The Fads and Foibles of Green Finance

Green Finance is a growing segment of the finance business, and as usual with anything new, it is full of fads and fallacies, and it sometimes does not live up to its billing. One part of green finance is large-scale projects, but since buildings are a large part of the problem in terms of GHG emissions, the opportunity for major renewable energy projects in buildings is huge. Evidently, the term green always risks being useless, and smacks of greenwashing, which in many cases it is. To begin with, the current practice mostly focuses on energy savings, not on improving property values, which only renewable energy would do. As a result, it is focused on marginal contribution, and equipment finance. More importantly, this methodology is by nature conducive to financial instability for the underlying property:

• Relatively small "savings" from energy efficiency: because most 'energy savings' strategies yield only a small incremental improvement--typically in the 20-30% range, which is easily wiped out by a price hike or two, and the effect on property values is negligible;
• Efficiency improvements are not unique in nature: because the same efficiencies are available to everyone, eventually all buildings will catch up, and be the same again. Boilers are now 95+% efficient and replacing older units that were 50-60% efficient, but going from 95% to 96% some day is not meaningful. Same for LEDs replacing fluorescents and incandescents.
• Financing short-term enhancements with long-term money is a risk factor: these programs frequently finance short-term improvements with long-term money, which does not contribute to long-term financial stability of the properties that avail themselves of such financing.
• No follow-on strategy: because of diminishing returns: all "energy savings," or "energy efficiency" strategies suffer from strongly diminishing returns for subsequent investments, so the energy savings strategy is a financial dead-end. Again, not good news for long-term property values.

Considering that the only objective for the property owner should be to maximize property values, and the only objective of the government should be the reduction of GHG-emissions, the current mishmash of rules and incentives adds to the confusion, and frequently creates constraints that prevent the best projects from happening. The supporting roles in creating this confusion are played by the government, including tax incentives which are typically tied to a technology, such as solar panels or water heaters, and programs by the utility industry, and/or semi public institutions such as New York's NYSERDA which provides incentives for property owners to do what's good for the grid.

Good intentions aside, it must be understood that none of these programs are designed to help a property owner maximize property values, which is the only objective the property owner should have. When you put them altogether, these programs amount the a government sponsored capital destruction, to the extent that they tempt property owners to do things that are not conducive to improving property values, in the name of being green.

Green Finance - the theory

What you can do with it is what makes it green

The green finance theory that supports all of these wonderful developments is that at the macro level the highest marginal return is thought to be on improving the efficiency of the systems we do have, and that's why macro-economists tell policy makers to provide incentives for energy efficiency. This approach puts the world on its head exactly, because the first point is that our energy model is wrong. The new model is based on renewable energy, which will increasingly mean buildings producing their own energy. And so, on the margin the biggest advances in "energy efficiency" in aggregate come not from the absolutely moronic spending on more and more energy efficiency, but from finding the low hanging fruit for converting to renewable energy, which is the only permanent solution, and the only one that enhances property values.

Lastly, the reassuring notion that "energy efficiency improvements" are self financing in nature is fallacious. The theory is that it improves operating cash flows, and thus are lenders assured of the ability to repay. This may seem harmless when it pertains to equipment financing, it is still destructive to property values in the long-term, if it crowds out viable renewable energy projects and prioritizes worthless efficiency improvements that fail to make a radical change. It becomes positively disastrous if the financing stretches for longer terms with a real estate collateral. In that case it makes the mistake of financing short-term measures with long-term money. In general, the mistake here is to prioritize the projects that are easy to finance, at the expense of the projects that would add value.

Green Finance - the practice

The unfortunate corollary to the usual energy efficiency financings is that, again because of diminishing returns, only the first few energy savings projects can be financed this way, after which by definition subsequent efficiency projects become prohibitively expensive, and this kind of abusive finance dries up, leaving a property owner stranded.

What happens in practice is that tax incentives, advantageous financing, and various subsidy and incentive programs that are all equipment driven, or driven by the energy suppliers, e.g. subsidized natural gas conversions(NYC Clean Heat), all serve other interests besides the property owner. As a property owner it behooves you to beware of all these wonderful offers. All of these programs have a potential hidden cost, namely they steal asset appreciation from the property owner.

The popular free energy audits are another ally of this fleecing of property owners. They are fine for a renter, to reduce their utility bills, but for a property owner, they are useful information, but no action should be taken unless a proper long-term plan exists with a view to improving property values. They promote frittering away money on trivialities, and never doing the big steps that are necessary. They trade on people's needs to do something, anything, and cheat them out of their money.

Green Finance, resiliency, and Property Values

Just as much as you cannot save yourself rich, all energy savings programs, taken in isolation, produce capital destruction, unless they stand in the context of making the property energy independent with renewable energy. The thing to do as a property owners, is to have your own 30 year DCF (Discounted Cash Flow) model of energy improvements to your property, based on a good grasp of the engineering, for there may be intense engineering interdependencies, which dictate in what sequence things should be done.

What you will learn if you do this long-term capital program, is that once you take one step in the direction of renewable energy, you have the benefit of potentially compounding returns in subsequent phases of implementation. At the very least you will see that you now start having two options at almost every turn, namely either more efficiency (insulation etc.) or more generating capacity - you are doing a direct trade-off.

It should also be noted that building resiliency is another obvious victim of prioritizing energy savings over renewable energy. For again, with making the fossil-fuel, grid-dependent systems more efficient, we are making ourselves dependent on the grid for longer. We are investing our own in customer retention by our energy vendors. No wonder many energy vendors and utilities are only too happy to provide 'subsidised finance' for such programs. Look at the site of the NYC Clean Heat program, and you'll find all the usual suspects there (CPC, NYSERDA and various energy companies), providing a range of green finance options, or so they think.

Of PACE bonds and property values

PACE bonds should have been the savior in this situation, but instead they got embroiled with Fannie and Freddie a few years ago, and since they had made the general mistake of prioritizing energy efficiency, their arguments did not carry much weight and the program had to accept some limitations and trade-offs, so that it cannot presently fully live up to its potential. One can only hope that PACE programs could adopt standards like the DaBX Renewable Retrofit Portfolio Standard, so as to regain their relevance, and indeed prove very clearly why sound renewable energy investments are much more conducive to rising long-term property values than energy efficiency overhauls ever will be.

Conclusion

We only just came off a property bubble resulting from easy money for second mortgages, ARMs, reckless lending and mortgage fraud, which undermined the market for all property owners. Now we risk robbing property owners of asset appreciation in the name of being green if we prioritize energy efficiency over renewable energy where such an alternative exists.

Green Finance, where it pertains to buildings, and any forms of real estate, is deeply flawed in its current form, because of its pre-occupation with energy efficiency. The only way to select meaningful priorities is with a 30 year capital budget for each property. Green finance should prioritize renewable energy over energy efficiency, because that moves energy from a liability to an asset, and is conducive to raising property values as well as improving air quality.

Financing Energy Retrofits and Capital Destruction

Creative finance solutions for energy retrofits abound, but most underwriters, including alternative financing programs such as PACE bonds, fall for the generally accepted delusion that energy efficiency should get top priority. This is a mistake - majoring in a minor - which increases underwriting risk, instead of decreasing it, for several reasons:

• If you start out with "energy efficiency" of an existing installation, that is not an energy retrofit at all, for you blithely accept that the design that was in place was the best one possible, and you are merely upgrading it, as in with more efficient versions of the same technology. The point of an energy retrofit is to use newer technology, which may necessitate a different design. An efficiency improvement in most cases is not a capital investment, but an operational expenditure.
• Since many of the newer technologies are about generating energy with solar, wind, geothermal, or even hydropower, they all imply a different model, and different designs. Specifically they enhance the capital asset, the building, with independent generating capacity. Financially they are also a permanent price hedge against energy price increases.
• Energy efficiency upgrades are also by nature short-term, they usually only achieve about a 30% improvement, which is easily wiped out by a few price hikes, therefore such upgrades should not be financed with long-term money, let alone be subsidized.

As demonstrated in earlier posts, financing energy efficiency with long-term money in most cases is a mistake, because the typical 30% or so improvement is all too easily wiped out by one or two price hikes, and because of the issue of diminishing returns, there is no follow-on strategy, and therefore it is financially unsound. Financially, energy efficiency is a horrible dead-end and should be avoided like the plague: again, it increases underwriting risk if it is pursued at the expense of an existing renewable option. As a strategy, investing in energy efficiency should be an absolute last resort, if you can't do anything better.

Renewables are an immediate and permanent asset of the building, regardless if you use solar, wind, or geothermal, or hydro-electric, plus any improvements to the building envelope now come back to you directly in terms of reducing the installed capacity you need. Renewables are an immediate energy price hedge. Because of diminishing returns, "investment" in energy efficiency is financially a shaky proposition, while renewables immediately raise building value.

Energy Retrofits Gone Wrong

Energy retrofits that prioritize energy efficiency amount to capital destruction, assuming there was an economically viable renewable option available. Thus underwriters of financing for buildings who focus on energy efficiency first are in most cases likely to be deteriorating their portfolio and needlessly increasing underwriting risk. This is long-term money for a short-term benefit, and that does not make for financial stability of the asset. Even PACE bonds have completely missed this issue, and all programs that I know of focus on energy efficiency first.

With proper financial planning, which is to say a 30 year capital budget for energy upgrades to a building, it will become very visible that renewable options are financially superior, for 30 years of zero energy bills will outweigh 30% energy savings. Or to put that differently, renewables may initially have a longer payback, but, properly evaluated, the renewable solution with a 7 year payback, may be superior over its life to a 4 year payback on an efficiency component, which "saves" 10%. The renewable energy equipment comes with zero energy bills, or in the worst case some 10-15% in back-up from a fossil fuel source.

How to underwrite energy retrofits

renewables improve value

The bottom line is that responsible financiers should demand a 30 year CAPM analysis of energy retrofits to the building, which could include an installation that could be spread over several years, and obviously realistic measures for maintenance and operating costs, noting that O&M are typically lower for renewable energy than for fossil fuel. Further, underwriters should rate projects based on the percentage of energy that is derived from renewables. The higher it is, the greater the financial stability of the building. My consulting firm DaBx Demand Side Solutions, publishes the DaBx Renewable Energy Retrofit Portfolio Standard (DaBx RERPS)

Conclusion: renewables reduce underwriting risk

Financing energy efficiency means financing short-term operational improvements with long-term money; energy retrofits with renewables reduce underwriting risk and improve the asset value of the property.

NYC Clean Heat Destroys Property Values

PlaNYC Heating Oil Regulations are pushing buildings from #6 and #4 oil to #2 oil, natural gas, or biodiesel. Conversions are in full swing. Sadly, many of the buildings are suitable for renewable energy conversions which would produce far better results for the environment and for occupants, as well as better long-term financial results for owners. It says on the website that owners can apply for compliance waivers through NYC DEP. Owners should do this if their buildings are suitable and if they have the financial wherewithal to make that transition to a renewable solution. As long as a credible renewable solution can be found, owners are in fact placing a long-term hedge on their energy costs, and will do far better than they would going along with the conversions which the City is pushing. The typical 30% gains in efficiency are too easily wiped out by the next energy price hike.

Compound investment returns from energy independence through renewables

Not only are these conversions counterproductive as long as there is a renewable energy alternative, owners are being offered subsidized financing to make it easier to make the wrong decision, and destroy the asset value of their buildings. Having said that, there may be some buildings that realistically could not make a transition to renewable energy economically, but in many cases it is well within reach to do in buildings that are 40 units and up. (Size matters because of economies of scale). In the long run, this will produce a steady path to asset appreciation.

Presently we are in PlaNYC 2013, but it started in 2007 as Plan NYC 2030, and since then evolved to PlaNYC 2.0. Clearly this is an extraordinarily important plan, and it puts NYC in a very proactive stance with respect to climate change issues, but in this area of renewable energy, not nearly enough is being done. Most of that shortfall rests on the general confusion in our society that energy efficiency somehow is an additive phenomenon and would result in energy independence. In that context renewable energy is then relegated to a marginal role. If you were to actually do a long-term energy plan for a building, you would see this is not so, unless the building is not capable of a renewable conversion. Most of the buildings that burn #6 could do it.

The first issue is a choice of what energy system do I want? Do I make my energy (renewables) or buy my energy (subscription-based, gas, electric, oil). The two paths are to a large degree mutually exclusive, because of engineering interdependencies. One clear example, if I can go the renewable route and perhaps eventually eliminate gas for cooking, and most heating/cooling, I may be able to eventually do centralized HVAC, and choose very different replacement windows, etc.

Most importantly, the path to energy efficiency of my existing fossil fuel system is an investment in becoming a long-term consumer of gas or oil, or even biodiesel, so it is a customer retention program for the energy industry. In this case it is driven by the well intended reduction of CO2 and particulates emissions of gas versus oil, but as long as a renewable alternative exists, the latter would produce greater benefits in the long run. Successive investments in energy efficiency produce strongly diminishing returns, so a property owner paints himself into a corner financially. Once the transition to a renewable infrastructure can be made, the financial future of that building is assured, because subsequent investments will produce compounding results. The transition to renewable energy practically ensures building preservation, because of superior economic performance over time.

Underwriters risk collateral values by underwriting energy efficiency

If you check the website for NYC's Clean Heat program you will see energy efficiency as the sole qualification for subsidized financing. All the usual culprits are there, CPC, NYSERDA et al, many of whom have energy credentials, for this conversion effort is a subsidy to the energy industry to the detriment of building values. Underwriters should learn to test for the difference between energy independence (renewables) vs. energy efficiency of carbon-based energy systems, simply because of the issue of diminishing returns with the former, and compounding returns with the latter. Energy Efficiency loans are riskier than Energy Independence loans, by far. To lump them all into one category is bad for owners and bad for underwriters. Building values for buildings that are 50% or better energy independent would rise strongly over the life of the mortgage, compared to buildings that invested in energy efficiency alone.

DaBx PlaNYC 2020: the Energy independence plan

Windspeeds over NYC are higher than Chicago

With my consulting company DaBx Demand Side Solutions, we offered an alternative model to Mayor Bloomberg on July 4th 2011, which would achieve better results, and faster than the mere conversion from #6 to natural gas, and, as noted above, better financial outcomes for building owners. The plan is within reach for probably at least 50% of the building stock that is now converting to natural gas. It is more capital-intensive at first, but not much so once you evaluate it against the alternative of the forced gas conversion. The outcomes for air quality and building preservation would be far superior, not to mention public safety and national security. The conversion to gas only seems easier and cheaper in the short run, it is not if you do a 30 year energy plan for a building.

The basic model is based on understanding that in C and D class apartment buildings that are usually only 6 stories high, the old steam boilers usually provide Domestic Hot Water (DHW) through a coil in the boiler, and 30-50% of BTU output of those boilers goes to DHW. In those cases, economically feasible solutions can start from providing DHW with renewable energy, either geothermal or solar thermal. This eliminates 25-50% of CO2 and particulates emissions right away, it also gives the boilers the summer off, so it extends their useful life, and then at the time when the boiler dies from natural causes, the conversion to renewable HVAC can be completed. And yes, the famous split incentive between landlords and tenants needs to be cured.

Energy independence, wind and geothermal energy

Energy independence of buildings means the building stays lit during an outage, even if only partially. The two technologies that have been underappreciated so far are geothermal and wind power. In 2008 the press practically ridiculed Mayor Bloomberg about his advocacy for wind power on buildings, but they did not understand that specific wind turbines for buildings where just starting to come to market, and the Mayor was right on target, perhaps without knowing it. Average wind speeds around NYC are higher than in Chicago, supposedly the windy city. Moreover, around buildings, wind speeds pick up dramatically, offering excellent opportunities for wind power especially in the city.

Geothermal is the most strategic technology of them all, and City Hall is only just now starting to research it. Basically a geothermal system gives you a 400% gain in BTUs, and most importantly it can act as energy storage, besides providing domestic hot water. Here is one place where compounding returns come in, for energy storage is the single biggest problem in renewable energy, but DHW ends up acting as energy storage for your building. Unfortunately most existing geothermal systems in apartment buildings were wrongly designed, as DHW only, and not for energy harvesting. Buildings need 30 year energy plans, not point solutions.

Conclusion:

PlaNYC can be much more successful if the confusion between energy efficiency and energy independence through renewables is eliminated. Better outcomes for building preservation, air quality, and economic competitiveness of the city would result. Energy efficiency of a building with a carbon-based energy system is financially inferior and prolongs the period of CO2 emissions, energy independence through renewables reduces CO2 faster.

Off the grid in four easy lessons #4

Off the grid is a direction not a destination, and the principal instruments to get there are financial analysis and economic modeling, not technology. So never mind the government has no energy policy, just a rag-tag group of programs and incentives that tend to confuse people more than help towards a solution. Never mind that utilities and oil companies do everything they can to seduce real estate owners to remain happy carbon customers till the cows come home with all kinds of energy efficiency solutions. It is up to the property owner to make sense of them, and the principal tool you have is the Capital Asset Pricing Model, aka CAPM and once you start studying it, and looking into the various technology options you may have regardless of what your starting point is, you will be amazed. Research CAPM, study Internet resources, including CAPM Free Questions.

Energy Efficiency and equipment payback - the trap to be avoided

To recap from earlier posts: energy companies (utilities, oil companies, etc.), and vendors of equipment will inevitably try to get the attention of real estate owners with investments in  energy efficiency, which are to the benefits of their shareholders, and NOT of the real estate owners. The nature of energy efficiency is that the first investment always looks very good, and typically offers outsize returns (on the basis of payback), and 99.99999% of owners do not stop to think that they are committing to an investment path that perpetuates their indentured servitude to carbon energy. The vendors capitalize on these insights by selling their "solutions" based on marginal analysis of energy savings, always showing a wonderful payback for their equipment, and waiving around Energy Star labels, tax incentives, or other subsidies. If they are successful, you've invested your money in remaining the customer of your energy company forever. This is voluntary vendor lock-in. Various tax incentives, but also NYSERDA, Energy Star, CPC, PACE, and most mortgage providers will steer you wrong because their programs are useful only if your own CAPM analysis says so. Don't run your financial future based on someone else's say so.

The morning after effect comes in when you want to do the next "investment," which is worse but you'll probably still do it. Some day you'll have to realize that diminishing returns mandate that you'll never ever find another investment as good as the first one. The cynic might say these are not investments at all, but operational savings. Even various form of PPAs offered by energy companies tend to suffer the same analytical defects and will benefit the shareholders of the energy companies more than the home owner. Caveat Emptor!

Off the Grid with CAPM

Getting Off the Grid starts with the one and only thing that every property owner should do first, last and in between: make a 30 year financial model of your property, and use it to model your own strategic energy plan, always comparing the base case as the investment in energy efficiency based on the existing infrastructure, with the alternative case using green energy. Again, energy efficiency will never get you off the grid, green energy will, if you figure out the right way of implementation. The first decision is a make or buy decision about energy: should you buy it on a subscription basis, or generate your own. Watch values of net zero properties for reference.

It is never ever what the salesmen will tell you, nor should you let yourself be confused by tax incentives, NYSERDA programs, PACE and/or other energy efficiency finance. They will all steer you wrong, to the detriment of the long-term value of your asset, your property. Study the energy economics of your property first, before you figure out what incentive programs are to your long-term advantage. You will repeatedly find that financing mandates, e.g. of Energy Star equipment, may benefit the energy industry more than it benefits you. Don't buy it unless it actually helps improve the long-term value of your property. Financial sanity starts with CAPM!

Your CAPM Badge

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OFF the Grid: The basic assumptions about the relevant cash flows

Here is a list of the major cash flows and assumptions you need to document:

1. For starting asset value use Zillow, or a similar service.
2. Identify ALL forms of energy you use - it may be two or three.
3. Make a 12 month model so you start to see seasonality, you will therefore have 360 cash flow periods.
4. Track both consumption and pricing.
5. Notice that in deregulated states it probably makes sense to split the cost of delivery and supply. In many cases, certainly in NYC, delivery is 65% of your utility cost per kWh or per Therm, and rising inexorably ABOVE the rate of inflation. For my gas it is 95%, because I use so little of it.
6. Identify specific inflation rates for all your energy component costs and rates.
7. Track reasonable assumptions for maintenance (i.e. annual costs, but also periodic replacements, such as a boiler or water heater that may last 10 or 15 years).
8. Make a base case (A) based on your existing energy mix, with incremental investments in energy efficiency. You will start to see how these investments will get wiped out by ongoing price hikes, let alone spikes such as have happened from time to time.
9. Make a case B based on renewable energy. Try to identify the rationale for a strategy to eliminate one fuel completely (oil or gas), or as near as you can get to it.

Experiment with such a model until you are comfortable. Until you are, you are not ready to begin shopping for energy solutions.

Off the Grid: Sane assumptions for getting there

As much as possible try to think of projects to coincide with maintenance things you'd have to do anyway. In other words, if in five years you would have to replace your boiler, that may be the timing for switching to geothermal, or solar thermal, or some other combination, and you may only need a very small boiler for backup. Or, if your roof needs to be replaced that may be a time to improve on insulation, and/or solar or wind installations. You do not want to install a set of solar collectors with a 20-30 year life expectancy on a roof that only has 5 years of life left in it.

Avoid tankless water heaters like the plague. Domestic Hot Water storage is a very efficient energy store, you may need it in your design later on.

CAPM: valuation issues

Study the energy independence profile of homes in your area. With net zero homes and buildings growing, energy costs will increasingly become important in valuation. If a few homes in an area are energy independent or close to net zero, that will start to diminish the values of all other properties.

Be prepared to learn a lot. Both good and bad. The renewable energy path is more capital-intensive, but it will increase your property value more. You will find opportunities with compound returns because of synergies. Keep studying what is going on in your market, and never ever listen to a sales rep coming with payback periods, and various incentives. He or she is stealing the value of your home.

Report 90by50 from the Urban Green Council

The recent 90by50 report from the Urban Green Council was an exceptionally well targeted feasibility study of the potential for drastic energy infrastructure change in New York City building stock. I already wrote about it on my green energy promotion blog. There is a lot to like about it, but it will also most likely be abused and bastardized in the process and the potential never realized. We seem to be a long way away from the kind of concerted action that is really needed, although the feasibility can no longer be in doubt.

While the report identifies clearly that things like New York's PlaNYC2030 were too conservative, and doomed to produce failure because it merely tinkers at the margins, this plan is too high level to be actionable as such, and therefore it may end up being its own worst enemy if we're not careful. Such a high level view has merits, but becomes tricky when it is combined with other high level views such as macro-economists are wont to produce and administrative institutions are wont to consume, so together they can make the high level nonsense that goes for energy policy, and worse, incentives.

However, the helpful implications are the fact that since reducing carbon emissions is definitely of primary importance, the sorts of marginal improvements that PlaNYC2030 envisaged were insignificant, if not counter-productive. There is great need to be more drastic than that. This was one of the reasons why, with my consulting company DaBx Demand Side Solutions, we issued a report 2 years ago, DaBx PlaNYC2020, to make the point that there was at least one class of buildings in New York that was capable of much faster and more drastic change in energy infrastructure, and achieve an 80-90% reduction in CO2 emissions in short order, with today's technology.

PlaNYC2020 alternatives, in relation to 90by50

In one way, I would consider our DaBx PlaNYC2020, of which Mayor Bloomberg was given a complimentary copy on July 4th, 2011 (which we dubbed 'energy independence day' for the occasion) to be a special case under the 90by50 approach, and in a way perhaps the low hanging fruit, although the technology path implied there is quite a bit different from the 90by50 model.

What the 90by50 report identified correctly, and one of the reasons why it chose a 37 year implementation period, is that the economically optimal way of achieving this transition would be to tie in as much as possible with the normal infrastructural overhauls that buildings need periodically. In our report we had argued that same point. For example, the program to phase out #6 oil and use natural gas or either #2 or #4 oil instead forces the issue and even provides subsidies to encourage such conversions, and thereby it preserves the carbon economy without any attempt to asses if renewable energy alternatives might be within reach. Clearly, if we could achieve substantial reductions in CO2 emissions, and at the same time improve long term building values by decoupling buildings from energy price hikes, not to mention any potential future CO2 assessments that would be desirable.

In short, there are certain building types that could make the transition to a low carbon lifestyle quicker than others, but that's being stopped by Soviet-style top-down twenty year plans and incentives to switch to Natural Gas. What we really need is grandfather provisions for buildings that commit to a renewable energy transition, but would be forced not to do so by the present deadlines for the conversion. Here is yet another example of how 'one size fits all' does not work for this problem, since there is such a wide range of structural potential and problems in different groups of buildings.

Methodology for Achieving the Green Energy future sooner

Bottom-up, not top-down

The risk of both the City's PlaNYC2030 and the 90by50 report is that they tend to steer towards a top-down approach. Much of this is predicated on how planners get their data. Planners are fed macro-economic pablum, which in the area of energy typically means an argument that by far energy efficiency gives us the best bang for the buck, and renewable energy is still mostly uncompetitive on the margin. And based on all that wonderful stuff, the administration then establishes policies accordingly.

Nobody seems to notice that in the process, the existing energy infrastructure is being taken for granted and treated as an unstated assumption, for the existing programs are typically geared towards energy efficiency, with the occasional cameo role for renewable technology. In other words, we start right away by optimizing for a secondary objective, efficiency, while skipping the initial make/or buy decision which should come first. It tends to be done correctly for new developments, but for existing buildings, this step is being overlooked. The further mistake that is implicitly made, is that renewables are evaluated in roles that are traditionally defined by the carbon energy model, and rarely do we see a systematic attempt to figure out what you can do differently with renewable technology, because of its unique properties, so that possibly you can pick up design advantages as compared to plugging renewable technology into a carbon based energy distribution model.

The first part of the insight into the potential of renewable technology is the extent to which it can be installed locally, so that a building in whole or in part supplies its own energy. A good example is sometimes provided by solar thermal. It is an often overlooked technology, yet it is 95-98% efficient compared to Solar PV at 15-20% efficiency. The question is, is there a practical way to integrate it into an existing building infrastructure. The cost of integration may kill the idea. However, it should evidently be tried, and be part of an evaluation.

CAPM, CAPM and more CAPM - the Capital Asset Pricing Model

In short, buildings should really begin to be looked at as potential energy producers, that can become partially independent from the grid. Net-zero is not a feasible objective in most cases for an existing structure, but enormous advances are feasible with today's technology. And such transitions can be incorporated in long term capital plans that take into account a 20-30 year equipment life cycle. Besides good engineering, the most critical piece is really  financial: a rigorous application of the Capital Asset Pricing Model should be the standard. If this is done, a far greater use of renewable energy technology is possible compared to what is being done today, and many existing incentives are counter productive at least some of the time, because the favor vendors of equipment and or the energy companies themselves, at the expense of the long term economic interests of the building owners.

There are also some regulatory hurdles that will need to be addressed. The famous split-incentive problem between landlords and tenants will have to be addressed. In low income housing there are rules that are promulgated by HPD and CPC, which prevent the highly necessary redesigning of energy infrastructure in building rehabilitations. And again, many incentive programs and tax abatements tend to steer property owners in the wrong direction. All of this is misguided policy, driven by the same macro-economic assessment that is erroneously applied to micro-economic planning at the building level, and it produces government sponsored capital destruction.

So again, we need to start working as if we were a capitalist society, from the viewpoint of the buildings as an asset, not with top-down soviet-style 20 year plans, that shove the macro-economic square peg, in the micro-economic round hole. Too many decisions are made driven by the latest incentive, instead of on a sound long-term economic basis, which would accrue to improved building values. An accelerated conversion to renewable energy would be more constructive to building preservation than the current regime of moving the deckchairs on the Titanic, and switching to natural gas as the "less dirty" carbon fuel. The vaunted role of natural gas as a "bridge fuel" is really a very destructive postponement, if it forestalls renewable energy in applications where it is economical today. Present HPD/CPC policies are merely creating the slums of the future, with real estate values held for ransom by energy prices, and landlords that are beholden to these rules are like lemmings waiting for the next energy crisis.