Energy Efficiency: The Cart Before the Horse

Energy Efficiency is almost universally being mistaken for a primary objective, but it is not. It is purely a secondary issue, a secondary objective. You first have to know what it is you are making more efficient, so the first question is: Do I make my energy or buy from the grid? Anyone who has operated complex systems knows that if you optimize for a secondary objective function first, you can get really disastrous financial outcomes. Yet, this is what we are doing as a society by focusing on energy efficiency first. We are not asking the first question first: Make or  buy? - do I want to make my energy, or do I want to buy from the grid? Energy efficiency does not beget sustainability.

If you started with a fossil fuel system, and you make it more efficient, you will simply get a more efficient fossil fuel system, and you will continue sinking in the endless energy bills that will remind you regularly of the joys of fossil fuels. Sooner or later the energy price hikes will wipe out the so-called "energy efficiency" which you paid a lot of money for. Once you have started down the path of energy efficiency, you have really invested yourself into a corner, and you'll be looking for a sequel, but diminishing returns will be facing you every way you turn. Energy efficiency does not beget Business Sustainability.

If you are making an investment today in fossil fuels, or even biodiesel, you are investing more money in a dead-end technology, for you are committing to paying energy bills forever. Moreover, with current developments, if you are investing in e.g. 15 year equipment, during its lifetime you are sure to have to deal with carbon taxation as well. Besides which, for both electricity and gas, the cost of the delivery and transportation is liable to rise faster than inflation, if you follow the track record of price hikes by your local utility. Make it as energy-efficient as you like, it does not add up to sustainability, even Energy Star is fool's gold.

Energy efficiency: how the trap is sprung

Here is how the energy efficiency trap works. Day one your energy bills were 100%, and we found some investments which enabled us for reasonable money to reduce our consumption by 28%, and therefore our base is now reduced to 72% of what it was. The projects we evaluated looked as follows:

1. For $25K we gained 20%, and that was reasonable, if our bills were $100,000/year to begin with, for this investment obviously had a one year payback.
2. Unfortunately, we then ran out of easy solutions, so the next phase was an $50,000 investment to get us the next 10%, but it works out to only 8% in reality, because our base has now come down. In short, this next project phase really has a 6.25 year payback ($8,000 in annual savings, vs. $50,000). Fortunately there was some incentive in the form of low-cost financing from our friendly gas company, that made it all a little better so we did it anyway.
3. However by year 5 the energy price hikes have wiped out the efficiency gains, and monetarily we're back in the same boat, we're consuming less, but the bills are back to the old level, so we start looking for another project.
4. Lo and behold we are lucky, and we find another $75,000 project, which saves us another 8%. 8% of $100,000 is $8,000, so our payback on this one is just shy of 10 years. We decide to forge ahead, for evidently energy prices will keep rising.
5. The next best project after that would cost us $100,000 and give another 8% improvement. Examples of this type of project are the notorious window replacements and the like, with 20 year paybacks.
6. The diminishing returns become more visible if you work on the basis of consumption, so you start with 100, and a 20% reduction leaves you 80%, the next 10% reduction is 8% off the original, and you're down to 72%. the next 8% reduction is 5.76% off the original, so you're down to 66.24% from the original, and the next 8% works out to 5.3%, leaving you at 60.94% of the original. So you are dealing with ever larger "investments" for ever decreasing returns.

In short, every next energy efficiency project gets worse in terms of financial results, and I continue to do just enough to keep the pain tolerable, and my friendly drug dealer... (oh sorry, utility company) is always there with financial incentives to make it just worth my while, and obviously retain my custom for another number of years. Customer retention is good for utilities, but not for property owners. This is not sustainability, but a dead-end. The point is this: in an older building you can always find one or two energy efficiency projects that will get you a reasonable financial result, or so you think. If you do not think ahead to the mounting cost of the follow-on steps, you will go along with it.

The renewable alternative, sustainability in practice

The renewable energy alternative starts with a MUCH larger initial investment, perhaps $150,000 or $200,000, and a long "payback," however, if I analyze it over a 30 year period, I begin to see that my remaining energy bills are immediately lower, let's say 65% versus of 100%, so I picked up 35% compared to 28% in the energy efficiency model.

However, if I do my 30 year plan properly, I will know in advance what my next options will be, and it might well be that there is a follow-on strategy, which because of renewable energy synergies that could pay off in spades. So in year 5, when energy prices wiped out the efficiency savings of the first model, with 39% cumulative price hikes, with our lower base of 65% of the original level, we are now at a $90K annual bill, compared to the efficiency alternative, which is back up to $100K already. But, now I can find an incremental $300K investment which wipes out my remaining energy bills to 20% of what they were, in short, I am picking up $72K in savings per year to pay for it. We are starting to have compounding returns, and again if we do a proper 30 year plan, we'll see that this next investment hugely adds to the NPV of our building. And I'm avoiding the risk of carbon taxation.

Renewable Adds Up

• Sustainability wins.
• Renewable energy does add up to sustainability, it's just a matter of finding the proverbial "low hanging fruit."
• By prioritizing energy efficiency, we face diminishing returns, and we never achieve sustainability.
• If we prioritize renewable energy and energy independence, every investment in efficiency (e.g. the building envelope etc.) pays of in reducing the capital expenditure for installed capacity. We enjoy compounding returns.
• Make a 30 year plan to establish the proper sequence of projects, for there will be engineering interdependencies.

ENERGY EFFICIENCY VERSUS RENEWABLE ENERGY: APPLES AND ORANGES

The identical building across the street which invested in energy efficiency is starting to experience exponentially longer "payback" periods due to diminishing returns, whereas our building with the renewable energy infrastructure is starting to realize synergies, and compounding of returns, all of which is going to come back in building value, for in year six the renewable building will have remaining energy bills of $18,000/year, whereas the efficiency building after its latest "upgrade" in year five, has bills of $92,000/year.

Again, if these buildings were identical, the "energy efficiency" building will now be worth at least $500,000 less than the renewable energy building. Now, the owner of the renewable building is starting to get excited, and he invests another $300,000 in Wind Energy, wiping out 75% of his common area bills, and supplying electricity at a profit to his tenants, which makes him net profitable on energy, and by year 8 of his renewable energy project, his building is now worth $1,000,000 more than the "efficiency" building. Again, compounding does work if you can integrate these various phases into a coherent plan.

Mutually exclusive alternatives

Because of engineering interdependencies, switching tracks once you have committed to the energy efficiency track, likely means you wasted at least 50% of your investment, in other words the hurdle that prevents you from switching tracks gets progressively bigger with every generation of upgrades to the renewable energy building, for the gap in operating results now grows explosively. This is again why you decide first if you want to make your own energy or buy from the grid. If your building is suitable, you should perhaps let the energy companies keep their financial incentives to themselves.

Conclusion:

Equipment vendors and energy companies will focus on energy efficiency and payback periods, which is good for their shareholders, but not a decision criteria for the value of your building. With renewable energy, greater energy efficiency of my building pays off by reducing installed generating capacity, and therefore reduced capital investment. Renewable energy produces compounding returns with successive projects over time.