuel is your only option, and not if harvesting (nearly) free energy is a viable alternative. It may be a great choice if your business is to sell hot water by the gallon on the street corner, but it's a lousy choice if you are the owner of a property, particularly a residential one, because Domestic Hot Water (DHW) is actually a natural storage of energy, and essentially "free" to the extent that it can be justified by Hot Water provisioning. Conversely depending on how we integrate energy in the building, and harvest peak load generating capacity (renewable energy), it may end up that analytically, the DHW is "free," because that storage capacity becomes materially important to the economics of building-level energy generation.

In short, the way to judge these investments is to view them as intra-marginal investments in your property, and evaluate their lifetime effects on the property's operating cash flow. Now that gas hot water heater may be cheaper to purchase, and more efficient than what it replaced, but it still has a nasty habit of burning gas, while the property next to you invested some more money, installed solar hot water, and almost completely eliminated their fuel bill for hot water. The storage of Domestic Hot Water meanwhile allows you to harvest the peak power from the sun, or the wind and store it as heat, eliminating even more energy bills. Over the 30 year lifetime of the solar system the neighbors would end up buying three gas hot water heaters, and pay the gas company every month. In short, as the owner of the building, you are not in the business of selling hot water on the corner, but improving the energy independence of the building, improving its operating cash flows, and eventually making money from energy, and that should be your vantage point, taken over the lifetime of the relevant technology, not judged by payback of an isolated piece of equipment. Proper analytical hygiene would also demand that also the price risks of oil, electric, and gas, including potential carbon taxation, are taken into account, compared to free energy which comes with a greater capital investment, but little or no subscription energy costs.

To put it differently, most available incentive programs really exist to extend the franchise of your local utility or the oil companies through "energy efficiency," but they do little for your business, or at the very least, they lead you eventually always to make the wrong investment decisions. Thus the Kosher financial recipe is to develop a long term strategic energy plan first. If you have a sound plan from an engineering and economic standpoint, it will give you increasing energy independence, and improving profitability, not merely energy efficiency and a pat on the sholder from the CEO of your utility company. Energy is becoming a technology business and a capital investment - a business opportunity - and it will gradually stop being an operating expense. Financially it is becoming a make or buy decision. Those who fail to notice this, will see the value of their real estate decline precipetously, for since it can be done, it will be done, and buildings without utility bills, and very low fossil fuel consumption will be worth more than the equivalent buildings, however "energy efficient," but still on the subscription model of energy. Our buildings are like babies about to be weaned off the breast of the subscription model of fossil fuels. As a society we are now at the stage of resenting it, but going back is no longer an option. We now need to learn how to walk.