What Energy Efficiency Said to Renewable Energy

The tortoise of energy efficiency (EE) always makes sure that we never get more than half-way there, and tries to convince Achilles that by the time he catches up, the tortoise will be ahead again, and he'll never win, when in fact the reverse is the case. Renewable energy (RE) in the broadest sense is Achilles, who only by fallacious logic could fail to outrun the tortoise of energy efficiency. The truth is, only renewable energy can reduce GHG-emissions in a permanent way, EE creates at best a temporary reduction, at the cost of extending the use, thereby ensuring an overall increase, wherever renewable energy would have been an option. Notice how politicians like to claim we're half-way there towards some climate change objective, and at the same time they endorse policies (energy efficiency), which positively guarantee that "half-way there" is as far as we will ever get.

As noted in my comments on the Draft 2014 NYS energy plan,  if we want to achieve 50% GHG-reductions by 2030, let alone 80% reductions by 2050, we cannot afford to do a single project that does not at least get us a 50% GHG reduction. To continue doing "energy efficiency" projects will allow the tortoise of energy efficiency to waste Achilles' time with his logical conundrums. Projects that reduce GHGs by 15-25% are the norm in energy efficiency land and won't cut it. Every single project has to produce over 50% GHG-reduction, and that means that aside from the analytical problems of energy efficiency as an end in itself, we are now entering a time when we simply cannot afford to bother with it anymore, and serious investment in renewable energy should begin.

Lewis Carroll and Energy Efficiency

In short, it's very much like Lewis Carroll's story, What the Tortoise said to Achilles, the only way for the tortoise to win against Achilles is by keeping him wrapped around the axle with philosophical paradoxes, going all the way back to Zeno's paradox. The tortoise argues Achilles can never catch up. The same logic drives the adoption of energy efficiency as policy. It makes no sense, but everyone believes we'll always be halfway there before renewable energy catches up. Except we'll never get beyond halfway there.

George Orwell and Energy Efficiency

It gets truly Orwellian when we get to newspeak like "the Fifth Fuel" (Amory Lovins), and "Negawatts," and to top it all off the  energy efficiency "Ministry of Truth" is the EDF's "Investor Confidence Project." Their masthead says: "Enabling Markets for Energy Efficiency Investment," and a little further on they claim they want to deliver "investor ready energy efficiency projects," a complete non-sequitur. Like any other confidence man, it all starts with some variation of: "I'll be very honest with you." And nobody seems to notice that the only reason for all these extra assurances about proper "energy efficiency" projects, is the fact that it is not at all an investable asset, for the simple reason of diminishing returns. So never mind how many bells and whistles you add in order to provide "investor confidence," anyone who understands the basic financial/economic reasons for diminishing returns on investments in "energy efficiency" would run for the hills.

Obviously, if you own the plant or the building, you want to run it as efficiently as possible, regardless if it runs on fossil fuels or on renewable energy, but that is an operational savings, not a capital investment, unless it is part of the original installation. Energy efficiency, in spite of popular myth and various rationalizations, does not generate electricity, and it is not--in its own right--an investable asset, in spite of all rationalizations to the contrary. Yet a whole industry has grown up around this fallacy. This is the sub-prime sector of the environmental business.

Incrementalism and energy efficiency

Along with the thinking of "energy savings" comes the financial fallacy of the payback period of the equipment based on marginal energy savings, which is a meaningless approach since the only thing that matters is how the equipment adds value to your building, which may be quite a different issue if you take all factors into account. This whole mistaken logic is reinforced by programs like Energy Star, and widget-level incentives.

The incremental approach of energy efficiency and "energy savings" is a paradise for the sellers of widgets, for property owners end up spending money like drunken sailors and the model guarantees they'll never get there. This is not investment, this is squandering money on a losing proposition in the strictest mathematical sense: diminishing returns. Energy efficiency spending always starts out with some window caulking, and some screwy light bulbs, and progresses to bigger and bigger projects, until finally it culminates in the latest absurdity, the solar PPA.

In the end, the energy efficiency approach leads to a dead-end and then property owners become desperate enough to try some solar PV and "save" a bit on electricity. It seems to be the lowest cost renewable option. Here in the North East, the proportions of electricity to heat & hot water might be in the range of 30% versus 70%, and property owners are now backed into a corner where saving 10% on those 30%, which is their electrical bill, seems like a good deal. In short, they will pay good money to lower their energy bills by 3%. If they do get a PPA, they'll be paying for it for 20 years, and not only that they will give up most of their usable roof space, without realizing that if they had done a proper plan, they might have gotten a solar thermal installation instead, which could have wiped out most of their heating/cooling and hot water, and reduced their electrical bills at the same time. Solar thermal gives you 5 to 8 times more energy per square area than solar PV.

"Green Finance," wolf in sheep's clothing

If the business of finance is: Who has equity that we can steal today? Then "green finance" is a winner. It delivers extortionate finance solutions under the beneficent guise of  being "green." Currently, what goes for "green" finance is Asset Backed Lending on the basis of marginal energy savings, and therefore it drives least cost quick payback equipment sales. The commercial pressure is for solutions that can be offered on this basis as "self-liquidating" propositions.

The net result of this is cherry picking of the clean energy retrofit potential of a property. If you were to look at a whole property, the process of converting to renewable energy is only profitable if it is undertaken as a comprehensive retrofit plan. If the property has been cannibalized by various partial "energy efficiency" solutions, this will undermine a renewable energy retrofit in several ways. It will undermine liquidity, and financial carrying capacity of the property, and from an engineering point of view, ill-conceived partial solutions are likely to get in the way of a more profound clean energy retrofit. Write-offs will result, and this is how the tortoise would win against Achilles. The incrementalism of energy efficiency derails the real solutions of renewable energy.

Profitable Renewable Energy Retrofits

Once you look at properties as an energy investment, it is immediately clear that on-site clean energy generation moves energy from liabilities to assets. Furthermore, if you can integrate multiple technologies in a property, very often legitimate synergies can be accomplished which offer compound returns. In terms of payback, it may mean that two components which by themselves have 7 and 8 year paybacks, suddenly combine to offer a 6 year payback. For example, geothermal heat pumps offer 400% efficiency because they extract free BTUs from the subsoil by heat exchange, but they require some electricity to run. But if you can generate your own electricity with wind, sun or water, you suddenly have a virtuous circle, including storage in the form of pre-heated hot water. These compound returns with renewable energy make it a proper investment, as opposed to the diminishing returns of energy efficiency.

Regressive non-profits in renewable energy

Sadly, the non-profit sector which should be leading the way, is mostly regressive, with NRDC and EDF completely buying into the usurpation of the green objectives by energy efficiency, and oblivious to the fact that they have made themselves into a customer retention program for the fossil fuel industry. The Sierra club is only marginally better, hawking solar leases or PPAs, which are soon to be the sub-prime scandal of the green business.

And then there's always Property Assessed Clean Energy (PACE), which is a smart way to finance the big capital bulge of renewable energy conversions, but the movement has been completely hi-jacked by the energy efficiency cult. This results in the classical problem of financing short term fixes with long term money, but it gets worse, because in its confrontation with the GSEs the PACE camp, barely snatched defeat from the jaws of victory, by hitching their case to energy efficiency, which misses the central point of PACE, namely that with an on-site clean energy retrofit, you are moving energy from liabilities to assets, and therefore this type of an investment permanently raises property values. And of course you'll do it as efficiently as possible, but that's entirely secondary. The decision is always between fossil fuels and renewables.

Renewable energy retrofits and Green Underwriting 2.0

Only renewable energy can permanently displace fossil fuels, and energy efficiency is a stalling tactic. For evident reasons, we must shift towards more renewable energy retrofits. That's where the great GHG-reductions are, and that's also where asset appreciation is, thus the economic justification, and the legitimate finance opportunity in which the asset appreciation accrues to its owners, instead of being ripped off by the financiers, as in the case of energy efficiency "investments," which benefits widget manufacturers and energy companies, not property owners. Green finance needs to grow up.

What will tie it all together is a proper green underwriting standard, which incorporates a target of at least 50% GHG-reduction, along with the correct economic analysis of a whole property from the standpoint of make-or-buy (energy), and focused on asset appreciation by generating as much onsite renewable energy as possible, energy efficiency should bring up the rear.

Improving Real Estate Value with Clean Energy

Real estate value can be enhanced with clean energy, while improving building resiliency at the same time.  Prioritizing energy savings tends to reduce resiliency: you are investing more money in being increasingly dependent on the given energy source. The economic magic lies in the fact that energy generated on-site with clean energy technology moves energy from liabilities to assets permanently, and creates a degree of independence from the grid. After that installation is paid for... no more bills for at least that amount of energy. Even partial energy independence can save you a lot of hassles in the next storm or the next blackout.

Recently, I had a chance to listen to some presentations about infrastructure projects, in the context of the Rebuild by Design competition, focused on resilient rebuilding in the aftermath of Hurricane Sandy, which reinforced how value creation is central to problem solving in this area. This observation has a parallel in energy policy. We are entering a paradigm shift from cost containment in the form of energy savings, to productive investment in the form of renewable energy.

Value, not cost

One of the speakers at the event mentioned above, Marcel Ham, of IMG/Rebel, speaking about the financing of such projects, emphasized that nothing gets resolved as long as people are focused on cost. What makes financing solutions possible is focusing on value. This is a core concept, and not only for infrastructure projects and large public/private partnerships, for it explains the failings of a few decades of energy policy, when everyone is talking about energy savings, and nobody seems to realize that you can't save yourself rich.

When you focus on cost reduction, you negotiate yourself into a corner every time, because energy savings, cost containment, is a game of diminishing returns. In other words, focusing on cost reinforces the problem, while focusing on value allows solutions to emerge. The best I can figure it, the problem started with oil crises of the last century, when the discussion centered very much on the notion that a dollar spent on reducing demand gave us more bang for the buck than a dollar spent on increasing supply (building another power plant). Then brilliant rationalizations emerged, like Amory Lovins with his "fifth fuel," and later the introduction of the concept of "negawatt." All of these were attempted rationalizations to make "investment" in energy efficiency palatable, and no-one appreciated that it simply extended the time horizon, and made the problem more intractable. Certainly, now that the environmental (climate change) aspect is ever more important, it is increasingly clear that the only thing that will do is reducing our carbon footprint, and that involves switching to renewable energy. The money spent making it more economical to continue CO2 emissions, is a write-off if it has not paid for itself already.

The bottomless pit of energy savings

From my experience as a home owner (19 years), I learned in retrospect how costly it is to serially make decisions about "energy efficiency," and "energy savings." Despite popular mythology to the contrary, "energy efficiency" is not an asset class, and not an investment proposition in itself. It is an operational savings. Energy savings is also a secondary objective, not a primary one, as is readily evident from the fact that if you compare a fossil fuel system with a clean energy system, energy efficiency is present in both solutions. However, while some of the "energy savings" measures may be the same in both solutions, some of them will be significantly different, therefore, if you start on the fossil fuel track, it is not easy to switch over to clean energy. Conversely, you need to think ahead about where you want to end up, and that includes deciding the timing for replacing major infrastructure, typically boilers, A/C, water heaters, and the like, along with elements of the building envelope etc. The value-destruction trap of energy savings is to the benefit of energy providers (customer retention) and the sellers of various gadgets and products that can "save" energy, not the buyers of them. Simply put, "savings" is a limit function, which is technology dependent, but at any given state of technology, there is a limit, and, in the case of burning fossil fuels, you can never do better than extract 100% of the energy value of your fuel. Very likely it is uneconomical to achieve that much, and you will be faced with rapidly climbing cost, and rapidly diminishing returns for subsequent investments. One of my favorite examples in NY is always the NYSERDA MPP program, which sets a band of incentives that can be achieved above a certain level of "savings." This method forces building owners to bundle multiple energy savings strategies, whereas some would seem uneconomical if undertaken serially,  and in practice it results in massive capital destruction, and ensures suboptimal and even regressive outcomes. Owners are simply gaming the system, and try to score the maximum incentives for the least amount of investment, and in the process commit their property to the path of diminishing returns that is "energy efficiency." There are armies of would be "energy efficiency" consultants to help them do this.

Successful transitions to Clean Energy are holistic

Simply put, the owner of a property has a financial interest in maximizing the value of that property over time. As a society, we have an interest in minimizing green house gas emissions. Unfortunately, various government programs and incentives have a tendency of being counterproductive and regressive, but the market is inexorably moving towards a time when net-zero construction becomes the norm. Therefore, the job of the property owner is to maximize building value by minimizing fossil fuel use, and to pay for the conversion largely from energy savings, so as to end up as close to net-zero as they can. Ideally the first step in a conversion should make the property 50% or better energy independent. The closer you can come to net-zero (i.e "near" zero), the better the assurance of retaining the value of the property. The more energy bills buildings have, the more their values will be depressed as net-zero becomes increasingly normative. I would venture to guess that buildings that do not generate at least 50% of their own energy will see their values deeply depressed 10 or 20 years from now. And, if your building cannot make that conversion, you might as well start of selling it now. The principal mechanism of why the transition to clean energy is constructive towards building values, is because on site clean energy generation moves energy from liabilities to assets.

Resiliency, clean energy and real estate values

As an important side issue, building resiliency goes up with every implementation of on-site clean energy generation. This is the principal reason New York City's "NYC Clean Heat" program has been so extremely regressive, and has produced massive capital destruction. By diverting the attention to fuel switching, just at a time when the transition to clean energy was indicated, capital was diverted to unproductive purposes, and the resilience of the city as a whole was disastrously imperiled as a result of becoming over dependent on a single fuel, when the opportunity existed to diversify energy sources with renewable energy.

Debunking "the fifth fuel," "negawatts"

These popular terms, starting from Amory Lovins' coining of the phrase "the fifth fuel," meaning energy savings, and energy efficiency, and later enriched by the hilarious concept of "negawatts," have created an analytical distortion that has permeated policy making at all levels, not to mention world-wide, but which lacks any solid theoretical foundation. In fact it is a pre-determined financial and environmental disaster, and it entrenches the problem more, and certainly does nothing to solve it. Delaying the sinking of the Titanic by five minutes is hardly a worthwhile investment.

"Energy Efficiency" loans, along with solar PV PPAs/leases are likely the subprime scandals of green finance. They extract value, but they don't add value, because they are typically justified on a least cost for marginal energy savings selection by payback period, and produce suboptimal decisions for the property and society at large. This is especially painful in the case of PACE finance, which was designed for marshalling the capital investments needed to switch to clean energy (hence the name: Property Assessed Clean Energy), but instead it is squandered on same-old, same-old "energy savings" projects that add no real value.

Clean Energy, paid for by energy savings, enhances real estate value

If we know the problem is GHG-emissions, and clean energy reduces or eliminates GHG-emissions, while energy savings reduces emissions nominally but lowers the cost of continuing emissions, so that it aggravates the problem in the long run... clearly the only rational priority is figuring out how we can upgrade our buildings to the maximum extent to clean energy. Interestingly, clean energy investments because they are an enhancement to the fixed building stock, move energy from liabilities to assets, and should be evaluated properly based on a thirty year capital budgeting analysis of the property as an energy asset. Once we use this methodology all investment priorities change, because three decades of no energy bills provide powerful financing ability for the required capital investment up front. The appropriate finance tools are increasingly available, such as PACE financing, even if PACE is often times misused to finance energy efficiency projects. Minimizing GHG-emissions, by maximizing on site clean energy generation, while paying for it from energy savings, should be the new policy goal. Property owners ignore this at their own risk, because on the margin, in new construction, net-zero is becoming the norm.

Conclusion

In conclusion, there are two problems that are holding up the show for the transition to a clean energy economy:

• Prioritizing energy savings when only on-site clean energy generation will make a difference in GHG reductions (as well as create greater resiliency in buildings).
• Making decisions based on marginal energy savings and payback of the equipment, instead of based on a 30 capital budget for energy for the property, which would immediately reveal the asset-enhancing value of clean energy by moving energy from liabilities to assets.

The clean energy future will forever be put off, if we continue to prioritize energy savings, but on site clean energy generation will reduce GHG-emissions and enhance real estate values.