Energy Efficiency is a commendable thing, but I like to question its sometimes guileless application, which can product less than desirable results. As I point out repeatedly on this blog, energy efficiency, when applied in a fossil fuel framework, runs into the law of diminishing returns, and at some point it leads to capital destruction, because you spend yourself into a corner you cannot get out of, and in fact you are making the switch to renewables harder, not easier. Thus Energy Efficiency is not additive to Energy Independence. Everyone knows we can't save ourselves rich, but the same people blithely assume energy is the exception to the rule. It is not.
The following then is a thought experiment, for an imaginary old building of 100 apartments in an old city, like New York, with a steam heating plant burning oil, a coil in the boiler for hot water, etc. On day one, today its total fossil fuel consumption is 100, then some technology is implemented with a 10% efficiency improvement is implemented and it drops by 10 to 90. But the next improvement of 10% is now applied to the 90, and thus the improvement is only a further 9 points to 81, based on the original scale. The next improvement of 10% only moves the market 8.1 points to 72.9 on the original scale. And so on.
If we assume that we prioritized these investments based on their relative paybacks, selecting the first one first, etc. we will say that the paybacks are deteriorating for every next decision, and this function runs into a limit, because of diminishing returns. The end point of a fossil fuel based system, however efficient, is always a system burning fossil fuels. That limit might be an impressive improvement over past practice, but nevertheless the bills keep coming. Depending on what technologies are being implemented, there may also be an engineering interaction, because e.g. the function of certain controls might overlap, and you find that a 20% reduction, and a 10 % reduction result in about a 23% real reduction, or even less than expected based on the numerical analysis above. In short there are both arithemetic reasons and engineering reasons why 2+2=3 in this scenario, again we have diminishing returns for every subsequent investment, and we are painting ourselves into a corner.
The remaining fuel consumption (be it gas, oil, or electric), is subject to various price pressures, which in all likelihood will outrun inflation for the foreseeable future. In other words, let's say an overall 35% improvement in efficiency was achieved, this will inevitably eaten up by price creep for the irreducable remainder. For oil there are immediate price pressures, because of increased refining requirements in NYC. There might be some form of carbon taxation, and other pollution taxes. Gas is now the darling of fossil fuel, but even there, there are storm clouds on the horizon, and it has the same cost pressures on the delivery cost as does electricity. In the case of electricity, the cost of delivery is now 65% of the bill. Because of aging infrastructure, and the horrendous cost of upgrades, it is set to outrun inflation as far as the eye can see, and the other 35% of the bill is hostage to fossil fuel energy prices in general, as long as fossil fuels dominate. In short, every reasonable case would show a tendency for these prices to continuously outrun inflation. In short this scenario is the hamster cage of energy efficiency, if it is applied within a fossil fuel based framework.
Some of the improvements to the building envelope, to water consumption, are likely to be of equal value if we had developed the building with renewable energy, however in some respects technology selections and decisions might have been different in that case, for if it becomes a capital trade off against installed generating capacity, the evaluation for upgrades to the building envelope is far more straightforward than if it were against a forward string of "energy savings" which are discounted to the present. Depending on the energy systems in a design, different approaches to the building envelope might be selected than in the fossil fuel dominated case.
More importantly, the above defensive strategy ends up in capital destruction in the long run, exactly because of diminishing returns, and the fact that a fossil fuel based system somehow continues to burn fossil fuels, and be the victim of price increases. There is no way out of the trap of "efficient consumer" of energy, it merely cements the dependence upon subscription energy costs in all forms, as it stretches them as far as possible. This strategy does paint the investor into a corner, and the best you can expect is that your local utility sends you a certificate of honor for what an efficient customer you are. The point is, they get to keep you as a customer. But wait, it gets better.
The alternative to the above "energy efficiency" scenario is to choose a path towards energy independence. Energy efficiency plays a role here too, but it is more secondary, for the first order of business is selecting the generating technology or technologies. The generally accepted view is that renewable energy is not yet economical. Fortunately, there are some incentives, etc., and simply put, some buildings are more suited than others. So if you own the Empire State Building the focus is on energy efficiency, and renewable energy plays second fiddle. However, if you own an old line 5-8 story apartment building, like in the example we are discussing here, there might be a path towards a successful renewable strategy.
A renewable energy strategy takes a different mind set, and it takes more capital up front. Or, as an investment banker friend put it: You cannot cross the Grand Canyon in three easy steps -- I had to think about that image a while, but then I saw it: on the second step you fall to your death, so you must have a bridging strategy which takes the first three steps at once. The "Grand Canyon" of this situation is the shift - a paradigm shift - from consumption to production. It means starting to think about energy as a capital asset and therefore a profit center in building management, no longer as a business expense. The technologies are rapidly evolving to enable this type of thinking. Energy is becoming a technology business, and building-level generation is going to become the norm, be it that retrofitting old buildings, which were designed in the era of fossil fuels, is often a challenge, so the thing to do is to pick the right type of building to do these things. For most building portfolios, this will initially be a matter of pearl diving.
Also, along the lines of the things we said above about energy efficiency, if the building was recently overhauled based on the current common practice of emphasizing energy efficiency, then we've actually widened the Grand Canyon, because we've doubled down on our bet on the fossil fuels, which may not be the winning bet... There's no logic to this, other than, it seems to be what everybody does, and everybody assumes that renewable energy is not yet economical, and most folks are overlooking the possibility on that assumption, or if it is being attempted, renewable technologies are plugged in as a partial replacement within a design that is driven by the fossil fuel model, and most of the time that does not produce the desired results. However, by integrating technologies, in the right buildings hybrid solutions are possible which definitely allow a gradual development towards a renewable energy model, with energy as a profitable activity of the building.
The energy independence strategy will hinge on a comprehensive rethinking of energy use in a building, a very deliberate and extensive use of energy efficiency, as well as a long term plan which respects the interdependence of different generating technologies, so that and initial investment will lay the foundation for shifting into an energy production posture, and will be improved by subsequent enhancements. Conversely, if renewable energy is implemented without a long term energy plan, very likely the wrong sequence will be chosen, and the risk will be spending the same dollar two to three times over over the long run. In short, to get an initial bridgehead to the other side, it would behoove us to search out the narrowest point across, with more or less friendly features. By properly pre-planning for the interdependence of technologies in the context of a long term energy plan we will be making sure that we eventually do reach the top of Mount Olympus in the way of the classic Greek notion of making sure that our every step goes in that direction. The result will be a progressive accomplishment of energy independence. Independence from the grid, and 80-90% reduction in direct fossil fuel consumption is within reach in some cases in perfectly ordinary buildings, though the economic case is not yet easy, however once the foundational investment is made it gets easier, for different from the above "energy efficiency"scenario, the value of our investment now goes up with every price hike for fossil fuels, for here 2 + 2 =5, if you have got the engineering right. In five to ten years this approach should therefore yield improved property values by maybe 10 or 20% or more compared to the energy efficiency retrofit, who will be facing the same old problems in five to ten years, as energy pricing and "grid creep" catch up to them. The renewable energy choice will then be the only option, but the gulf is likely to be wider, because to some degree the same dollars will have to be spent twice.
To put it a different way, as is familiar to seasoned investors, all else being equal, investing for growth beats investing for efficiency and "savings," which is by definition a dead-ended strategy, something that becomes intuitively obvious by a reductio ad absurdum - anyone can see that 100% efficiency is impossible, just like you cannot save yourself rich. The strategy is clear enough and on a tactical level it boils down to finding the narrowest place to bridge the Grand Canyon, and to be like General George S. Patton who went back to square one, by selecting his route through Brittany and ultimately to Berlin based on Caesar's routes, where he could naturally ford rivers, so that the Germans could not stop him by demolishing bridges.
