Sunday, September 19, 2010

What Was The Question?

A paradigm shift starts by flushing out the assumptions that are unconsciously taken for granted. The classic business school example was the great crash of the railroad company, which followed... you get it: the railroad rush and boom... if only, the theory goes, they thought of themselves as transportation companies instead of as railroads. But, naturally it is only typical that when we are successful at what we do, we do not have eyes and ears for the next thing, for almost everyone falls for the temptation of believing themselves and their business invincible - after all their accountants tell them they are making record profits, so they must be doing it right. There seems to be no need to question the "accepted" model and the long forgotten assumptions that underlie it.

Energy policy is such an area. Technology is shifting very fast, but the use of it for the most part is unimaginative, and plagued with those unconscious assumptions. So we end up plugging renewable energy into a business model that is based on the subscription model of energy, and the capital expense for renewables does not seem to be warranted. We are oblivious to the fact that we asked the wrong question.

The question seems to be I'm now spending, let's say $100,000 a year for energy in my building, what can I do to reduce my cost? The first round of answers came from the utility industry and was based on the insight that sometimes you get more bang for the buck by reducing demand than by increasing supply, so incentives were created to achieve that. But on the basis of an individual building manager, answer is not enough, for it does not address the true economics of building ownership - it simply perpetuates the franchise of the utilities, which defeats the purpose in the long run, which must be energy independence. This approach is akin to a heroin addict who goes on methadone for a while because he can't afford his daily fix any longer, but then after awhile goes back to heroin when he thinks he can manage it. Making the addiction "manageable" does not solve the problem. Or, to use another metaphor, our real estate industry is like a little baby who refuses to be weaned from the breast of the utilities and the oil companies and start eating solid food.

To put it in financial terms, if the question is how do I reduce my $100,000 energy expenditures, then I tend to get focused on energy conservation as an investment, which always produces the predictable diminishing returns. Simply put, when I started I had the choice of 5 technology options, and since I'm conservative and prudent (or so I think), I take the one with the shortest payback first. It saves me 10%, so now my base is 90% of what it was before. The next one also saves 10% but only 9% on the original scale, so the second 10% reduction brings my expenditure to $81,000 annually, and the third 10% to $72,900. Note, in actual life the results will likely be worse, because some of these options tend to partially cancel each other out, so in reality I may get to $75,000 in constant dollars.

Next I contemplate a much more expensive option, which promises a 30% savings, however since my base is now only $75,000 and my payback period now is 4 years, when it would have been only 3 years, if I had done this investment first. Not to worry, just wait until the energy prices go up again, and your payback will meet your criteria. Or did you think energy prices were going down? The bottom line is, that of the five options we had we should have contemplated the biggest one first, and the other second, for otherwise we talk ourselves out of the deal. The longest payback should have won out on that basis, if it was within the criteria at the outset.

However, we are still investing with diminishing returns, so incrementally every dollar yields less, and we run up against a hard limit beyond which we cannot go with this approach. The alternative is to learn to wean ourselves from the breast milk of the local utilities and the oil companies. When is the time? Perhaps we should first max out our investment in energy conservation, before we wake up? Or should we wake up now and start properly investing in the profitability of our business, instead of just incrementally spending ourselves into the corner of diminishing returns, and be totally stuck when the next energy crisis hits?

The point is very simple, that solar hot water heater, may have a 6 year payback, even after incentives, and it has a 30 year lifespan, but that high efficiency gas hot water heater with its 3 year payback only has a 10 year life expectancy, so over the 30 years you will still have gas bills, and 3 replacements, while the solar plant has negligeable O&M costs. In six years, which building will produce a higher asset value mine with an energy cost of $20,000 a year, or yours - an identical twin otherwise - with a proud certificate of achievement from ConEdison and NYSERDA on the wall that you are one of their most efficient consumers because you reduced your energy consumption by 30%? By the way, you're now only 4 years away from having to replace that high efficiency gas hot water heater, and I don't think that a new one that's 99.6% efficient in the lab is going to make much difference over the old one which was 99.5% efficient, and looked like such a bargain. And meanwhile my building may still be buying energy in one form, but quietly it is generating an offsetting amount of energy in another form, and monetizing it, so that it is effectively hedged against the cost of energy going up.

So, financial common sense would argue that you quit listening to the vendors who are pushing their devices based on payback - let the shortest payback win - and treat these investments as intra-marginal investments in your building, and focus on long term asset value of your portfolio. In short a discounted cash flow model, and NPV should be your criteria, as well as the long term engineering path towards energy independence. I know, the banks will gladly lend you 20 year money for a 5 year problem fix. Sure, you can save a lot of energy, and you can afford to service the loan, but after all, whose interests do you serve - the utilities, the oil dealers, the banks, or perhaps creating value in your own business should be considered?

In short the next question that should be questioned is: "How do I reduce my energy bills?" The proper question should be: "How do I create the highest asset values in my buildings?" and energy should be looked at as a profit center, not a cost center. Even an economically minimally viable path towards energy independence will create higher asset values, than current practices that are focused on energy conservation, energy efficiency. You may have to give up on those certificates of achievement from your local utility.

Saturday, August 21, 2010

Of Hamster Cages, the Grand Canyon, and the Climbing of Mount Olympus

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.

Monday, July 12, 2010

The Upshot of the PACE Bond/FHA Flap

If you carefully read the position of the FHA Statement on Certain Energy Retrofit Loan Programs, it should be clear that the right solution could only be positive, but that does not guarantee we will get there.

Simply put, everyone who has done any work in the renewable energy area understands that as of yet there is very little understanding in the market place that energy is becoming a technology business and therefore a capital asset of buildings. It will completely alter the mortgage business, but it cannot do so unless and until it has a rational foundation. If this issue is solved constructively it could be the single biggest progress in improving real estate values in the nation, because in effect permanent renewable energy plant in any building is a hedge against rising energy prices, and there are very few people who would believe that energy prices will go down, or that America could ever hope to be competitive if it continues to spend more on energy per inhabitant than the rest of the industrialized world.

Buildings are the biggest single frontier in that battle with energy intensity, and handling this transition correctly could do more for real estate values than anything else. Meanwhile the current confusion is entirely due to the parlous state of energy programs and incentives, which generally confuses energy efficiency and energy independence, making in effect the unstated assumption that energy efficiency will add up to energy independence, which is simply not so. In fact, making energy efficiency a priority and treating it as a subsidized capital expenditure guarantees that we will prolong dependence on fossil fuels indefinitely, and completely back ourselves into a corner economically.

Only energy independence should be stimulated, subsidized, promoted, and energy efficiency should only be subsidized under the auspices of proper renewable energy projects, where it does become a capital decision, because it is a direct trade off against installed capacity. Energy efficiency in the context of fossil fuel use is an operational savings, and should not be treated as a capital investment, unless it is the only option, and preferably in the context of a strong renewable component. Giving buildings a measure of energy independence, by focusing on energy production at the building level, will always enhance building value, assuming it is done correctly. This is true for a residence as well as for commercial properties, and lenders will have to learn to make energy independence the true focus of building valuations, not mere energy efficiency.

Having said that, there are of course efficiency measures which are rightly part of the building structure, such as insulation, windows, etc. and they will therefore take on a permanent nature, but by making the distinction suggested here, we would solve the total quagmire we are in with respect to these types of investments. Namely, if we prioritize energy efficiency based on fossil fuel based systems, we are in effect postponing the decision to produce energy at the building level, and financially making it harder to ever make that decision in the first place. This type of a shift should properly be the domain of public policy, to see to it that the shift happens. The corollary to this is that once the focus is on building level energy production, investments in energy efficiency have a much quicker payoff, because they are then a proper capital decision, namely they directly reduce the need for installed capacity. In other words it is the order in which we do these things which is important.

Given that the confusion between energy efficiency and renewable energy is so pervasive, and programs therefore routinely subsidize investments which destroy capital by prolonging fossil fuel dependence, it will take some time before these mechanisms are adjusted to the new realities. Meanwhile it is up to owners to analyze their investment decisions correctly, and the ones who do will definitely win by seeing their returns not only operationally, but in terms of building valuation. Many old buildings can be made 80% energy independent with todays technology, by pursuing renewable energy production first, and efficiency second.

Wednesday, July 7, 2010

Of PACE Bonds, Freddie Mac, Fannie Mae and Property Values

There are some fascinating developments around PACE bonds, and apparent obstructionism on the part of Freddie Mac and Fannie Mae, as reported in the New York Times on June 30th, 2010, "Loan Giants Threaten Energy-Efficiency Programs."

Based on some of the issues discussed in recent posts on this site, Freddie Mac and Fannie Mae arguably are actually right to threaten these energy efficiency programs, for to the extent that PACE bonds can be used to extend the fossil fuel franchise, they are suboptimal, and therefore destructive of real estate values.

The smart thing to do would be to have maybe the energy department provide simple criteria to ensure that the energy enhancements are viable renewable energy investments which would in fact enhance property values and therefore provide increased security for any mortgages, so that the technicality of the priority lien becomes irrelevant. After all an investment with a thirty year useful life, and a five year payback, in fact offers twenty-five years of free cash flows from energy "savings," which means a tremendous increase in value of the underlying asset.

This issue goes to the heart of the matter and is very suggestive of a constructive solution. The nation certainly needs some support for real estate values, and the unfortunate fact is that the current confusion of energy efficiency and energy independence based on renewable energy in the rules and incentives, by Energy Star as much as by the ARRA incentives, which in turn depend on the Energy Star programs, is to blame for this confusion. Energy Efficiency only makes sense within the context of a viable renewable energy program, when it comes in the context of a direct trade off against installed capacity, and an improvement of the economics of the project.

Energy Efficiency as applied to extending the franchise of fossil-fuel based energy solutions does not deserve tax credits, or other incentives, it is an operational savings. To emphasize again an issue that I've raised in other posts on this site: Energy Star rated High Efficiency Tankless Hot Water Heaters are perhaps the poster child of federal subsidies for increasing our dependence on fossil fuels, and preventing a switch to renewable energy at a time when numerous viable renewable DHW solutions exist in the market place. They should be outlawed, not subsidized. There are many other examples along these lines, but this one has perhaps more visibility than anything.

If you think of these issues over the typical thirty year life of a mortgage then you'll quickly see that a 30-40% gain in efficiency in water heating with fossil fuels will be eventually offset by energy prices, and perhaps forms of carbon taxation, while solar or geothermal hot water are available and reduce dependence on subscription energy by 80-99%. Energy Efficiency of fossil fuel based systems only possibly makes sense if there is no economically viable renewable alternative. Thus the issue here is "free energy" versus a temporary reduction in energy bills, and the permanently free energy will win the day in most cases if the value of that free energy over the next 30 years is taken into account, and that is a direct enhancement to property values.

The whole issue goes back to focus on payback periods of the investments as if they were independent of the buildings. They should instead be viewed as intra-marginal investments in the building, to ensure that they enhance property values. For society as a whole this will lead to the optimal result.

Freddie Mac did the right thing for the wrong reasons, and the solution lies in a test along the lines suggested here to ensure that such energy investments are constructive and supportive of property values, not a mere green washing that undermines long term real estate values for the appearance of being green.

Monday, July 5, 2010

The Lessons of Lamborghini Applied To Energy in Buildings

Lamborghini underwent an interesting paradigm shift with their latest new model, the limited edition Gallardo LP 570-4 Superleggera  and the lessons of their design considerations are relevant to what is going on around energy usage in buildings. The "Eureka" came when they finally understood that investment in more horse power was running smack into the wall of diminishing returns as it was becoming exponentially more expensive as it became less and less effective, while reducing weight was so much more effective that at that level of performance carbon fiber became a totally affordable option by comparison in seeking to raise performance.

In buildings the reverse paradigm shift needs to happen. We have been overemphasizing energy efficiency, without looking into energy production sufficiently. Often because energy efficiency investments tend to be smaller, and more easily justified, and no one seems to realize that in the process we cheat ourselves out of the investment decision to produce energy in the first place and become at least somewhat energy independent. Simply put, since money tends to have some resource constraints (costs and availability), by nickel and diming ourselves into a stupor with more and more energy efficiency, we will ensure that we will never invest in energy production and energy independence because the more efficient we become at burning fossil fuel, the lower are the returns on investing in renewable production. So energy efficiency is the lullaby which will make us once again the perfect little victims for the next energy price spike. Still the energy efficient buildings which do not invest in renewable production will eventually be worth less than the equivalent buildings which do because of the rising value of eliminating recurrent subscription costs of energy.

Seen in this light, energy efficiency is not a worthwhile goal unless it is truly the only option, and the basic make or buy decision of renewable energy production versus the alternatives should be considered first, lest we cheat ourselves out of ever making it. The way current policy and incentives reward energy savings on a par with renewable energy causes a metastatic cancer in our energy posture as a country, in which we continue to tinker with becoming simply more efficient addicts to fossil fuel consumption without ever making the switch to energy independence through renewable energy production. The way out of this delusion is to ask which building is worth more, this energy efficient building, which shaved 25% off their energy bills or the equivalent building next door which is e.g. 50, 60 or 70%% energy independent. Now it all comes down to a real estate decision, not an energy saving decision, and if you think you are in the real estate business, that is likely to be your better investment posture. And again, decision made, you can improve on it with energy efficiency.

Or, to put it differently, energy independence produces a higher property values than energy efficiency, and the order in which we consider these options matters a lot. As soon as some of the market adopts an energy production posture building values of those that don't will be depressed. Every investment in energy production is a direct price hedge, while energy efficiency for fossil fuels only attenuates the price risks. Politically the upshot is that the national interest in energy security coincides with a maximal use of renewable energy at the building level, and current incentives produce wildly suboptimal results. For real estate owners it is hard work to make the right energy decisions in spite of incentive systems which are very seductive, and make the wrong investment decisions seem plausible.

Energy Efficiency is Not What It's Cracked Up To Be

A building is a system, and just like you can't save yourself rich, you can't achieve energy independence by endless investments in energy efficiency, for they are not additive, but instead, they run into the brick wall of diminishing returns on investment. Energy efficiency extends the franchise of the fuels involved, and needs to be seen in that context. They belong in the utility model.

To set up a methodology of justifying capital investment at the building level based on energy savings is counter productive to the extent that it locks us into the subscription models of fossil fuel use. The implicit and unexamined assumption of fossil fuel burning creates buyer lock in, and prolongs dependence on those fuels. This is not to say energy efficiency is not important. It is. However, energy efficiency is a secondary issue not a primary one.

We need to go back to square one, and that is the question what energy do we need? How much do we need as heat, and how much do we need as energy (electricity). After that we should look into however much energy can be generated at the building from renewable sources, solar, wind, and geothermal. Those decisions are make or buy decisions. Then comes the trade off decision of energy efficiency, namely how much can we lower installed capacity through energy efficiency. This will cause a much more constructive view of energy efficiency. It will also produce more of a systems look at the whole building.

Naturally, part of the consideration is also how can we successfully harvest peak load energy such as solar and wind energy, and in residential construction Domestic Hot Water (DHW) storage is our friend, and not the enemy, as long as we use well insulated storage tanks, to harvest our intra day needs of heat energy. Thus tankless hot water heaters are a no-no in almost all cases and should be stripped of their Energy Star ratings, because they lock us in to excessive use of peak cost energy, since they work on demand by definition, and the whole notion of the smart grid is learning to store energy and diminish on-demand usage. These devices represent a false economy which in the long run will lower the value of your building by more than any savings they could ever produce.

Sunday, July 4, 2010

Federal Incentives to Prevent Renewable Energy in Residential Construction

OK, that was just a bit tongue in cheek, but it is actually serious, and it raises issues of unintended consequences, which are not always easy to address. However, it is urgent that home owners, and building owners come to grips with it, for it will materially impact the value of their real estate holdings in the future.

It all revolves around a theme that is pervasive on this blog, and that is sub-optimization. You could spend a lot of money on energy efficient appliances and still not create an energy efficient solution. The whole gist of the Energy Star label (when it works as intended) is to focus on the individual function, and make that as effective as possible, but buying everything Energy Star-rated will not solve your problem, and may in fact cause you to spend a lot more money than necessary, thus sub-optimization leads directly to capital destruction (aka stupid investments). A big example is the issue of tankless hot water heaters that I've raised on this blog, which is a hopelessly suboptimal solution because renewable hot water solutions are so easy and plentiful. Eventually there are others, and they all boil down to one and the same thing, which is the systems approach, the holistic approach in which the building is central, and not the equipment. The focus is on operating cash flows, and long term building values. Thus, if you can implement solar DHW, it may pay to look your washing machines and dishwashers to make sure they can take in hot water, in lieu of heating cold water. For never mind how efficient is their heating element, if they can take in water from your solar thermal installation.

Once you put the building central, you can look at integration of various technologies, and implement them even in sequence, if necessary, something now, and something else five years from now, when you're done paying for what you installed today. This kind of preplanning is entirely possible when you figure out the engineering and economic interdependencies, and do not fall for the temptation to implement something now which will prevent you from doing the next logical step five years from now. If you are only looking at the available incentives and the Energy Star ratings, and let them prevail over proper engineering and planning, you are very likely to make these mistakes, which will cause you to spend the same dollar two or three times over over the life of your house or building. The incentives, as much as the ever so well intended Energy Efficiency ratings look only at the level of the individual function of subsystems.

Besides planning ahead your engineering integration of a whole house/building system, the general principle is not to overspend in places where it really does not pay off, for the highly efficient variants of products are often not only more expensive, but sometimes less reliable. Simpler is better in that case. Another examply of where you should break the mold is the reverse, namely you should probably overspend on LED lighting where it conerns far out of the way lighting. If you only look at the difference in energy savings, LEDs are still hard to justify for most applications, but not in out of the way spots, where their longer lifetime pays off in reduced hassle and maintenance cost. LEDs last two or three times (or more) longer than the alternatives, and by looking at both energy savings and maintenance savings the picture changes the more they are in hard to access locations.


By the same token, many forms of subsidy and incentives are geared to the use and installation of Energy Star rated equipment, and again there is no guarantee that this results in an optimal design from the standpoint of energy economics of the building, be it a home or an apartment house. The simplest example is that of the back-up water heater for a solar thermal, or geothermal hot water installation. For this function it may not at all be worthwhile to buy an Energy Star rated piece of equipment. The other example is the installation of solar pv systems financed by your local utility against a Power Purchase Agreement (PPA), which is a low yield investment, which extends their franchise, but is suboptimal from the standpoint of operating cost of your building, since even the worst solar thermal system offers a higher yield of energy than Solar PV.

The fundamental error is that energy efficiency and renewable energy are treated as interchangeable, when they are not. Energy efficiency is not additive to energy independence, but renewable energy is. Energy Efficiency should rationally be funded either directly from savings or by PPA from your utility or oil company, not from public money. Renewable Energy, if it is engineered sensibly, is the only thing that deserves public stimulus because it achieves energy independence, raises real estate values, and is a permanent improvement. There may be exceptions when energy efficiency is the only option, depending on the nature of the buildings, in which case policies should be flexible enough to support it.

Renewable Energy is the Real Energy Independence

Energy independence is the goal of renewable energy, it is a make or buy decision, but in the transition we will simply have gradually decreasing dependence on fossil fuels, before we achieve complete self-sufficiency from renewable sources.

Energy efficiency however, is a subgoal, and it is counter-productive if it is elevated to the primary goal, for it tends to include the unstated assumption that all our buildings can do is to consume energy, based on the recent subscription model of fossil fuel based consumption, and thus it overlooks the productive capacity which is now a reality, with increasing numbers of renewable technologies becoming available at building scale. In short investments in, or subsidies for "energy efficiency," such as is now common practice, do not optimally augment values of building stock, but are instead supportive of extending the franchise of oil companies, utilities, and constitute a subsidy of technology manufacturers, and therefore come at the expense of real estate values on the margin. Or, to put it differently from the standpoint of extending the fossil fuel franchises, energy efficiency is additive, so that in a fair world the providers of those fuels should pay for it, not the building owner.

If we focus purely on Energy Efficiency, i.e. reducing consumptions through various forms of economizing, be it through technology or sacrifice of convenience, we are locking ourselves into the consumption model, the subscription model of fossil fuels, which is the unstated assumption behind "Energy Efficiency." If instead we see energy efficiency from a production standpoint, there is a direct capital trade-off against installed capacity. Your boiler doesn't live forever, but your investment in energy efficiency by means of improvements to the building envelope directly reduces the size of your next boiler, and depending on where you are in the life-cycle of your boiler, this may be more or less relevant. Depending on what other things you undertake in your building, the economic life of your boiler may become shorter than its mechanical life expectancy.

Energy Independence with Renewable Energy will never arrive if we focus on energy efficiency only, we will merely extend the fossil fuel economy a bit longer. In this area failing to plan is definitely planning to fail. There has to be deliberate planning to shift from the consumption model, which is the model of the utilities and oil companies, to the production model, which is the model of renewable energy and of increasingly energy independent buildings. The most important aspect of renewable energy technology is that it is coming down to building scale in a variety of ways, and thus the opportunity arises to produce the energy right where it is used, and avoid high transportation costs (including some transmission losses), as well as avoiding the subscription model of energy. This is a make or buy decision, and with current technology we are shifting to a situation where the economics favor local production. This is particularly evident in metropolitan markets where the transport costs of energy are some of the highest.

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.

Sunday, May 2, 2010

Solution Selling and its Undoing

Technology vendors tend to focus on selling "solutions" in which their respective technologies play the starring role. At times this may be an obvious ploy, but often enough it is done in good faith, but can be disastrous nevertheless, because it focuses on the strengths of the technology in isolation, and not its relevance to a building energy infrastructure.

Owners who buy such would-be solutions without properly reviewing the technology in context as an integral part of a long term energy infrastructure, rather than in a stand alone fashion, will pay dearly for such carelessness. At times it may even turn out that certain technologies are complementary from an the standpoint of energy engineering economics, when in the competitive sales process, where vendors all operate in their own silos, they are presented as competitive solutions in a way which is very misleading, unless owners have competent engineering and planning staff at their disposal. Existing incentives often make sloppy analysis worse by distorting the picture even more. Once technology commitments are made in the wrong order, it can be very expensive to undo them.


A proper financial discipline in this regard will view all such investments in the context of a strategic shift towards long term energy independence, which will be driven by the economics of energy as an asset, not a liability, and from the standpoint of producing energy, rather than consuming energy - which can only be mitigated somewhat by "energy efficiency." Moreover the building needs to be appreciated as a whole, and individual functions which are subsystems of that whole should never be analyzed in isolation, at the risk of serious capital destruction, if perceived problems of subsystems are solved without addressing the whole system as and integral energy and economic system.

A good example is very easy to find in today's market place. An apparent tradeoff decision may seem to exist between a "High Efficiency" (preferably "Energy Star" rated) hot water heater (gas or electric, depending on local rates), and either a geothermal or solar thermal hot water system. Vendors present their "solution" based on the payback periods, and their jubilant claims are enhanced further by the various incentives that are available, and predictably owners come to the wrong decisions. If a good solar or geothermal system has a 30 year life expectancy (and a 20 year warranty), during that same period, the hotwater heater may need to be replaced two or three times, and it comes with a constant and still substantial series of energy bills, all driven predominantly by the cost of fossil fuel (and delivery costs), which are rising relentlessly.

Based on payback alone the High Efficiency fossil fuel based method is likely to win. In NY, the typical situation is an old system in an apartment building which is based on a coil in a steam boiler, which is only 50% efficient as a hot water heater, and the modern high efficiency gas-fired water heaters are 95% efficient. Easy solution. However, remember, this still assumes a constant series of gas bills, and two or three replacements over the 30 year lifespan of the alternative system based on renewable energy. A geothermal system may offer 200% in system efficiency by comparison, and a solar thermal sytems may offer near infinite efficiency because the only fossil fuel bills it brings along on a recurrent basis is a little backup heat for the periods when there is no solar energy to harvest. And in both systems the harvesting problem of peak-load energy may be offset with water storage.

In short, when properly analyzed as an intramarginal investment in the building the $150K Solar or Geothermal system may end up being a better investment than the $15K high efficiency gas heater, while the payback period of the gas heater would definitely be shorter, when seen in isolation, but it comes with still recurrent and comparatively substantial energy subscription costs as well as two or three replacements over time. And the return on the more expensive system may be greater than on the cheaper fossil-fuel based solution. There may be other knock-on integration effects which further increase the value of the geothermal or solar solutions, where recurrent energy costs may be less than half or even only 10% of the gas fired alternative. It all becomes easy to understand when you see two identical buildings side by side, each with 100 apartments, and one spends $1,000 per apartment per year for Domestic Hot Water (DHW), based on the old coil in steam boiler, and the other $100, or $200 based on a renewable solution, while the third chose the lower capital investment of a simple high efficiency gas fired heater, but still ends up with bills of $500 per apartment per year. Energy independence in economic terms is thus a make or buy decision, or, to put it differently it boils down to buying free cash flow. The real issue is the resulting real estate value of the building, which is not what's on the mind of the equipment vendors. They would rather bamboozle the owners with magical payback numbers. So I keep reminding owners that they're in the real estate business, not in the hot water business, for that is where the deception starts.

The Geothermal DHW Dimension

One of the most strategic renewable energy components in residential living, and even more so in multi-family buildings is no doubt geothermal hot water (DHW). The reason is simple, everyone needs hot water for domestic purposes, and simple hot water tanks allow the water (and thus the heat) to be stored for later use, with minimal loss, and energy storage is the holy grail for the smart grid. Solar thermal is a superior solution for that reason also, because it is capable of far higher energy density than PV, but also because the storage problem is solved more easily in the form of DHW than it is with PV and batteries.

Unfortunately, manufacturers have a habit of living in silos circumscribed by their respective technologies, all the while pretending that their technologies are the solution to the exclusion of others. This creates the impression that e.g. geothermal DHW and Solar Thermal DHW are competitive solutions, when in fact they are potentially complementary, because of the extremely different behavioral characteristics of the technologies. Particularly, from the standpoint of designing energy generating systems, geothermal energy is base load capacity, i.e. within some limitations it can produce whenever you turn on the switch, whereas Solar and Wind power are peak load generating capacity, which are dependent on the weather, and thus may or may not produce when you turn on the switch. Therefore, solutions that are routinely presented as mutually exclusive, often are complementary instead.

As a result of the technology-centric approach, the field has been plagued by false tries, and in one extreme case a leading manufacturer of geothermal heat pumps, who is promoting their technology for the DHW application, in fact promotes a financial model for the application which leads to inherently wrong systems design. The problem here seems to be that the manufacturers should worry about what happens within their systems, and specifying the proper warranty specs, which become in effect minimum design standards, but NOT design specifications which should be engineered appropriate to the building not to the equipment. Building-centric design is the key. The answers are not the same for all buildings and all markets.

The unfortunate example alluded to here can be found at: Faulty Cost/Benefit Analysis for Earthlinked DHW Systems Designs which is a model apparently intended for design of geothermal DHW systems, but which cannot reliably predict the economic viability of such systems, and moreover makes the design error that generating DHW is the purpose of such systems, when in fact the storage of energy is much more important from the standpoint of designing renewable energy systems. The central problem of dealing with peakloads is how do I store the energy, and thanks to the constant demand for DHW in residential facilities, water storage allows us to harvest economical, renewable peak load power, or even off-peak power from the grid.

In a hybrid system, where the geothermal heatpump preheats the water typically to ca 100F, there is a backup source of heat, to take the water from 100F to the typical storage temperature of 140F (ASHRAE 12), and/or to serve as backup in case of failure. Therefore, preheating the water with geothermal heatpumps only makes sense as long as the cost per delivered BTU of the electricity which drives the heatpumps is lower than the cost per deliverd BTU of the fuel for the backup heating, these days most often Natural Gas. Therefore should the backup fuel be cheaper, it makes no sense to run the heatpump. Particularly when the cost of the two fuels move at different rates, this situation bears watching. Specifically gas is seasonally low in the summer when electricity is seaonally high, and the reverse happens in winter, when electricity is seasonally low, and gas seasonally high.

The model above uses an average for the two input costs, gas and electric in our example, wich is only usable in cases where the prices of the two fuels are far enough apart that the cost per delivered BTU cannot ever cross over, however, when the prices are in a narrow band, and do cross over seasonally, this model will give false indications of the savings that can be obtained by such a system, and if a false positive is used to design a system, the result will be a system which roughly saves money 9 months out of the year, and dis-saves money 3 months out of the year, and if the summer peak is bad enough, it could wipe out the savings of the other nine months. In short, such systems will fail, if they are rigidly based on such evidently false assumptions. Be that as it may, I've seen systems fail for these reasons, and get sold with entirely wrong predictions of their economic value, and in this case the manufacturer's patently faulty financial model is the cause of it.

Saturday, May 1, 2010

Throwing out the Batteries with the Bath Water

For the last few decades, there has been a gradual shift in understanding that the end of the fossil fuel era is at hand, and not necessarily because we run out - although there are of course vested interests who would like to sell us every last drop of oil, and every last lump of coal, not to mention whatever gas remains. The paradigm shift however, is about understanding that the fossil fuel era is at an end because of diminishing returns. In short the unintended consequences like CO2 emissions and other problems are the manifestations of that shift. The cost of the commodities themselves is going up because of increasing scarcity, and the cost of the various nefarious side effects are weighing more heavily all the time as well.

The other side of the shift is the increased creativity in the development of alternatives, both in terms of the technologies and in the complete frame of reference in which we operate with energy. However this process is nowhere near complete, and in the transition sometimes ridiculous misalignments come into play. One example of this is the storage of Domestic Hot Water which I have been writing about on this site. We are only just starting to understand that renewable energy means that that buildings can generate some or all of their own energy, and that the most typical renewable sources, wind and solar, are both of the peak load variety, i.e. they produce power when the weather is favorable, not necessarily when we turn on the switch. Therefore energy storage is an absolutely crucial design element in harnessing these sources. This issue has been part of the smart grid conversation for years, and we continuously hear how expensive batteries are.

Meanwhile the buyers of tank-less hot water heaters (unless as a backup heat source), are throwing out the batteries with the bathwater, or, to be more precise, by eliminating storage of Domestic Hot Water (DHW), they are eliminating the cheapest form of energy storage available in residential living, and one that is of crucial importance if we ever want to make our buildings energy independent with renewable energy. The focus in this case is on eliminating the BTU loss from hot water storage, never mind the fact that with modern insulation, these losses are negligible, and yes some space is being reclaimed. This however ignores the fact that hot water is the most natural energy storage solution, which we get practically "for free," if we realize that with various renewable technologies it is cost justifiable as part of the hot water provisioning for the premises.

This particular issue is quite absurd in its consequences. There are super efficient tank-less hot water heaters, with Energy Star labels, and they are marvelous, if heating hot water were the problem, except it is not, and therefore tank-less hot water heaters are not the solution. Rather, they are the problem. The absurdity becomes complete when we realize that there are tax incentives for tank-less hot water heaters, which means that the US government thus provides a subsidy for the postponement of our renewable energy economy by another twenty years or so, and building owners are torpedoing their best options for making their buildings energy independent. In short the very concept of the super efficient tank-less hot water heater, is of value primarily if the only option for a residential building is in consuming energy, and economizing by consuming less of it. This is the utility model, and the utility companies, gas and electric, as well as the oil companies represent this economic model, and the traditional incentives are all geared to energy efficiency more so than to energy independence.

The new model however is that energy is becoming a technology business, and buildings can increasingly generate their own energy locally, at the building level. As a result the economic value of DHW storage is now as an energy store, which enables the use of peak-load generating technologies like wind and solar. This solves the storage problem only in the form of heat, which is the largest energy demand in residential construction. In as far as the demand is for electricity, some form of battery is unavoidable if you want to rely on peak power, and come either partially or wholly off the grid.

As I have seen demonstrated over and over, the plumbers of the world do not understand that Hot Water is now going to be a freebie, and a happy by-product of this shift in energy infrastructure, in which buildings increasingly produce their own energy. This shift is particularly dramatic in existing residential construction, but   that is exactly where the greatest economic opportunity is. Accordingly, if the government wants to achieve energy independence, the incentive programs, from tax incentives to special finance programs (such as the Multi-family Performance Program from NYSERDA was one), need to take the new realities into account.

The mere accumulation of energy efficiency, which seems the only option in the utility model, is also the best guarantee that we stay in the fossil fuel economy forever, and therefore would be disastrous. Yet almost all incentive programs, with the best intentions, make this totally self-defeating assumptions. Energy independence does not happen unless you plan for it. The renewable energy economy and the utility model are two radically different economic constructs, and "energy efficiency" as a goal remains the child of the utility   model, and will prevent us from ever getting to energy independence and a renewable economy. As a dear friend pointed out recently: "You cannot cross the Grand Canyon in two easy steps." We are now at the point that we need to wean the baby from the breast of the utility companies and the oil companies, and the baby will cry at first, but to become independent, it is absolutely necessary. And there is money to be made from this energy conversion, once it is properly understood as a business opportunity.

Friday, April 30, 2010

Official Correspondence regarding Tank-less Hot Water Heaters

To the Secretary of Energy, Mr. Steven Chu:

quote

Subject: Misuse of Energy Star Label in "legititmate" applications
Date: Sun, 28 Mar 2010 09:09:24 -0300

Dear Mr. Chu:

Besides some of the outright hoaxes under the Energy Star label, there are occasionally problems of disastrous misuse of the label, which may seem perfectly legitimate on the surface.

Perhaps the biggest "legitimate" hoax under the Energy Star label is the oxymoron of a Tankless Hot Water Heater with Energy Star Rating, which qualifies for tax incentives to boot, but which positively undermines the
architecting of a renewable energy future.

The problem here is one of sub-optimization, and is in this case quite disastrous in nearly all applications of Hot Water Heaters. Namely, DHW storage is the cheapest most effective form of Energy Storage imaginable,
and switching to a tankless system is a ruinous decision from an energy management standpoint, since it means throwing out nearly "free" batteries, that would allow a property to harvest cheap energy, be it off-peak grid power, via time-of-use metering, or peak-load power such as wind or solar.

Conversely tankless water heaters may be quite valuable as backup power, in situations where renewable peak power is used, however in that case the Energy Star models should not be used, as they introduce needless maintenance issues if they only fire up a few times a year. So for that application, actually the non-energy star models are preferred, because they will last longer and are therefore dollar for dollar more effective and likely to be more reliable.

This issue is big enough that it deserves top level attention. There are geothermal heatpumps which can generate DHW with 400% efficiency, and as long as you design water storage large enough for intra-day use during peak power, you can run these off-peak on the grid, or alternatively with peak loads such as wind or solar, and have "free storage," and I'm using "free" advisedly, for the analytical point is that the water storage is cost justifiable from the DHW application alone.

Even large organizations, like NYC Housing Authority, have used stimulus funding to install tankless hot water heaters, and thus undermine their own long-term renewable energy future. It is time for this fallacy to stop.

Of course more generally there is always a risk of sub-optimization, if the attention becomes focused on the component level. Thus there is need for wide use of system-level Energy Star ratings, which could offset the
type of abuse of the rating here. It is too silly that stimulus money should be used to prolong the carbon intensive energy economy, instead of enabling the renewable energy future.
unquote

To which the unfortunate reply was:
quote

EXEC-2010-005700

Dear Rogier Fentener van Vlissingen,

Thank you for contacting the U.S. Department of Energy.  I understand you have concerns about ENERGY STAR qualified tankless hot water heaters.

ENERGY STAR is a joint program of the U.S. Department of Energy (DOE) and the U.S Environmental Protection Agency (EPA) designed to help all consumers save money and protect the environment through energy efficient products and practices.  In an effort to ensure that only products meeting the program requirements can receive an ENERGY STAR label, the EPA and DOE are further strengthening the certification process.  For an outline of these steps, please view:

ENERGY STAR
News and Announcements
EPA, DOE Announce Changes to Bolster ENERGY STAR Program (April 2010)
http://www.energystar.gov/index.cfm?c=news.nr_news&news_id=http://www.energystar.gov/cms/default/index.cfm?LinkServID=E77FB9F2-96D9-EAAD-6B3C6ECF0D9E4808#c_B4A3256E-188B-36F7-215E56FDB1D2450C

If you have further questions about ENERGY STAR product ratings, please contact ENERGY STAR directly through the contacts listed on the following web page:

ENERGY STAR
Contact Us
http://www.energystar.gov/index.cfm?c=contact.ct_index

You may be interested in reviewing rulemaking activities and regulations regarding energy efficiency for residential water heaters available through the DOE Office of Energy Efficiency and Renewable Energy’s (EERE) Building Technologies Program:

U.S. Department of Energy
Office of Energy Efficiency & Renewable Energy (EERE)
Building Technologies Program
Appliances & Commercial Equipment Standards
Residential Water Heaters
http://www.eere.energy.gov/buildings/appliance_standards/residential/waterheaters.html

The federal tax credits for energy efficiency are congressionally mandated. Products that qualify as a federal energy efficiency tax incentive were set forth in the Energy Policy Act of 2005. On October 3, 2008, former U.S. President George W. Bush signed into law the Emergency Economic Stabilization Act of 2008 to extend many of the energy efficiency tax incentives first enacted in 2005 that expired at the end of 2007, or that were scheduled to expire at the end of 2008. On February 17, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 which includes several provisions modifying and expanding the scope of the energy efficiency and renewable energy incentives:

The Tax Incentives Assistance Project (TIAP) Legislative Language & Pending Updates
http://energytaxincentives.org/general/legislative.php

To inquire about possible changes to the list of eligible products, please contact your local congressperson.

For information on how energy related stimulus funds are being implemented in the state of New York, you may wish to contact your state energy office or view New York’s recovery website.  Below you will find your state’s energy office contact information as well as a link to your state’s Recovery Act website:

New York State Energy Research and Development Authority
Energy Efficiency Services
17 Columbia Circle
Albany, NY 12203-6399
Phone: (518) 862-1090
http://www.nyserda.org/

Recovery New York
http://www.recovery.ny.gov/

As you mentioned geothermal heat pumps, you may be interested in viewing  the following websites:

U.S. Department of Energy
Office of Energy Efficiency and Renewable Energy Energy Savers
Geothermal Heat Pumps
http://www.energysavers.gov/your_home/space_heating_cooling/index.cfm/mytopic=12640

Geothermal Heat Pump Consortium
The Consortium is a national non-profit trade association of the geothermal heat pump industry.
http://www.geoexchange.org/

U.S. Energy Information Administration (EIA)
Geothermal Heat Pumps
http://www.eia.doe.gov/cneaf/solar.renewables/page/heatpumps/heatpumps.html

Western Area Power Administration
Geothermal Heat Pumps
www.wapa.gov/es/pubs/fctsheet/GHP.pdf

Sincerely,

Amy Foster Parish
EERE Information Center
Office of Energy Efficiency & Renewable Energy (EERE)
U.S. Department of Energy
http://www.eere.energy.gov

unquote

Oh well, so off I go, now to write to the Energy Star program directly... to be continued.

Monday, April 26, 2010

On Sub-optimization with Energy Star

The Energy Star program is getting a lot of scrutiny lately, and no doubt that is helpful to make the program better and a more meaningful rating of actual performance of equipment we buy. However, there is another aspect to Energy Star, where it can be seriously misleading, even if all the performance data are correct. Collectively we are still a dysfunctional family when it comes to achieving a workable renewable energy economy, in lieu of merely extending our fossil fuel dependence in the name of "energy efficiency."


The example is similar to the issues we have recently seen on Wall Street. If incentive systems are such that they reward short term claims of profit, on investments on which the profits are in the distant future and by no means assured, the sales incentives of the "bankers" and "traders," really boil down to a modern version of "après nous le déluge," or, if you will: "Take the money and run." It boils down to sub-optimization where one party can game the system. I saw some examples of the same at the time of the build-up of MCI-Worldcom, when some of the sales people in that organization were able to collect double commissions, because the internal sales tracking systems were not integrated. It seemed, looking from the outside in, as if that company was in no hurry to correct the situation, while their sales people were drinking up their ill-gotten gains. Later it dawned on me that these double bookings of course perversely supported an inflated stock price, which it seems was the goal of management.


Similar issues of misaligned incentives happen with Energy Star, and it comes to light in some cases when you are designing systems based on integrating many components. It comes to light in strange ways. One of the strangest may be the case of tank-less Hot Water Heaters, which are wonderfully engineered, and highly efficient devices, and there have been a lot of them installed with moneys from the ARRA (Recovery Act), with the tax-incentives which are available in this area, and yet in almost all cases does this choice undermine a long term green energy strategy, and it boils down to a needless prolonging of burning fossil fuels to heat water. 


One of the central problems with generating energy from peak load capacity, such as solar- and wind-energy, is the problem of storage, and in any residential construction, you usually have daily usage of very predictable volumes of hot water. Thus a renewable energy solution becomes vastly more economical when it supplies all or part of the hot water for a building, thus allowing the storage of energy. The entire concept of the smart grid revolves around solving the energy storage problem and the very concept of tank-less hot water heaters runs counter to that trend, moreover a well insulated water tank is now so efficient, that the loss of BTUs from storage is insignificant, whereas its value for harvesting and storing energy in this fashion is extremely high, and strategically crucial if we want to solve our energy problems any time soon. 


Arguably a tank-less heater could make a good backup if hot water comes to depend on peak load capacity such as wind or water, but in that case the condensing, modulating high efficiency models are not worth the extra cost which gets them their energy-star rating. The greater complexity of those designs brings maintenance problems with it, which are aggravated if the equipment runs very infrequently, and so the Energy Star label is exactly what you don't want.


In short, high efficiency, Energy Star-rated tank-less hot water heaters are more likely part of the problem set, and not part of the solution set when it comes to solving the energy problems of residential living, be it in apartment houses, hospitals, dormitories, etc. as they undermine the achievement of building-level energy independence, and gratuitously postpone a renewable energy economy by another twenty years. They are however the best friends of your local gas company. You may even win awards for your energy efficient building. Economically however, you will have shot yourself in the foot with a bazooka. It is high time we bring out a proper understanding of marginal economics to this area of endeavor. Maybe installing these systems should require a very expensive license, to make sure all feasible renewable alternatives were exhausted first. OK, that was tongue in cheek, I guess.