During the conference it hit me with even more force than usual how the entire energy retrofit business is a shambles that in large part is caused by the structure of incentives and regulation at both the federal, state, and local levels. At the same time, I am sincerely impressed with the REV process in NY State, which at least attempts to create a structure for energy solutions for the future, based on a clear awareness that the legacy regulatory structure is holding us back in the face of technology change.
Interestingly, this conference took place against the backdrop of all the uncertainty about the new administration and its energy policy, about which we know too little for now, as Bloomberg just reported in a major article that points towards a major shake-up. The good news was that I heard comments even from equipment vendors attempting overcome this confusion and take a longer view, such as one CHP vendor who pointed to the fact that they were at least discussing their solutions with clients in terms of long-term building values, which is of course the only valid perspective to have.
I got some welcome take-up for one of my own pet-peeves, that accountants should not be desinging energy systems. I advanced as an example of dysfunction how incentives and Energy Star ratings had promoted the use of tankless water heaters, but that in practice this was often a bad decision if a property owner found themselves a few years hence looking at either a heat pump solution or a solar thermal solution where DHW (Domestic Hot Water) storage provides the cheapest way to harvest energy. The premature decision to adopt tankless water heaters in that case amounts to throwing out the batteries with the bathwater. This is a typical example of how the 'energy efficiency' regulations themselves and the incentives cause capital destruction, in which property owners make decisions like so many chickens with their heads cut off. Sure, tankless water heaters may very well be very efficient by themselves, but that fails to take the overall building systems into account. The answer is that the only thing that will work in the long run is a carbon tax or similar solution, and not device-level incentives, so that the focus shifts to results, not how you get there. Politicians and accountants should not micromanage the design of systems, and make successful outcomes harder, not easier. Focusing on the results is the only way where engineers and economists can design the optimal solution that creates building value, and leave accountants and component-level tax-incentives out of it. From that standpoint, it would be fine by me if the new administration just wiped out all incentives across the board, and let the markets sort it out - people would have to start thinking for themselves again.
Dysfunctions resulting from the incentive structure
The examples I have seen are many and varied, and anyone who has been around this industry for a while has seen the ridiculous results when tax- and other incentives and regulations dictate energy system design ahead of engineering and economics. My list includes:
- Tankless water heaters, even though they have valid application as backup in a renewable design.
- Condensing boilers in a back-up role where the heat-exchangers rot out if these don't run flat-out, yet the rules specify Energy Star boilers, which all come with heat-recovery. In short, in a backup role in a renewable design,
- In general the incentives at the device level push over-use of certain devices, and this is often compounded by vendor greed, because they make more money over-specifying devices, instead of doing what's good for the customer. This can be seen in oversizing boilers or CHP or solar systems, all of which are commonly done. These equipment vendors sometimes take no interest in optimal outcomes for customers that can be realized through efficiency measures because they reduce the size of the systems they sell, even though they would sell more systems if they produced better economic outcomes for their customers.
- Solar PV is the single most prominent example of a technology that thrives only because of incentives, but in practice it is a negative-NPV decision for most property owners in the Northeast, except for in specific design scenarios, particularly where it's combined with a heat-pump solution which by itself would increase electrical demand, but in combination could be very well an optimal solution in many cases. But the tariff structures and incentives are becoming an increasingly thorny issue here, particularly if grids are not designed for two-way traffic.
More Political Dysfunction ahead
The pendulum swings of politics are about to really upset the apple-cart of energy policy, as summarized in the Bloomberg article cited above, but there are limits even there, as summarized recently in a Forbes article by attorney Brian J. Potts: the new administration will have to pick favorites, for there are many clear examples of conflicting interests even among the fossil-fuel options. Another aspect that is a major unknown is what international response will be. Evidently, foreign investment in the US may suffer, and even US investors who are committed to a climate change vision may shift their investments outside the US as a result of regressive policies. Growing the US economy and dialing back energy policy may well prove to be incompatible.
Needless to say the last word about our energy future has not been said, and for the real estate industry in particular, the fact remains that buildings will outlive the swings of politics, and smart decision making would focus on retrofits that make economic sense, and fortunately many renewable technologies are extremely valuable because they in fact eliminate major energy costs. Heat pumps with efficiency ranging from 200-250% for air source to 400-500% for ground source remain an attractive choice, and the applications for solar thermal, offering 4-5 times the energy output of Solar PV, are multiple. Solar PV without a subsidy regime to prop it up is not going to be very attractive in many cases, though it will be worthwhile in niche applications.
What will be interesting to see is how the states will respond, for increasing dysfunction at the federal level will shift the burden to the states. Will the Northwest reinforce its regional climate change efforts with Canada? Will California secede, or at least grow its climate leadership role? Will New York and New England orient themselves to Canada more, where a serious climate change agenda is now a fact? We cannot ignore the fact that energy is the single largest industry in our industrialized society, and is key to our long-term welfare.
The upshot is the major imponderables are the roles the states will play in energy policy, and the role the international community will play, the role that investors will play by voting with their dollars, and at the end of the day there is the fact that the Trump administration in no way has a mandate that would support the sweeping change it seems to be contemplating. So, the politico-economic outlook is definitely cloudy, and property owners must make their own long-term decisions, in which the only sane argument is to look 30-50 years out and ignore these short term swings. What remains is the fact that properties outlive political swings.
Creating Long-term Value
The simple must be, as always, that property owners must discipline themselves to look at energy retrofits as capital decisions, even though traditionally energy is treated as O&M (Operating and Maintenance) by most property owners. The reality is that the availability of many technology paths produce clear alternative scenarios for buildings, that must be evaluated as such as a long-term capital decision.Site-Derived Renewable Energy (SDRE) is an alternative to the typical legacy energy plan that depends on buying energy from the grid (or oil, or propane deliveries, etc.), so the consideration of SDRE is a make-or-buy decision, but even within that, there are usually multiple scenarios which most often are mutually exclusive and have very different economic/financial outcomes. The unfortunate effect of the legacy incentive regime is that it is completely counterproductive to looking at long term capital decisions, for it tends to place the emphasis on short term payback at the equipment level, which can arguably be improved by incentives, but undermines the necessary discipline for long-term capital decisions. The prospect of dismantling various levels of incentives therefore shifts the focus from the short-sighted decision making that tends to create capital destruction, towards the long term decision making that helps property values and capital formation.
Hybrid systems are the future
At the convention I found myself happily technology agnostic, and plugging the idea that with some simple efficiency measures, we are able to take 20-30% of the energy demand out of buildings and shorten the payback of deep retrofits that include on-site generation by 20-50%. Needless to say we also have interesting financing partnerships developing, for shorter paybacks make financing easier. Most vendors welcome that conversation, but there are always a couple of regressive thinkers, who put the short term ahead of the long term, and their own commission check ahead of the customer's welfare, never realizing that happy customers will create referrals and more business. It drives home the point that property owners need to have the intelligence and advice on their side and look at the long term energy outlook for their buildings, at a holistic level, with at least a 30-year capital budget for energy provisioning.
Already, hybrid solar thermal cum fossil fuel heating systems are becoming the norm in places like Germany, and new solar thermal systems in this country are rapidly increasing the options, such as Zonbak, which is starting to ship in mid 2017. The future will be hybrid solutions in which the traditional silos will increasingly break down. You A/C does not have to be electric, it can be thermal, and your heating does not have to involve combustion, it can be largely or wholly thermal, with a little bit of electricity to keep it running.
In practice, some efficiency measures may be independent from structural retrofits, such as on-site generation, but in many cases it is not, and examples include both solar, and battery charging, and therefore BEV implementations. The fact is that harmonic noise is cumulative in a facility because of the shared neutral bus, and LEDs and solar inverters and battery chargers all inject harmonics into the electrical system, adding the load and therefore potentially increase the overall harmonic load, making harmonic filters every more critical. Are there other solutions? Yes, but they are more expensive, and on a facilities basis, the harmonic filters intercept the problem closest to the source, preventing deterioration of the whole circuit.
The benefits of harmonic filters:
10-30% reduced electrical bills,20-50% shorter paybacks for retrofits.
Holistic Solutions Put Property Values Central
Selecting the right energy technology plan for your property with a life-cycle outlook and taking all the relevant efficiency measures into consideration at the same time, is the only valid way forward. The best advice amid the whole confused scenario is to keep your eyes on the ball, and that means to maximize long-term property values, and it's up to the political will to provide incentives to minimize environmental impacts. Both economizing water usages and minimizing GHG-emissions are part of the long term value picture, regardless if one administration or another changes the incentive regime. Don't let the vendor of solar panels, or CHP, or anything else be your only source of information, for at least some of them will sell you and oversized system. Don't put the incentives first. Good financing (including incentives) can make a good project better, but it can never make a bad project good.
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