To move something from the liability column to the asset column is a dream opportunity and an art form that occurs only once in a great while in business. It is the operational way to asset appreciation. The renewable energy revolution will facilitate a complete metamorphosis of some buildings, and leave others behind in the dust. Because we remain stuck in the old model, people are slow to discover it, and moreover there are many brakes on the system, rules and regulations, and tax incentives, and other programs which falsify the decisions. It is easy to see in newer, net-zero (or close to that) buildings, it is harder to see the opportunities in existing construction. Changing the paradigm is never trivial, because the resistance of the old system is so tremendous. We have been used to it for so long.
In NYC there are numerous initiatives to try to push us in the right direction, but many of them tend to backfire in terms of the transition to renewable energy. By creating massive incentives that focus on "energy efficiency," or even on clean air, renewable energy is swept under the rug. It will take savvy investors to realize the opportunities that do exist, and to not squander money on marginal efficiency improvements, but instead to focus on the long-term prospects of switching to a renewable energy infrastructure.
Marginal operational improvements versus investing in renewable energy
The existing focus on energy efficiency and clean air works out to be a customer retention program and an inadvertent subsidy for the fossil fuel industry, and along with the common practice of evaluating technologies piecemeal on the basis of payback of the equipment, rather than value-add to the NPV of the building as a whole, it raises the hurdle for renewable energy.
- Whole Building Plans for Renewable Energy!
If a renewable energy solution has a payback of seven years, it loses out against a raft of quick fix energy efficiency solutions, because as long as payback of the equipment is substituted for proper financial modeling, the quick fixes will win out. But once you do a proper 30 year capital budget and a financial model, it will quickly turn out that 30 years of near zero energy bills will often beat a mere 30% reduction of energy bills. The only challenge then is how to get there economically.
In short, any renewable energy plant we can integrate into a building is directly constructive to long-term asset value, for it replaces a liability with a permanent part of the asset, which is the building, and in some cases it may even move energy into the revenue column. Programs like the NYSERDA MPP have virtually institutionalized bad financial planning among building operators, for they reinforce the bad habit of focusing on marginal improvements based on payment of equipment, compensated by subsidies including subsidized financing to incentivize building operators to do the things that are good for the utility and not for the building, and by limiting the conversation to some small improvements at one point in time the whole long-term financial planning for the building is ignored, including the fact that there's no follow-on strategy once you have started investing in energy efficiency alone.
NYC Clean Heat favors fossil fuel
Never mind the short-term argument that the switch from #6 and #4 oil to natural gas reduces emissions, the point is that if this prevents buildings from switching to renewable energy, it is prolonging the fossil fuel era, and prolonging the period of CO2 emissions. It is my estimate that 50-75% of buildings affected by NYC Clean Heat could make the transition to renewables economically and gradually within 10 years, but instead, subsidized finance is wasted on an interim fix of transitioning to natural gas. This is capital destruction, at least in the case of those buildings that could have realistically switched to renewable energy instead. Obviously, a switch to renewable energy would also help NYC meet clean air standards much more permanently in the long run.
In short, the NYC Clean Heat program in as much as it will do these things, will in the long-term undermine NYC's objectives of meeting Clean Air standards and ensure failure. The renewable alternative is being overlooked, but would lead to strong asset appreciation of the buildings. The reasons are partly wrong financial modeling by owners, and partly incentives that make it more attractive to make the wrong choices.
Asset appreciation should drive renewable energy adoption
Taking buildings even partially off the grid with renewable technology, replaces a liability (energy bills) with a fixed asset (generating capacity), and once an existing building starts a process of renewable energy conversion, the follow-on investments show potential for compound returns. Example: your new wind turbine could drive your geothermal hot water plant, and have enough power left over to supply the common areas as well as some of your tenants. Another example is that if you can convert to hydronics and/or heat pumps, you could eliminate all window A/C's and supply cooling to tenants cheaper than it would be with window ac's, and make money doing it (BTU metering).
Most old line apartment buildings could be cash positive in energy with renewable technology over ten years. Underwriters should take note. Also, false proxies such as specifying energy star equipment should be eliminated from underwriting. Instead a proper long-term energy plan should be the focus.
The majority of old line apartment buildings are suited for most forms of Clean Energy, from Geothermal to Wind Energy, to Solar. The magic is in integration. For more information, see www.dabxdemandsidesolutions.com
Conclusion:
Only renewable energy is directly constructive to asset appreciation, if it can be done economically. Energy efficiency of a fossil fuel system merely attenuate the correlation of energy pricing with building values, and is a mild support in the short-term and useless in the long-term, because there is no follow-on investment strategy after the first few rounds of energy efficiency improvements, and particularly if the focus on energy efficiency prevents renewable energy alternatives.
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