Energy Tax Reform is in the Air

Senator Max Baucus (D-Mont), Chairman of the Senate Finance Committee proposed far-reaching energy tax reform. The principles  are solid, to quote:

“It is time to bring our energy tax policy into the 21st century,” Senator Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale.  We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”

Regrettably, as drafted, it is limited to electrical generation, and thereby it aggravates the problem of confusing incentives that get in the way of maximizing reductions in GHG-emissions. It effectively accomplishes the opposite of its stated goal mainly by locking out the thermal technologies that are so powerful on the demand side of the grid, and can hugely reduce electrical demand, and therefore reduce GHG-emissions.

In its present form it would leave out the huge potential shift in energy production from the supply side to the demand side of the grid, where thermal technologies have the greatest potential. In general, renewable energy generation facilitates a move towards more on-site generation, and thus alleviates the demand on the grid. I addressed this issue earlier in an open letter to President Obama proposing simplifications in energy tax and incentives, including eliminating incentives at the technology/component level, such as is now done with the Energy Star rating system.

We can only hope that the proposal be amended to include ALL ENERGY GENERATING technologies, as well as energy storage, and certain passive energy technologies, insulation, energy efficiency, etc. Careful drafting is in order as to what is in and what is out. At the extreme, some homes and buildings should arguably be scrapped altogether, if they are hopeless energy sinks. However, even if they were replaced with a net zero building, that should probably not be permitted as a tax write off in its entirety as intended in the proposal... or should it? (Think e.g. Zenesis House.)

Utility-scale Projects

For utility-scale projects that continue the old model of the grid, with centralized generation and mass distribution, electrical generation is the way to go, because electricity is easier to transport than process heat. Various technologies can come into play, and we have recently even seen solar thermal win some interesting applications, such as the Ivanpah project. For remote energy generation, the Baucus proposal levels the playing field in the only way that makes sense. But centralized energy generation is of decreasing importance, and the greater reductions in GHG-emissions can be achieved on the demand side of the grid, not on the supply side.

Building Retrofits Include Energy Generation

Building retrofits are different. They are on the demand side of the grid. According to DOE, buildings account for 39% of total energy consumption, and 72% of all electricity. If the incentives are leveled in the spirit of the Baucus Energy Tax Reform proposal but include ALL forms of energy generation as suggested above, HUGE changes are possible. Not only can more electricity be generated in buildings (solar, wind, hydro), but more electrical demand can be replaced with thermal technologies, such as geothermal and solar thermal, thereby reducing the need for remote production in the first place.

This shift is necessary both because of direct environmental reasons, such as GHG-reductions, but also because greater building resilience is becoming mandatory, and in many areas with weather related risks (such as the coastal zones), greater energy independence and micro-grids are becoming very necessary, and laws are already starting to encourage them. Here is where thermal technologies will shine, and need to be on a level playing field with the alternatives.

The Potential Impact of Thermal Technology on GHG-reduction

The advantage of thermal technology when it is implemented at the demand side of the grid is extensive:

• Greater efficiency, in some cases this is very obvious. For example, solar thermal directly converts the heat of the sun and uses it for heating and cooling, and it can even be used for on-site electrical generation.
• Ease of storage, whether it is geothermal or solar thermal, storing process heat is much easier. With geothermal heat, preheated hot water used for heating or cooling can be easily stored, With solar thermal you can store process heat in high heat tanks, and downstream you can store preheated hot water.
• Because there are no transportation losses, and heat can be easily stored for intra-day use on-site. Also, geothermal can easily provide the ability to store energy from wind or solar PV for intra-day use also, which typically provides superior returns compared to selling back to the grid at wholesale levels, and again water storage is more environmentally benign than batteries.

Energy Star Portfolio Manager to the Rescue

Help is on the way from your friendly EPA. The Energy Star Portfolio Manager program is designed exactly to model building performance and plan energy retrofits with an eye to GHG-reduction, in short, the tools for a comprehensive revision of the incentives for ALL forms of energy generation are already in place. The proposed revisions of the energy tax could and should rely on this type of modeling, and it would seem proper if the EPA set the standards. With this type of support in place a simple incentive structure for GHG-reductions is all we would need.

Conclusion: Include All Energy Generation

As drafted. the Baucus proposal for energy tax reform is a step in the right direction, but it would accomplish the opposite of its stated goal by leaving out thermal technologies, and the sector that is capable of such dramatic GHG-reductions: building retrofits with on-site energy generation. We can only hope that the same simplification of incentives should be extended to all forms of energy generation, active, and passive, instead of applying to electricity generation alone.

Energy Efficiency, Handmaiden of the Koch Brothers

We are still in an alternate reality, as in: "down the rabbit hole" in Alice in Wonderland, where planning the green future is concerned. Basically, we are stuck repeating the mistakes from 40 years ago, based on assumptions that might have been more valid than now. Be that as it may, they are no longer valid today. A new plan is in order.

When the grid was still THE GRID and Energy Efficiency the solution

Back in the day of the first serious energy price shocks, economists pretty quickly surveyed the energy landscape at the macro level, and figured out that the marginal dollar is more effectively spent on reducing demand than increasing supply. From that time forward the energy industry (oil companies plus the utility sector), adopted energy efficiency as an objective and participated in attempts to achieve those demand reductions, in order to keep its products economically viable.

After environmental damage (Green House Gas (GHG-) emissions) became more known as a cost of carbon energy, the energy industry hi-jacked the renewable future, co-opting green energy with a substitution of energy efficiency for renewable energy. Thereby "green" was now good for the shareholders of the energy companies, for it extended the franchise, and the do-gooders in the environmental movement fell for the snow job, and became the best allies of the carbon cowboys under the auspices of energy conservation, energy efficiency, or whatever other moniker will serve, anything that made people feel like they were sacrificing for the good cause...

All of this had its roots in a time when we thought that economic use of energy was the problem, and before it was widely known that GHG-emissions were the problem, and renewable energy the answer, but we have never adjusted our policies. Most importantly, what has also changed in the last 40+ years is the rapid development of renewable energy solutions that can be installed in properties, on the demand side of the grid.

The Energy Star Program takes the cake

The Energy Star program is the epitome of the problem of dysfunctional energy policy, because it focuses on the component level, not on the systems level. This may be valid when it comes to selecting a new fridge or microwave, but anything that is even potentially part of the permanent energy infrastructure of a property needs to be looked at on a systems level. Unfortunately, only too often these days, there are tax-credits for specific items of Energy Star rated equipment, and all-too often these get specified by bookkeepers and accountants even when the engineers know they make no sense.

The Energy Efficiency Trap

Energy Efficiency is actually an economic trap, and it is also an environmental trap, as is very convincingly argued by Prof. Steve Hallett in the book The Efficiency Trap. Economically and financially, energy efficiency is a trap because of the phenomenon of diminishing returns, which creates the perfect trap with which to lure suckers into uneconomic and eventually self-destructive behavior. Here is how it works:

1. In year one we finally grab some subsidized program that will offer us energy efficiency. So we did a certain amount of weather-stripping and insulation, a set-back thermostat perhaps, and other low dollar, high impact fixes. It reduces our bills somewhat.
2. In year two or three the bills went back up, because of price increases, so our "investment" in weather-stripping has been wiped out,
3. However we now look at what inefficient equipment we have and with help from the Energy Star program we figure out how we can further reduce our energy use. In reality we get that new fridge we always wanted, and some other gadgets, but we save energy, so we can shop without guilt. Nobody is calculating what the return on investment is.
4. Another year later, it's time to get serious, we have cumulatively spent a lot of money on energy efficiency, with little to show for it. But we know our water heater is coming to the end of its life, and the boiler should be replaced in a few years. So let's do the water heater this year. In comes a happy salesman with a tankless hot water heater. Energy Star rated, good for a 30% tax credit, and with a ten-year guarantee, and 5 year financing so we are spending less than the energy we now buy to heat water. Miracle of all miracles: a self-liquidating proposition. The salesman loves saying that, and we like it too: "Sign here, press hard, three copies!"
5. Two years hence we finally have to replace that boiler, so we shop for new Energy Star rated boilers (what else!). Our old boiler was 60% efficient, and the new one is going to be 95% efficient. More tax incentives, and self-liquidating financing propositions. Finally we're spending less on energy, but we're still paying off this equipment. By this time we may have a 25-35% reduction in energy consumption compared to the year we started working on this issue. Our oil or gas bills are going down, but our electrical bill is still stubbornly high.
6. The next year there seems little left to do. Replacing the windows? A twenty-five year payback convinces us otherwise. But, wait a minute, here comes another sales person, now with a solar PPA, for less than our average monthly electric bill, we can now really go green and help the environment, not to mention impress the neighbors. And we're saving 10% compared to paying the electric bill, and we already know the rates will go up anyway...

By the time you add all this up, we have spent a fortune on energy savings, and our energy savings result in an energy bill that is only slightly less than when we started taking into account the various payments. Our utility company and our oil company love us. They even send us certificates to congratulate us on how "green" we are. But the problem is, every next investment was bigger than the last one, culminating in the solar panel that was an $35,000 investment, and 10% reduction of the electric bill was only a 4% reduction of the overall energy bills, and we're paying for it over 20 years, but the actual payback is very slow, and in the meantime, the remaining energy portion of our bills keeps going up.

Why Energy Efficiency is a trap

In the six steps to energy efficiency above, there were several thresholds that were crossed. Instead of upgrading the boiler, we could have chosen a solar thermal solution, except it seemed expensive, and we had just eliminated the water tank two years earlier, not realizing that it could provide "free" energy storage, so what were we to do? Write off our brand new tankless hot water heater and scrap it? Of course not! So we upgraded the boiler. In short, we walked a path of successively larger investments, with less and less energy savings, and we still have an energy bill that is well over 50% of what we started with.

If we had done a systematic analysis at the outset, taking into account when various equipment would run out, we might have ended up with a new energy plan in which we perhaps also did some insulation first, but saved up some money to install either geothermal or solar thermal for HVAC and Domestic Hot Water (DHW). And we got some tax credits on those as well, but we ended up reducing our energy bills by 70-90%. Moreover, we eliminated most major sources of indoor air pollution (boiler, DHW), leaving only the stove. We could now convert to electric cooking, and replace the windows with new triple glazing, and get some heat-exchange ventilation. And we could end up with our old house being near net zero, certainly if we could combine geothermal with solar PV. Site Derived Renewable Energy (SDRE) permanently replaces subscription energy from the grid. It is also permanent part of the plant and equipment of our property, and raises the value.

Ten years later Site Derived Renewable Energy wins

In these two alternate realities for our lives, the energy-saving alternative had us walking into the efficiency trap. We reduced our energy but at a staggering cost, and we still have a significant energy bill left, and it keeps going up. In the second alternative, we bit the bullet and invested significant money in the early years, but it looked better with every passing year, for the payments did not go up, unlike the energy bills of the neighbors. This is the effect of Site Derived Renewable Energy (SDRE). In short, the value of the property goes up, and we are helping the environment by eliminating 70, 80 or 90% of direct carbon emissions from the house. Not only that, but a new development of net zero homes was going up nearby, and we were approaching that level for our own home, so the value of our property should hold up.

Conclusion: SDRE wins

SDRE means permanently replacing the monthly energy bills with our very own generating capacity, which we only buy once. It could be solar thermal, geothermal, wind, solar PV, various passive energy solutions, or a combination etc. It adds to the value of the property. In fact, our property's value now goes up with energy prices, and we won't have to worry about the carbon tax when it comes. Site Derived Renewable Energy should be prioritized over energy efficiency, and ratings of components should not distract us from the total design concept.

The Voodoo Economics of Energy Efficiency

Recent reports continue to draw attention to the notion that energy efficiency predicts lower mortgage default rates. Indeed, it seems obvious that energy-efficient homes are worth more, and that mortgage default risk on such properties should be lower. This is the same kind of analysis that was previously used to promote PACE bonds. It may be superficially right, in the sense that the relationship is observable and provable, but it misses the point, simply because a more categorical understanding is possible. Or, while these relationships may exist and seem statistically significant, correlation does not imply causation. There is no consistent approach to underwriting risk for energy efficiency, nor is there an analytically sound approach to explaining why or to what extent the risk of defaulting on home loans is reduced under energy efficiency. The following attempts to fill that gap by means of a simple example.

Energy Efficiency is Secondary

First, energy efficiency is not a primary objective, but a secondary one. The first order of business is a make-or-buy decision about on site generation with renewables (Site Derived Renewable Energy) versus a carbon energy subscription. The easiest way to see this, is to realize that you cannot save yourself rich, something everybody knows and understands. Let's look at four people, property owners all, and their different approaches, Mr. Tinkerer, Ms. Efficiency, and Mr. Analyst, and Ms. Intuition.

Mr. Tinkerer - Energy Efficiency Flying by the Seat of your Pants

• Mr. Tinkerer begins by "saving" energy without thinking, and thereby accepts the status quo. In his single family home he has an $300 electrical bill and an $700 oil bill, for $1,000/month combined.
• He then buys some gadgetry that reduces energy consumption and some insulation, and his bills goes down to $900.
• A year or two later, after some energy price increases, and more wear and tear, he is back to paying $1,000 a month.
• He keeps tinkering and spending money on Energy Star appliances and other energy-efficient products, but never realizes why he's not achieving serious energy efficiency.

This is a case of casually pursuing energy efficiency, and it is probably the most common. Mr. Tinkerer operates from the unexamined belief that he can save himself rich, but all he does is overpay for "energy saving" devices, without ever realizing that energy savings are not additive. Most of us dabble in energy efficiency in similar ways, it's a way to shop without guilt. It probably is a wash in the beginning, we spend as much as we save, but in the long-run we spend way more than we "save." Sometimes it's a lot more, for the savings do not add up, EVER.

Ms. Efficiency - Energy Efficiency by the Book

• Ms. Efficiency really goes hog-wild, and does everything she can to reduce energy consumption, year after year. The first year she spends $3,000 and creates a 20% reduction, i.e. she enjoys a 15 month payback on her investment.
• The second year (she still have 3 months to go to earn back that first investment), she spends $6,000 for a further 10% reduction. Simplistically, 10% of the remaining $800/month energy bill is $80, and therefore she now enjoys a 75 month payback, or 6.25 years.
• The third year she can't find anything else to do, she wants to do something major, and now she talks to SolarCity (or any other similar provider of solar pv on a PPA- or lease-basis), and they can provide her with a solar panel (nothing down!!!) and reduce her electrical bill by 10% (she's already very efficient), for a further 3% of her overall energy bills. It's a 20 year Solar PPA. So now her monthly energy bills are down to $698.40 in constant dollars, but there were a few price increases, so she's at $750/month for the year. However, now her roof is covered with a beautiful shiny solar panel! She sends a Christmas card to her mother, to show off the solar panel, and mom is duly impressed with how green her daughter has become.
• However, once she analyzes the figures correctly, that solar panel is a 20 year investment of $40,000 for a 3% reduction in her energy bills (10% on electricity alone), which means a payback of 154 years.
• She's still paying $750/month in energy bills (including the $200/month solar lease), and the prospects remain that prices will go up for the remaining $550 "energy" portion of her monthly payments. What has she won? To a financier it seemed things have improved, for $750 now is less than $1000 a few years ago, but that PPA commits $40,000 of her borrowing capacity, and the panel locks out most of her roof, for any alternative uses that might prove to offer better results.
• The residual energy portion of her monthly obligations continues to be above 50% of her starting figure.

In short, a categorical make or buy decision has to be made first before anyone starts on efficiency: do we continue to buy energy, or can we economically make our own. On site renewable energy generation is the alternative to buying energy in perpetuity. Energy efficiency only comes into consideration AFTER we make that make or buy decision, or else we falsify that decision, which is now commonly the case.

Energy Efficiency and Diminishing Returns

The example above shows the effects of diminishing returns, the successive investments show less and less savings, because the base is growing smaller. Ms Efficiency started out investing $3,000 with a return of $200/mo then $6,000 with a return of $80/mo, and finally $40,000 with a return of $21.60/mo (clearly she is paying more for every successive improvement, while here additional savings decrease). This is a losing battle, and it is the battle home owners are losing all around the country, as long as they believe in the "savings" paradigm.

Short-term, yes cash flows are improving, but a few energy price hikes can wipe that out, and the result is that eventually the improvements prove minimal or non-existent within a few years.

PACE Bonds and Mortgage Default Risk

The rationale for the creation of PACE bonds was to provide building owners with a means of financing major capital investments up front to do material retrofits in the energy infrastructure of properties. Unfortunately, the PACE bond camp has been hi-jacked by the energy savers also, and thus they have become yet another customer retention program for the energy companies, and the vendors of energy saving widgets, which was not the original idea. PACE bonds were designed to overcome the capital intensity of the switch to renewable energy, not to squander money on energy efficiency enhancements. Investment in renewable energy moves energy from liabilities to assets, and therefore would structurally reduce underwriting risk, if the economics are solid.

Enter Mr. Analyst - Investing in Site Derived Renewable Energy first

Here is how it should work: Mr. Analyst, with the same $1,000/month energy bill, invests significant money (maybe $140,000), and gets 20-year PACE financing that costs him $900/month, but he wipes out 85% of his energy bills. He gets a geothermal heat pump that provides his HVAC, and a solar panel that offsets most of the electrical load. The first year he gets a 30% tax credit on some of that investment, etc., which helps, but he ends up in a similar situation to his neighbor Ms. Efficiency. She went the energy savings route for the first 3-5 years, but then gradually Ms. Efficiency observes her bills nudging above $1,000 again. Mr. Analyst stays steady at $900/mo in payments, and his residual energy bill of $150 grows a little bit, but not a lot. And Mr. Analyst looks better with every passing year. Let's assume that equipment lasts 30 years. By that time the energy profiles of the two homes will be vastly different.

Ms. Intuition - Thinking Long-Term

Ms. Intuition in the meantime may be even smarter, she gets the same geothermal heat pump, and puts it on a time of use meter, running it mostly at night. She reads the papers, and she sees that solar panels today are 15-20% efficient, but there's some new invention every few months that promises a great breakthrough. She waits a few years, until solar panels have gone from 15-20% efficiency to 35% efficiency, and she now installs a solar panel that completely offsets her electrical use, and she ends up with zero energy bills. In short, she "ate" the electricity cost for a few years, but she gained a technology advantage compared to Mr. Analyst. Geothermal heat pumps are already 400% efficient -- returning 4 joules for every 1 joule you supply -- and are not likely to get any better. With solar PV there is another patent announced every week to increase the conversion efficiency, so it was a reasonable guess to expect that the efficiency of that technology would increase in coming years, and that waiting could be prudent. Notice also that the solar panel here enhances the investment in the geothermal heat pump and improves the value of that energy price hedge even further.

These are just examples. The numbers are rough, to show orders of magnitude, but the principles are clear. They show that the passive stance of "energy efficiency" and "energy savings" is often bested by a focus on generating your own energy wherever it is economical.

• We can't save ourselves rich, and energy efficiency might reduce underwriting risk somewhat, but there are better alternatives, such as investing in Site Derived Renewable Energy (SDRE) instead of energy efficiency.
• Energy efficiency is an operational expense, not an investment, it is short term in nature and mostly not part of permanent plant, but subject to wear and tear.
• Energy generation with renewable sources is an investment that adds to property values, by moving energy from liabilities to assets.
• Logically, in the short-term "energy efficiency" might be a self-liquidating proposition, which by definition would reduce the underwriting risk and the chance of mortgage default by the amount cash outflows are reduced, however these effects don't last, for easily provable reasons.
• Site Derived Renewable Energy (SDRE) is a clear and lasting energy price hedge, certainly if more than 50% of the energy requirement can be economically generated on site. In this case the performance of the property improves with every energy price hike, and thus there is a long-term reduction in underwriting risk, and we can expect a commensurate, but lasting reduction in mortgage defaults.
• SDRE also offers protection against a carbon tax, if it ever were to come. Again, energy efficiency cannot do that, even if it may temporarily reduce mortgage default risk. 

Current research into the issues of mortgage default rates fail to distinguish these structurally and financially very different alternative scenarios, while it is analytically clear that the one has a short-term effect, and the other adds lasting value to a property.

Conclusion - Investment in SDRE wins out over Energy Efficiency

Energy efficiency can be shown to produce improved cash flows in the short-run, and therefore should reduce underwriting risk and mortgage defaults. However, for good analytical reasons the longer term value of energy efficiency alone is uncertain, and a better option is renewable energy generated on site (SDRE), that is justified not only by the marginal savings of the equipment, but also by the lasting improvement of property values.

New York's Green Bank

New York's new Green Bank is another chance to start getting renewable energy right. This initiative appears to be driven by the concern that existing programs are not producing adequate development of renewable energy resources. No one however seems to have noticed that existing programs, both at the federal level (tax credits), and at the state level (NYSERDA programs, etc.), for the most part are effectively designed to prevent the widespread adoption of renewable energy.

Marginalizing Renewable Energy

Typically, existing programs, such as the NYSERDA MPP tend to marginalize renewable energy solutions for retrofits simply because they prioritize energy efficiency over green house gas reduction, and because they encourage small incremental change over the radical change to renewable energy infrastructure. The cardinal issue here is that technologies are evaluated serially in terms of their marginal energy savings, and the fundamental question of what type of infrastructure do we even want is not being asked. Analytically, energy efficiency fixes will win the day with this approach, and it seems to become simply a matter of which ones to pick.

The trap in this approach is that you unthinkingly start tinkering with a bad system, and you maybe throwing good money after bad, if there is an alternative that makes more financial sense. Therefore the property owner first needs to develop a long-term energy plan, and prioritize energy investments purely on the basis of how much they improve the value of his property. What currently takes place is paid for by property owners, but it serves the interests of the utility industry, not the owners of the property, and it sacrifices long-term property appreciation for short-term efficiency gains.

An unintended consequence of the approach of evaluating options based on marginal energy savings, is that cheap energy efficiency solutions will always win the day initially, and beat out the more expensive renewable energy options, That serves the energy companies, who are trying to achieve certain demand reductions, but economically it is most often to the detriment of property owners because it destroys the potential of long-term asset appreciation with renewable energy. A nefarious side effect is that a property becomes committed to the path of energy efficiency, which has diminishing returns, so the future is a dead-end. With renewable energy there is always an upside for you can frequently do follow-up improvements that will further enhance the value of the renewable energy option, producing synergies and compounding financial returns.

We need to go back to square one, but do it in a way that harmonizes with the normal aging and replacement cycle of major plant, typically the boiler of HVAC system. A 30 year capital budget for the building should be developed to evaluate the options. If this were done, the adoption of renewable energy solutions would be progressing way faster than is now the case. Simply put, thirty years of no energy bills will most often beat the typical 20-30% reduction in energy use that is now often achieved by these retrofit projects, as long as it is feasible in your property.

Underwriting Standards can make all the difference

The opportunity that arises with the new Green Bank is for establishing underwriting standards that would avoid all these  problems. It would be very simple to demand as part of the underwriting requirements for loans that properties produce a model for green house gas reduction based on the EPA's ENERGY STAR portfolio manager, and combine that with a 30 year capital budget that shows how the project produces asset appreciation. Suddenly, the old approach of energy efficiency would look paltry by comparison, limited only by  whats economically feasible in a building because of its features and location etc. Moreover, any investments in energy efficiency of the building now will produce compound returns to assets. Most importantly, in most cases one might now choose different types of energy efficiency measures at least in many cases. So the two paths are mutually exclusive both from a financial standpoint and an engineering standpoint.

Open Letter to Governor Cuomo: the Green Bank and Underwriting Standards

My recent Open Letter to Governor Cuomo raises these issues in a systematic way. From a standpoint of governance of what could become a major and very influential economic institution, the adoption of sound underwriting standards will have a decisive influence on:

• The speed of reductions in Green House Gas emissions
• A speed-up in recovery of real estate values
• Development of a sound secondary market for paper based on such lending

The last point is possibly the most important one financially, because by setting the tone through its underwriting standards, the uncertainties of valuing paper for energy retrofits could be cleared up, and it should be noted that both NYSERDA and the Commonwealth of Pennsylvania have experienced difficulties in placements, which in my view is attributable only to the absence of a rational financial/economic base for valuing papers that represent "20-30% energy savings over last year." That just does not cut it when on the margin it's net-zero construction that is the only real growth sector in markets nationwide, not to mention world-wide.

Indirectly, the Green Bank could therefore eventually have an influence on mortgage underwriting standards as well, and set the tone for PACE programs, which should abandon their disastrous focus on energy efficiency, and focus on the twin objectives of asset appreciation and reductions in green house gas emissions. The biggest reductions will come from retrofitting all types of clean energy, solar panels, wind energy, geothermal heat pumps, and other forms of heat exchange and recovery, and hydro power. Passive construction methods also have their role to play.

Conclusion:

The Green Bank of New York could wield historic influence through prudent underwriting standards and shift renewable energy retrofits into high gear, to accelerate reductions in Green House Gas emissions, and help shore up property values, building resiliency, and economic competitiveness.

Open Letter to Pres. Obama on reducing GHG-emissions

Streamlining Incentives is the Low Cost/No-Cost Option to Speed up Reductions in GHG-emissions by Accelerating Renewable Energy Retrofits and creating Property Appreciation

The following is an open letter to President Barack Obama about ideas to promote faster reductions of GHG-emissions by simplifying incentives for renewable energy retrofits, and basing programs on correct economic and financial principles so that the benefits accrue to the investor (property owner) in the form of property appreciation, and not to the energy companies or equipment manufacturers as is now often the case.
Note that every major statement is backed up with references to relevant articles on this blog. Additionally the search functions allows the reader to drill down deeper.

Open Letter to President Obama on Reducing GHG-emissions, by increasing renewable energy retrofits and creating property appreciation

Note: The letter was sent on the letterhead of DaBx Demand Side Consulting, Inc.
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August 8, 2013

President Barack Obama
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President:

Re: Climate Change – A Proposal to Make Major Progress to Reduce GHG-Emissions from Buildings by Streamlining Processes.

Please consider this an open letter. I may send copies to such federal and New York agencies and officials as may seem relevant given the topic, and/or the press, and/or publish the information online.

There are a few very simple steps your administration could pursue that would unlock the forces of change to reduce GHG-emissions —without any need for major funding. Such action would also go a long way to shoring up real estate markets and boosting long-term economic competitiveness. These steps would entail both the radical simplification of many subsidies, incentives and programs, along with the proper use of financial solutions such as PACE bonds. These and other vehicles can be used to provide the financing to meet up-front capital requirements for renewable retrofits and to build asset values in real estate markets.

In order to achieve these real estate value-enhancing goals, we would need to abandon all subsidies and incentives for specific technologies, such as ITC for Solar PV( but not for certain other technologies which might be superior fora given building). By targeting the incentives to property owners for GHG emissions reductions for individual buildings, instead of by technologies used, tremendous creativity will be unleashed.

Any engineer experienced in this field has seen optimal solutions rejected because some accountant comes along to point out a tax credit on one technology versus another. Very often, wrong solutions are specified to qualify for incentives. Imagine how much better we could do if a 30% ITC were awarded pro-rata for 50% reduction in GHG-emissions in a building. Perhaps even award extra percentage point for every 10% above 50% reduction. Things would change quickly.

This problem gets really out of hand when finance programs target specifics such as the use of Energy Star rated equipment. Sometimes, the wrong equipment will be selected because the financing depends on it. Again, the incentives should be based on the overall goal of reducing GHG-emissions at the property level. There should be simple, agreed regional standards for such improvements and the related financial computations.

This building-focused approach has been proposed by us in our publication, the DaBx Renewable Energy Retrofit Portfolio Standard (copy enclosed) and is available with supporting references here:

http://www.vliscony.com/2013/06/12/dabx-renewable-energy-retrofit-portfolio-standard/

Also, our proposal has been published in our report to New York City, DaBx PlaNYC2020, in the new 2013 edition, available here:

http://www.scribd.com/doc/58761637/DaBx-PlaNYC2020-Draft

A copy will be gladly provided upon request.

The individual issues referred to above have been discussed extensively on my blog at www.vliscony.com and in the annotated version of the DaBx Renewable Energy Portfolio Standard for Multi-Family Buildings. As previewed earlier, pressing issues documented by our firm include a) the distortions created by ill-conceived incentives b) the distortions in decision making caused by prioritizing energy efficiency over renewable energy, as well as, c) the way many programs incentivize counter-productive financial decisions, whereas d) under a 30 year Capital Asset Pricing, the attractiveness of renewable energy would move to the top of the list. For your ready reference, I have highlighted key issues and proposed fixes as Enclosure I to this letter with references to the relevant DaBx commentaries and documents.

Commending the above to your attention.

Rogier F. van Vlissingen

Encls. DaBx Renewable Energy Retrofit Portfolio Standard for Multi-family Buildings.

c.c.:NYS - Governor Andrew CuomoNYC - Mayor Michael BloombergEPA - Gina McCarthy, AdministratorDOE - Dr. Ernest Moniz, Secretary of EnergyNew York Times - Jill Abramson, Executive EditorBloomberg Business News - Matthew Winkler, Editor In ChiefThe Wall Street Journal – Gerard Baker, Managing EditorFannie Mae – Timothy J. Mayopoulis, President and CEOFreddie Mac - Donald H. Layton, CEO

Enclosure I – Open Letter to President Obama

Proposed Building Code and Energy Policy Revisions to Reduce GHG Emissions and Enhance Real Estate Values

Highlights from DaBx Demand Side Solutions
Commentary & Publications

1. Programs that prioritize energy efficiency as a proxy for reducing of GHG-emissions fail, because they will marginalize renewable energy in favor of efficiency improvements of existing carbon-based infrastructure. Thereby, they effectively crowd out investment in renewables that would, in many cases, create greater enhancements to property values than available through carbon-based energy efficiency. Improving energy efficiency is not a goal in its own right, as it merely lowers the cost and increases demand for energy. Example: http://www.vliscony.com/2013/06/10/energy-efficiency-sinks-green-underwriting/
2. Incentives directed at energy efficiency without regard to the prior (make or buy) decision regarding carbon-based energy versus renewable energy, will always work out as a subsidy to carbon-based energy due to sunk costs. Example: http://www.vliscony.com/2013/06/01/nyserda-mpp-dimishing-returns/
3. Incentives directed towards specific technologies will tend to destroy property values given, first, the inappropriate technology choices they foster in many cases, and, second, their tendency to encourage property owners to make capital decisions on energy infrastructure based on payback of the equipment, instead of based on long term cash flow and increasing building values. Example: http://www.vliscony.com/2013/06/03/energy-retrofits-underwriting-risk/
4. When securitized, the performance of energy-efficiency loan portfolios has not been an unqualified success, because the valuations are dubious. Net zero construction has been the fastest growing segment of the construction market for 20 years. Therefore, the value of reducing your energy use 20-30% over last year diminishes as this new construction upgrades the overall stock of buildings. Energy-efficiency driven finance is merely the latest form of predatory lending offered by Wall Street to Main Street, hi-jacking property appreciation from its rightful owners. Example: Solar PPAs – the current fad: http://www.vliscony.com/2013/05/30/ma-solar-ppa/
5. The single most positive change to help bring about rapid reductions in building-level GHG-emissions—have the financial industry make mortgage lending for rehab/retrofits, including PACE bonds and similar vehicles, contingent upon 30-year cash flow projections for the property. The valuation extension would have the financial effect property by property of moving energy from liability side of the owners balance sheet to the asset side through renewable investment. Once 30-year cash flow models become the norm, the marketplace will start to appreciate that 30 years of no energy bills beats 20-30% of energy “savings.” Moreover, emphasizing property values is the proper, capitalistic approach, in lieu of the 20 year top down plans which are now the norm. These plans reek of the toothless 20 year economic plans proffered in the former Soviet Union to protect the status quo. Such plans subsidize the shareholders of energy companies at the expense of property owners and are generally designed to fail. Example: http://www.vliscony.com/2013/07/21/renewable-energy-policy-new-york/
6. Two simplifications go hand in hand here: 1) policy and regulations should focus on reducing GHG-emissions and 2) building owners should focus on investments that enhance long term property values. Together, these complementary priorities can eliminate vast amounts of red tape and unleash the economic forces that will drive the shift to a less carbon intensive economy.
7. The place to enforce the application of a proper 30 year cash flow model of the property is in the application process for financing and/or incentives. The model of current applications encourages financially counter-productive decision making, which benefits either energy companies (in the case or energy efficiency), or equipment manufacturers (ITC and other incentives), not the property owners, by emphasizing payback of specific equipment or efficiency measures. By shifting to a reporting of the long term improvement in property values, while qualifying for incentives based on reducing GHG-emissions, the correct habits can be enforced seamlessly as part of the process.

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Conclusion: Simplifying Incentives will Speed Up Reductions in GHG-emissions with Renewable Energy Retrofits and Speed Up Property Appreciation

Reducing GHG-emissions can be speeded up tremendously by simplifying regulations and targeting them better towards the real objective, instead of proxies for that objective, which always fail. Renewable energy retrofits in buildings directly reduce GHG-emissions at the source, and will serve to increase property values by moving energy from liabilities to assets for a property, creating property appreciation and constructive engagement of the property owner in reducing GHG-emissions with simple incentives to stimulate those investments.

Green Energy Policy Failures and Real Sustainability

The one thing that is missing in the whole sustainability area and renewable energy policy is a sound focus on the economics and the finance of green energy. With new buildings this is not a problem, but the greater market is retrofits in older buildings and in that arena by and large people are wasting their money with tinkering in the margin instead of making the most of the opportunity.

If it takes 10 years for a new efficiency standard to work its way through the car fleet, then the picture is much worse with buildings, because they typically last a bit longer than cars. Living in one of the older parts of NYC, I'm surrounded by 50+ year old structures, which still have plenty of life left in them.

Policy Failure #1:
Conflating Energy Efficiency and Renewable Energy

Conflating energy efficiency and renewable energy is an obfuscation which serves only the fossil fuel industry, which is why they eagerly embrace "energy efficiency." This is how they compete against renewable alternatives. Energy efficiency is a marketing strategy and a greenwash of the fossil fuel industry, and it is financially disruptive. In various posts on this website, I have demonstrated how this manifests itself across many programs, and acts as a way to divert investment from green technology, even if it would be financially more advantageous to property owners.

Since this approach benefits the fossil fuel industry, this is a typical policy failure, which achieves the opposite of what is intended, and change is in order.

Policy Failure #2:
Arguing over Clean Fuels is like rearranging the deck chairs on the Titanic

As argued in earlier posts, the whole NYC Clean Heat program is a massive example of policy failure in this area. The whole point is we are in a transition away from fossil fuels, and towards renewable energy, and now that we generally realize how much energy is consumed by buildings, and green energy technologies that are suited for mounting on buildings are proliferating, it is time for policy makers to encourage this development, instead of putting road blocks in the way. Even with all of the best intentions, this is how most programs have worked out so far.

Policy Failure #3:
Not seeing the forest for the trees - misguided incentives

Tremendous amounts of time, effort and money are wasted over what technologies are blessed with the Investment Tax Credit, which is good for sales for the companies that make them. However this puts the focus on individual technologies, and not on the whole project, which can only be judged on the property as a whole. If accountants start specifying the wrong components because of ITC, inferior projects will be developed, never mind how good the individual components are. There is a right place for everything. But having accountants make engineering decisions is counter-productive.

Policy Failure #4:
Disregard for long-term financial planning is encouraged by incentive programs

By various forms of incentives on equipment, such as the ITC, or a requirement to specify Energy Star equipment, regardless if it is the best for the job from an engineering standpoint,  suboptimal projects are being developed. What matters is to reduce the Green House Gas emissions on a building level, so the incentives should address the achievements of the building as a whole. Energy Star is fine for a fridge or a micro wave, which are one-off decisions, but specifying the credits on construction components causes accountants to  mess up the best engineering. More importantly the whole industry has gotten in the bad habit of evaluating financial decisions at the component level, based on payoff of that component in terms of savings, which gets in the way of long-term capital plans, which would reveal very different design strategies.

Policy Failure #5:
Absence of simple objectives, such as reducing Green House Gas emissions

Once the policy focuses on the right issues, namely reducing Green House Gas emissions building by building, better designs will proliferate, and long-term capital budgeting becomes the obvious way to design capital plans. Thirty year cash flow models should be the norm, and ideally should be required by financiers and e.g. PACE bonds. The whole point of PACE bonds was to have a way to raise the upfront capital needed for this transition, which would add to long-term asset values. Instead, a lot of PACE money is being wasted on dubious "energy efficiency" projects, and property owners are frittering away the long-term appreciation of their buildings by investing in renewable infrastructure, and moving energy from the liabilities to assets.

Conclusion:
How to Achieve Sustainability in Spite of Policy Failure

In spite of all policy failures, building owners have a vested interest in sustainability, because it increase asset values, and they should be using 30 year capital budgets for energy retrofits with green energy technology; in other words the various programs and incentives should be ignored and the long-term economics of the building should get priority, before you figure out how to qualify for the incentives.

NYC Clean Heat Amounts to Capital Destruction

Recently I demonstrated on this blog why NYC Clean Heat is regressive with respect to Clean Air compliance, because it diverted buildings to natural gas, that would have been perfectly suited for renewable energy deployments. The typical buildings that were (and in some cases still are) burning #6 oil, are ideal candidates for renewable energy conversions. In many cases that would have produced financially and economically superior outcomes for building owners, and certainly for the city in terms of Clean Air, and for tenants in terms of quality of life. Green House Gas Emissions could be reduced far more than is now the case, and NYC Clean Heat was an unqualified victory for the carbon energy industry. Next time we should get our fossil fuels facts, before we argue any fossil fuels pros and cons.

There are several other aspects to the matter, which make the picture even far worse. There is no argument that natural gas burns cleaner than #6 or #4 oil (and even than #2 oil), and produces less CO2 and fewer particulates. However, the reality is that the distribution losses of methane are 30+%, and the uncontrolled release of methane into the air from fracking ("unconventional gas"), add even more environmental burden, since methane is a far worse Green House Gas than CO2. Increasingly, our natural gas is "unconventional gas." Fossil fuels are the problem, and "cleaner fuels" are mostly simply an obfuscation.

Greenwashing Fossil Fuel

As has been pointed out in many ways on this blog, the greenwashing by the power industry is the single biggest PR stunt to halt the conversion to renewable energy. The argument is not over types of fossil fuels. it is a matter of renewable alternatives. With the evidence cited here, and more, it is clear that dubious claims were used to promote natural gas as a clean fuel, and a "bridge fuel," it is mostly a diversionary tactic, and it is absolutely imperative that we transition to renewable energy wherever it is economically feasible. Switching to different forms of fossil fuels is window dressing, not progress.

There are many more opportunities in the city's aging building infrastructure than are now being exploited (see my DaBx PlaNYC2020), because government programs are steering owners away from them. In a more general sense, it is also clear that the obfuscation that results from promoting energy efficiency in fossil fuel based systems makes them more competitive, and fuels the demand, crowding out investment in renewable energy. So energy efficiency of fossil fuel systems is not part of any green agenda, except simply if it is the only thing you can do and arguably better than the alternative.

Methane leaks and more from Fracking

How big is the problem of natural gas (methane) leaks from fracking? As usual the answers depend on who you ask. The article cited here is probably conservative and reports an extreme finding of 14% of production (output) in losses from fracking. And that is only the current leaks, during extraction. What no one knows is how much seeps out in the years following production. As the article notes, it will take a long time before we have an accurate fix on this issue, but it definitely takes away some of the charm of natural gas. The more alarmist view of methane losses from fracking can be found in many places, if you want to arrive at a balanced view. The fossil fuel industry talks of 2% or less, and more independent opinions are as high as 10% of all gas produced.

The only encouraging information is that while methane is anywhere from sixty to one hundred times more destructive than CO2, it dissipates in the atmosphere within 20 years, while CO2 builds up forever. Be that as it may, renewable energy would reduce our green house emissions faster than the natural gas bonanza, and the element of leakage takes away some of the charm of natural gas.

The environmental degradation from fracking may well be equivalent or worse than the toxic sludge from the scrubbers of coal-fired power plants. The jury is still out on this part of the story.

Green House Gas Emissions from Distribution

The distribution loss of Methane (Natural Gas), as you can see in this article, 5%-10% leakage from distribution may be the range in the UK, and according to the calculations cited there, anything over 2.8% leakage may be enough to offset the "clean" advantages of natural gas over coal, which is the dirtiest fuel. In the US losses may be lower. EPA estimates that the losses of natural gas are distributed as follows: 37% from transmission/storage, 24% from distribution, and 27% from production. Overall EPA estimates that globally the losses of methane from leakage are 3.2%, which would largely wipe out the advantages over coal or oil.

Green House Gas Emissions from Burning Natural Gas

Here is where Natural Gas has it over coal and oil, producing far fewer problems, starting with less CO2, but also fewer particulate emissions, as well as various other toxic exhausts, including mercury. This is what allows New York City to claim that a switch from #6 and #4 oil to natural gas would produce reductions in Green House Gas emissions. Evidently NYC is the point of consumption, and the fact that gas is cleaner burning seems to carry the day. However, it should be obvious from even this brief overview, that this may appear to be true locally, it is not true on a complete system-wide view of the matter. Hence the drive to gas conversions is little more than window dressing, particularly in light of the alternatives that are not being pursued.

Government Sponsored Capital Destruction

In short, the drive to convert from oil to gas is largely futile, and to the extent that it is forcing building owners to prematurely change boilers, it amounts to government sponsored capital destruction.

Most importantly, the opportunities discussed on this site, for green energy generation in buildings, which would permanently improve building values, and make huge contributions to Clean Air, are basically being disregarded as a result of the dubious environmental benefits of natural gas, and passing up that financial opportunity alone is yet another form of capital destruction, because with while fossil fuel is an ongoing operating expense, truly renewable, green energy moves energy from liabilities to assets, and permanently improves building values.

Conclusion

In short, NYC is missing the boat by rushing into a pseudo solution that merely shuffles the deck chairs on the Titanic of the fossil fuel economy, that has precious little real environmental benefit to offer in terms of reducing Green House Gas Emissions, except for some very short-term window dressing and greenwashing of the fossil fuel economy, while it passes up the long-term economic potential of substantially reducing Green House Gas emissions, greater building resiliency, and improved economic competitiveness that would result from a greater emphasis on switching to renewable energy within the city. Given the alternatives, the campaign amounts to government sponsored capital destruction.

Geothermal Heat Pumps and the Green Apple

Geothermal heat pumps seem to be a bit of a dark horse in the Big Apple, which these days has aspirations of becoming a Green Apple. In some respects the reasons for it are unclear, because there have certainly been successful geothermal projects. On the most practical level the obstacles seem to be mostly lack of knowledge as well as some quasi-regulatory issues. But geothermal heat pumps are probably the single most strategic renewable energy technology in the City, and it is gratifying to see that City Hall is finally studying the technology.

Lack of knowledge about geothermal heat pumps begins with the fact that people are  uninformed about the different geothermal technologies that exist, and what their applications are. There is deep geothermal, and if you are in Iceland, and you have a geyser or lava stream in your backyard, you may have an opportunity to exploit that technology. This is not what we do in urban environments. The shallow varieties of geothermal are really forms of heat exchange that exploit the largest solar collector in the world: the earth's crust. Below the frost line it is permanently 52 degrees Fahrenheit in NYC, and that is enough to set up a heat exchange which can provide cooling in summer and heating in winter, (HVAC), and perhaps Domestic Hot Water (DHW), and it might be able to heat your pool water, or provide an ice-melt system for your driveway.

NYSERDA MPP hampers geothermal heat pumps

The most practical problem that is holding up geothermal heat pumps may seem to be the difficulty of retrofits. Obviously, new construction is easier, but that issue is not as large as it seems, for the payoff from geothermal can be significant, particularly in the city, where space is a problem and we need to exploit every available angle if we want to generate our own energy. The most practical impediment to geothermal deployment is the NYSERDA MPP program, which penalizes a project (building) for adding any load to the grid. Their objective is reducing load. Besides all the other reasons why this program is an impediment to green energy technology deployment, here is yet another one.

From the standpoint of the overall improvement of the energy economics of buildings, there are few more powerful solutions around, however we've stacked the deck against it, because the focus of the NYSERDA MPP is narrowly defined by reducing electrical demand. This is yet another case where these kinds of programs are targeted to get building owners to do what is good for the utility in the short run, not even in the longer run. As a result, building owners are missing out, and so is the overall energy household of the city.

Geothermal heat pumps: the multiplier effect

The reason geothermal heat pumps are such a strategic technology, is because they create a multiplier effect, which can create compound returns from a renewable energy retrofit. At a Coefficient of Performance of around 4.0, which is the terminology the geothermal industry uses, they return 400% on their energy input. To put it differently, for every one BTU equivalent input, you get 4 BTUs out. Now that's a good trade! It may be marginally economic with grid power, depending on your rates, but you can boost the economics by leveraging time of use rates (for your geothermal field needs recovery time anyway, and you're designing around the objection mentioned above, against increasing demand from a building). Then, if you can generate some serious power from wind or solar, you can create a very powerful, and totally renewable, solution.

In short, if you can cover part of your BTU load from geothermal energy today, you have the option to generate more of your own energy with other means, either solar PV, or a wind turbine (there are more and more building mounted options coming on the market), so that if the electricity prices become to high to your taste, you can probably cover your requirements for your geothermal heat pumps, as well as taking part of your building off line, and there you will have a permanent energy price hedge. And remember, you are competing with retail electricity in your home or apartment building, and in NYC the rates are sky high, because we are far away from power generation, and the long haul transportation is expensive. Only Long Island is higher than the City. In either case the cost of transport is 60-70% of the bill in most cases.

Geothermal Heat Pumps for Multi-family Buildings

In a traditional multi-family building, the most obvious strategy is to replace the Domestic Hot Water (DHW) with either geothermal heat pumps or a solar thermal system. It usually represents 30-50% of the BTU load in the building, at least the for the building owner, who is responsible for heat and hot water.

With the proliferation of building mounted wind turbines, wind energy becomes a logical complement to the geothermal solution, particularly because pre-heated hot water becomes an effective storage solution, and that is the single most difficult aspect of creating an effective green energy infrastructure. It explains why we can create compound investment returns with these types of integrated green energy retrofits.  This way multiple green energy technologies can be exploited within one building and taken together, they produce superior investment returns, while providing enhanced building resiliency.

Conclusion: green energy and property values

The reason geothermal heat pumps are so strategic for a green energy infrastructure in a building is because they represent a multiplier with which you can build an effective energy price hedge into your building, and create a compound return on integrated green energy technology which will accrue to you by raising property values.