EPA Energy Star Home Energy Yardstick: a dangerous toy

Recently I explored the EPA's Energy Star Home Energy Yardstick to see if it could help some people get a handle on their home energy problems, and the conclusion is it offers a few useful features, but mostly it is detrimental to your financial health. In some ways it really is worse than useless, for financially it will with certainty steer people completely wrong.

Home Energy Yardstick will give you some useful information, by showing you where your home is on a relative scale of energy efficiency, and therefore the potential for improvement. It might give you some ideas of what to look for, but it does nothing to help you sort through the economic priorities of how to create an optimal energy retrofit for your property. That failure sets people up to go about upgrading their property in totally helter-skelter fashion, and lose tons of money in the process.

One of the periodic criticisms of the Energy Star® program has been that it's being abused by vendors, by misreporting the performance of products in order to get the qualification. That is bad enough, but the Home Energy Yardstick program systematically steers people the wrong way, and lacks critically important features that could make it useful, specifically:

• It focuses on energy efficiency, which tends to lead to a decision path of least cost incremental energy savings, which produces diminishing returns and is a financial death trap.
• It focuses on widgets, not on plans, and it focuses on costs, not value.
• It does not capture the holistic, "systems" view of the problem and the potential solutions. The problem and the solution are 4-dimensional, not three. It should be mandatory first to create a 30 year NPV calculation to analyze the value of various energy improvements from an investment standpoint.

The unintended consequence of the model that this program effectively  fosters an unwitting collusion of equipment vendors, energy companies and finance companies, all using this information against property owners, and in the process they are stripping equity from property owners, by ensuring completely suboptimal outcomes from an energy and environmental standpoint. If guaranteed failure were the mission, this would be the way to do it.

Energy Star is a sort of "Good Housekeeping" seal of approval for a sales program of any number of energy efficiency products and services that provide partial "solutions" but never add up to a solution for the real problem, except they'll keep the property owner paying forever, and allow politicians to always claim progress, while they can rest comfortably in the knowledge that we'll never get there, so next year they can still claim the same thing, ad infinitum, while consumer spend themselves silly on "Energy Star" products. Energy efficiency is one of those feel good ideas that is accepted without further examination, but falls apart if you ever take a serious look at it, for it makes the problem worse, not better.

Widgets over systems

By focusing on widgets over systems and plans, the illusion is created that you can just "buy" energy efficiency on an incremental basis,  as an add-on, without any plan. You give daddy an Energy Star rated shaver for Xmas, and ma gets an energy star rated hair dryer, and soon all will be well, except it does not work that way.

As in any crime, you look for means, opportunity and motive, and in this case, various vendors of energy efficiency related products and services need a gullible public that keeps on buying their bunkum. Energy companies use incentives to retain customers in order to serve their shareholders well. Finance companies live from commissions on the loans they write, so more sales is better, never mind if it makes financial sense for the property owners. Meanwhile, mathematically energy efficiency is a death trap because of diminishing returns.

The only thing that makes sense from an investment point of view, and needs to have priority in any retrofit plan is maximal Site Derived Renewable Energy (SDRE). SDRE alone materially reduces GHG-emissions, and adds value if it can be financed from energy savings well within its economic life, so that the property owner (investor) enjoys the benefit of a long tail of no energy bills.

Your Energy Star credit card

Various supposedly "green" finance programs make things worse. They propose typically "self-liquidating" financing, preferably with "no money down," to lure you in. The vendors of efficiency equipment have refined their marketing pitches to a fine art, to focus on sales that are easy and frictionless, and can be justified by "energy savings,"
so they pick high value projects first. "Self-liquidating" and "zero money down," are the catch phrases, which should warn you of incoming torpedoes.

PACE financing is still in some sort of limbo, and it should be as long as it is abused for the purpose of financing energy efficiency, if far more valuable SDRE projects are available.

Your energy company to the rescue

It is in the nature of energy companies that they make money by selling more energy, To them "energy efficiency" is something that helps them retain customers, moreover our society seems to tolerate a "greenwash," as if "energy efficiency" of a fossil fuel system is "green," even though the opposite is true. Where is the FTC when you need them? Many if not most energy companies have programs to help their customers become more energy-efficient, and energy providers are happy to offer you financial incentives, in order to retain you as a customer longer.

One of the more hopeful initiatives is the enabling of co-investments of energy companies with customers, which could help with SDRE projects. When done wisely, energy companies can make a return two ways: in financial terms, and in improved utilization of their assets. In NY the public service commission is now looking into this under the REV initiative. That double payoff should facilitate a reasonable deal being offered to consumers.

Where's the plan?

A building, a home, any property is a system, and moreover it is a four-dimensional system - it lives for decades. It contains mechanical systems that may need replacing at several points during its life span. Roofs may need to be replaced, windows added, and siding replaced, insulation added, etc.

Only renewable energy (SDRE) will materially reduce GHG-emissions, but it will also replace energy bills... it will move energy from liabilities to assets, and in many, many cases you will end up with a capital improvement that is paid for in under 10 years, but eliminates a big portion of your energy bills for 30 years (or more).

Thus there are two dimensions to an energy plan for a property:

• one is about the source of the energy, which is a make or buy decision, i.e. generate your own energy with SDRE, or buy your energy (electric, gas, oil).
• the second part is about passive measures, and energy efficiency. It should be noted that many decisions in this area will be different if you use more SDRE vs. fossil fuels. The fossil fuel path and the SDRE path are not interchangeable, which makes it imperative to plan ahead, lest you design yourself into a corner.

In short, a long-term energy plan is needed for two reasons, one because there are engineering interdependencies, that will impact on your decisions, and two is to truly understand the economic value you are creating on a life-cycle basis. These decisions have an effect for sometimes 20-30 years, and ultimately the life of the property. That tankless hot water heater may be a great idea if your only option is heating with oil, but if you can do geothermal or solar thermal, you need a domestic hot water store to harvest energy, and that same tankless hot water heater would be a horrible waste of money.

The emperor's new clothes, energy efficiency?

The pursuit of "energy efficiency" means that you do not think about the long-term energy strategy for your property, but you plunge in and start making what you already have more efficient, which means you may be throwing good money after bad, if in fact there were economical options of switching a good part of your energy requirements to renewable on-site generation.

In principle, if this approach were valid, you would proceed in the way of least cost/most benefit, and simply do the highest return projects first. This fails because of diminishing returns, and it fails again, because you may be designing yourself into a corner if you lock yourself out of some of the most valuable projects, but don't realize it, because you started from the wrong premise and without a plan.

Whole house, holistic energy planning

When you start looking at your property as a system, and start looking at the long-term issue of energy, your first stop should be a financial model of the situation, for the default model should be that you want to switch to renewables as much as possible, while financing it with the energy costs you displace, and helped with any applicable incentives, tax abatements, etc.

A good energy audit will give you your options, and the Home Energy Yard Stick may give you a hint for where to look. However, you don't want to fall prey to the vendors who will all pitch you on their systems, and never do you want to get yourself locked in to any vendor just because they do a "free" energy audit.

The basic framework becomes how to add the most value to your property. This is very different from the lowest cost approach of energy efficiency. The long-term value of your property should guide your decisions.

Conclusion: SDRE should come first

Energy Efficiency does not exist in isolation, but only in the context of the chosen generating technology: fossil fuels or on-site renewable energy, and the Home Energy Yardstick does not help sorting this out, which can lead to costly mistakes.

SDRE is first priority when we pursue property value adding strategies, energy efficiency is only complementary, and the Energy Star rating system detract the attention to components instead of the whole property.

Baucus Energy Tax Reform Misses with GHG-emissions Reduction

The Baucus Energy Tax Reform Proposal, which has reduction of GHG-emissions as its focus, risks aggravating the very problem it is trying to cure. As drafted, for all its merit, and precedent-setting simplification, it would exclude an entire class of technology that offers more bang for the buck in GHG-reduction: all forms of thermal technology that can be deployed at the demand-side of the grid.

The proposal limits itself to addressing electricity generation, and production of transportation fuels. In other words, it limits itself to addressing the production of energy at the supply side of the grid, and thereby reinforces the grid model, at the very time that technologically we are capable of building microgrids, and net-zero or near-zero buildings (including retrofits), and because of the increasing demand for building resiliency, we should be stimulating more Site Derived Renewable Energy (SDRE), for that eliminates at least one energy conversion (from whatever to electricity), as well as the transport problem for either gas, or oil, or electricity.

Net-zero, Near-zero, Thermal Energy to the Rescue

The conversion to electricity goes with energy losses, as does its transportation, yet evidently it has redeeming value because of the ease of distribution, but the quiet revolution that is going on for the last decennia is the consistent growth and profitability of Net-Zero Energy Building (NZEB) construction. With natural gas it is already becoming an accepted fact that the production and transportation losses are so significant, that it is just as bad as coal on a system-wide basis.

The next frontier is Near-Zero Energy Retrofits, and in all cases the difference between mere energy efficiency (typically with a 20-30% reduction of energy bills), and any solution that maximizes the use of renewable energy technologies, both active and passive (Site Derived Renewable Energy - SDRE), is that projects can achieve 70/80/90% reductions in Green House Gas (GHG-emissions) with SDRE, and be absolutely economical. The extreme example is the Zenesis house, but in general Near-Zero Emissions is a tremendous achievement for existing construction, and any retrofit achieving over 50% GHG Emission Reduction should qualify.

The key technologies are thermal, both active and passive, including solar thermal and geothermal, and harvesting process heat from either the sun directly or from the ground with a ground source heat pump. The normal transportation losses with process heat do not apply if you are using the energy on-site, and you are saving energy conversions, plus you have an easy way of storing the energy in either high-temperature process heat storage or low temperature pre-heated Domestic Hot Water, as well as various other related, passive solutions. So the batteries are cheap, whereas with the centralized grid, and electricity in general, batteries are expensive, and very environmentally unfriendly.

Technological Non-neutrality and More GHG-emissions

The stated goal of technology neutrality would therefore not be achieved by this proposal, for the most efficient solutions, thermal technologies at the demand side, i.e. in buildings would be excluded from this tax treatment, whereas they would be big winners if the new technology neutral regime applied to them, since they produce far more bang for the buck than the grid-based alternatives. For example solar thermal is about 500% more efficient in converting the Sun's energy, and if you add the benefit of the ease of storage for off-peak use, that advantage becomes even greater. Plus, by nature it does not produce the fluctuations on the grid that come from solar PV.

In short, this proposal would exclude the very technologies that offer the most bang for the buck (the words used in the proposal staff discussion documents), and the greatest reductions in GHG-emissions, as well as reduce demand on the grid, and improve building resiliency, all of which are highly desirable outcomes today. Especially greater resiliency is of extreme relevance for the coastal communities and many other areas, where the reliability of the grid is questionable. The current proposal would reinforce the centralized generating model at the exact time when the nation needs more decentralization.

Building retrofits:
reducing GHG-emissions by excluding energy efficiency and including SDRE

Mere energy efficiency retrofits should probably be excluded from the tax incentives, for they are an indirect subsidy to the energy companies, not the building owners. Moreover, they are generally a solution with diminishing returns to property owners, not to energy companies. They typically achieve only 20-30% energy savings, and maybe the energy companies should sponsor them as customer retention programs. What should be included is Site Derived Renewable Energy (which may include energy efficiency upgrades). If these incentives are structured correctly, there will be a huge increase in building level renewable energy retrofits, with all the desirable outcomes noted above: greater resilience, reduced demand on the grid.

The Audit Problem: Verifying Results of GHG-reductions

The staff discussions of the energy tax proposal reflect concern about verification for retrofits on the demand side of the grid. Verification does not need to be hard, for long term lenders have a similar interests. Requiring audited GHG-reductions based on clear standards are the answer, and the EPA's Energy Star Portfolio Manager provides the framework.

Conclusion: net-zero and near zero buildings reduce GHG-emissions faster

There is a huge potential for GHG-reduction through on-site energy generation with renewable technology (SDRE), in the form of net-zero or near-zero construction and retrofits. Retrofits will obviously be the larger market. The more these solutions gain traction, the more demand will be removed from the grid and building resiliency will increase. As long as these proposed simplifications of the energy tax structure are limited to the supply-side of the grid, they will greatly impede the most promising technologies available, and they will aggravate the problem of technology neutrality which they are trying to solve. The most bang for the buck in GHG-reduction is on the demand side, with net-zero and near-zero construction and retrofits.

Compound Returns from Renewable Energy

There are many ways to look at our energy conundrum, and to understand why we're so dysfunctional, and not getting the job done with renewable energy. As argued here repeatedly, one of the primary obstacles is putting the cart before the horse with honorable sounding secondary objectives, which obfuscate sound financial decisions. Energy efficiency, energy savings and clean air standards are examples that cause such distortions, and lead to policy failure. They are secondary objectives, not primary ones. The worst policy failures are resulting from confusing energy efficiency with renewable energy, and treating them as if they were interchangeable, or worse yet, additive, when they are often mutually exclusive in practice.

The effect of majoring in a minor by putting these secondary objectives first, is to postpone the switch to renewable energy indefinitely, and to subsidize the fossil fuel industry at the expense of property appreciation. Therefore it produces the opposite of energy independence and undermines any attempts to ever meet Clean Air standards, such as New York City pretends to want to do. Energy Star, NYSERDA MPP, NYC Clean Heat, PlaNYC, various tax incentives, are all examples where false priorities foul up sound financial decision-making about renewable energy. Collectively they have more to do with why we are not making the progress that we claim to want than anything else. They are examples of policy failures. Their ally is the fallacious financial practice of property owners making energy decisions based on payback of equipment, instead of net present value add to property values.

In short, government incentives have assisted property owners in making more bad decisions about energy faster, by rewarding them to ensure they keep making the wrong decisions, and the beneficiaries are the fossil fuel industry primarily, and to a lesser degree the manufacturers of energy efficiency equipment. It all comes at the expense of property values, so owners of real estate are destroying their capital asset base, to the extent that there are renewable alternatives that make economic sense, and in many, if not most cases, there are. False priorities supported with government incentives amount to government sponsored capital destruction in our economy, and serve to prevent the switch to sustainability. In NY State there is even an Energize New York Finance Handbook, and an exam to make sure you learn how to destroy your property values even quicker, using other people's money (but you're still liable). There is even an entire not for profit industry to help you manage your property into the toilet, such as "Energize New York, comfort and savings for your home."

Sustainability is only sustainable if it is also profitable

Adam Smith's invisible hand arguably does not always work, but sometimes it does. And here we have a capitalist society, embracing soviet style 20-year plans to make sure we prevent the invisible hand from working... But the good news is, there is a way to sort it out on an individual level, though eventually the whole structure of false incentives will have to be revised.

Every property owner can, with a simple spreadsheet make a 30 year energy plan for their property. And if you are lazy, you can make it a thesis project for your kid. It does not matter if you're going to sell it sooner than that or not, for if you invest wisely, it will come back to you when you sell it. After all, real estate simply has a long economic life, but if your analysis shows that your property is a wreck, and incapable of being made somewhat energy independent, sell it quickly while the going is good. The energy companies and the government will keep you in the poor house by confusing your decision-making and keeping you a slave to the energy companies longer than you have to be. Proper financial modeling is the way out, he process is a simple 30-year NPV analysis of all energy decisions about your property. Do not ever give in to the energy efficiency argument, it will keep you in bonds to carbon energy forever. Salesmen of energy efficiency and Solar PPAs are stealing appreciation of your property from you.

If you do that 30-year CAPM model, you will not easily make wrong energy decisions again. Never allow yourself to be seduced by the sellers of energy efficiency, and any government incentives, or subsidized finance from your energy company (talk about the fox watching the chicken coop). Remember always: Good financing or incentives can NEVER make a bad project good, it can ONLY make a good project better.  Hang that on your kitchen wall before you start talking about anything to do with energy in your property. Now for the good news: Renewable energy pays, because of compound returns.

Compound Returns from Renewable Energy Make Sustainability So

Payback of a piece of equipment may be useful as a quick and dirty calculation to see if it could have promise, but you need to have a coherent, holistic energy plan first, or else you will be cheated out of your money, and squandering it. The obvious mistake is if you start using equipment payback for your actual energy plan, such as models from NYSERDA and similar organizations elsewhere tend to do. Incentives are then added to the mix to make other objectives more attractive to property owners, either from a societal standpoint (and most often indirectly benefiting the energy companies and/or the manufacturers), or for the energy companies directly, and then if you add up all these wrong decisions and you score enough points in their system, you are rewarded with subsidized finance to help you destroy the value of your property faster. The shareholders of the energy companies thank you.

But now you know. And armed with your 30-year energy plan for your property, here is what you do: You do your model first. You focus on selecting the technologies that make the most long-term sense for your property. And next you figure it out with the NYSERDA MPP model, or your Energize New York application, or whatever is appropriate in your case, and you now figure out backwards how to maximize your use of incentives, and how to exceed their standards so that you do qualify for the subsidized financing, including PACE bonds. But never follow the methodology of these institutions, for it will destroy your property value. Your own economic energy plan must be king, meeting their objectives is a secondary criterion that gets you the financing you want, but you must take ownership of the plan.

Here's the payoff: on your list of potential things to do you might have a geothermal heat pump and a wind turbine, with paybacks of 8 and 7 years respectively, and they are kind of at the bottom of your list. But then you find out, when you integrate it in your model, that the heat pump allows you to store output from your wind energy in the form of pre-heated hot water. By doing so, you no longer have to sell excess energy back to the grid at wholesale rates, so you are now improving the payback on your wind turbine. Put together, they might have a 6 year payback, but again, the 30-year projection tells all.

Or, you were evaluating a tankless hot water heater with a 3-year payback and a solar thermal system with an 8 year payback, but your thirty year model reveals that the solar thermal system works out better in the long run, in part because with solar thermal you can harvest process heat, and if you take that effect into consideration, it may turn out that it's a better investment than tankless hot water heaters. Thirty years of no energy bills beats 30% energy 'savings' hands down. And of course solar thermal beats out solar PV because it produces 5x more energy per square foot, and on top of that allows storing process heat. All of which you would never see in a payback analysis, but you will see it in your 30-year model.

Or, you were evaluating a geothermal hot water against solar thermal hot water, and it turns out that on a payback basis solar thermal won, but then you started to look at your integrated model, and you could put your geothermal heat pump on a time of use meter, and integrated it with self dimming LEDs (100% dimmable!) for premises/common area lighting, and suddenly the geothermal hot water system won, and now you could look if you could drive your HVAC from geothermal also.

Sustainability through compound returns

Examples abound where the thirty year model shows you synergies of two (or more) technologies that you would not otherwise figure out, but most importantly it is the time value of money that allows you to see that 30 years of no energy bills beats 30% reduction in energy consumption most of the time, and a bigger capital outlay is warranted, and feasible if you can access subsidized financing. Such compound returns through synergy are worth gold.

Conclusion:

Renewable Energy done right produces compound returns through integrating several Clean Energy technologies at once. Energy Efficiency of a fossil fuel system produces strongly diminishing returns after you hit about 30% 'savings,' which is literally fool's gold. Only energy-efficient renewable energy gives you financial sustainability.

When Energy Star is Counter Productive

Energy Star is a powerful label. It does a lot of good for simple decisions, such as a kitchen appliance (as long as manufacturers are not gaming the system). Yet it is frequently used in counterproductive ways when it comes to more complex decisions, and, the program itself is counterproductive if it focuses on energy efficiency alone, such as it does for buildings.

Energy star appliances

Provided you have good data on the actual consumption of appliances--which has not always been easy--the Energy Star idea makes decisions easy. You know you want a refrigerator, you expect it to live 15 years, and you live in NY, so you look at the price forecast, and you see that the reference case from the US Energy Information Administration forecasts flat electricity rates for the next 15 years, evidently the spike from a few years ago is behind us. If I look at my bills, my rate per kWh may average (all in) 35 cents per kilowatt-hour. And so, if one fridge burns 100 kWh more per year than the other, then I stand to save $35/year for 15 years. So far, so good. As long a the data is real, it is easy. The only real issue then is about the quality of the disclosures.

Energy star appliances as components in a building project

It gets more complex when Energy Star components are specified for building projects, as happens when lenders, or the IRS, have this in their specifications. All with the best intentions, of course. However, it leads to sub-optimal choices in many cases, because for a building what really matters is the performance of the whole project, not just of the component.

My favorite example is the tankless hot water heater, which is being heavily pushed on consumers, but frequently is the worst possible choice. Yes, if the only thing you could ever do was to heat hot water with gas, more efficient is better. But the truth is that you have options like solar thermal and geothermal and both can produce a substantial amount of free BTUs for your hot water (and maybe HVAC as well). If you do a proper 30 year net present value analysis, the systems with free energy (renewable), may outperform the system that merely offers energy efficiency, because you continue to have energy bills even if you reduce consumption by 20% compared to your previous heater. That still leaves 80%, plus you probably need to replace that heater at least one time in the 30 year period. In the renewable case, your energy bills might be reduced to 15-25% of what they were before, just for backup, or complementary heat. Now if there are incentives in place which favor one over the other, and get people to make worse decisions, that's not good.

If you need a water heater for backup in a solar or geothermal install, an Energy Star rated 98% efficient heater with heat recovery (from the flue gas) may be the worst option, because not only is it much more expensive, but it will need to be replaced probably twice during the 30 years, because the heat recovery system will tend to become corroded when that heater is not running flat-out most of the time. You will get condensation, and maintenance nightmares. But the construction finance, or the IRS (tax incentives) specify that the components must be Energy Star, so your accountant wants to force you to use Energy Star equipment, when you know it will be a headache, and less economical in the long run. In short, in this case the Energy Star system might have made sense if it was a primary system, but it definitely is counterproductive as a backup system.

Energy star - Battle of the Buildings

At the building level the problem with the energy star approach really comes to the fore. Now it is all about majoring in a minor. Much ado about nothing. Whatever you want to call it. The major is Energy Generation, the minor is energy efficiency. When you major in a minor, you miss your objective. In this case the most energy-efficient solutions is often the worst one in the long-term. Energy Independence was the goal, and you focused on saving a nickel. You may win a prize, but the long-term value of your asset, your building will be depressed, if you chose energy efficiency of a carbon based energy infrastructure over a (more expensive) renewable energy solution that brings you energy independence. The reason is simple the 30% more efficient building will still use 70% of what it used before, and be subject to energy price swings as before. One or two price hikes can wipe that out. And the next investment in energy efficiency will run into a wall of diminishing returns, the next 10% of savings will likely cost more than the first 30%. To begin with the 10% savings off the original will now only be 7%, and it is a project you had on your original list, but you did not choose it, because you could get 30% from other sources. But now you've painted yourself into a corner.

If you can do one renewable project in that same building, and you are doing a proper 30 year financial analysis, you have now permanently replaced xyz amount of BTUs from renewable sources, and you still have all your options open. This is the beginning of

Only free energy is really free

energy independence. Now if there is a price hike, you may decide to do more insulation, and the result will be that your original investment, which was covering 30% of the BTU load, now will cover 50% of the BTU load, so you are getting compounding returns on your subsequent investments. The building that started on energy efficiency without first doing the make or buy decision about energy sourcing (from the grid or from renewables) can only get 7% improvement from his next investment, but you can get 20%.

In short, the two investment paths are explosively divergent, and in the end the building that  went for energy efficiency and won a prize will pay for their foolishness with lower building values. The whole problem starts with looking at energy efficiency at one point in time, versus looking at a 30 year time horizon on a CAPM basis (NPV analysis). Counterintuitively, the EPA is sponsoring energy INefficiency and capital destruction by foolishly promoting energy efficiency at ONE point in time. What is needed first is a proper make or buy decision - renewables versus the grid. Building owners may get to be on TV with their buildings for being so efficient, but they'll pay for it in lower building values.

Energy independence vs energy efficiency

To summarize, buildings are assets that last a long time, and they are complex energy systems which must be completely understood from the supply and the demand side before you can see what your best options are. Energy Efficiency of an existing carbon-based energy system may be your only option, but you can only make that decision by doing the 30 year economic analysis first. If renewables are an option at all they provide a long-term investment path with superior returns, and a realistic hedge against energy prices. Therefore they will provide for dramatically superior building values.

The upshot is: Energy Efficiency by itself achieves the opposite of Energy Independence in a Carbon-based system, and the Energy Star program is seriously counterproductive in these cases.

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.

Off The Grid In Four Easy Lessons #1

Getting Off the Grid may sound easy, but it's hard to do, and the major reason it is so hard is financial, not technological. One of the major problems is that energy efficiency and green energy are being confused in the priorities. The majority of government programs in fact are unintentional (and in some cases intentional) subsidies to the fossil fuel industry, and the vendors of energy equipment make use of the confusion to sell us all more of their energy efficiency equipment, on the pretense that it is 'green,' and the wrong use of energy efficiency causes the indefinite postponement of the green energy economy. We want green energy and not green paint.

Off the grid living may be a marginal phenomenon, but it If you check out the Wikipedia article in the link above, you'll see that already in 2006 there were reports that the number of homes that were off the grid had been growing at 33% a year for 10 years. This off the grid trend is now rooted in seriously green energy, though not in all cases, and we should separate the survivalists from the regular economic approach choosing green living simply because it makes more economic sense. Today as I'm writing this, the Wall Street Journal just had a major article about Stealthy Green Homes. Off-Grid Real Estate is the thing to watch. Off the grid homes are no longer a marginal phenomenon. Anything growing at 33% for 10 years or more bears watching, and by the time WSJ reports it is becoming main stream, you can rest assured it is main stream already. The important point here is that this is mostly about new construction, and that of course gives you a lot of options to design things right from scratch. But, since there are more old homes than new ones, retrofitting is more important, and it is also more difficult.

Green energy confusion: avoid retrofits that invest in fossil fuel slavery

There is a general confusion that somehow energy efficiency and green energy

Green Energy, not Green Paint

are synonymous, and they are not. Energy efficiency will never add up to green energy, and if you are now consuming fossil fuel-based energy, and you start investing in energy efficiency, you are merely ensuring that you are never coming off the grid. You are merely investing your own money in becoming a better customer to your existing energy suppliers. In short, this is an issue of mixing up the priorities. The first decision is how you get your energy, fossil fuel (from the grid in the widest sense), or green energy in whatever form. Then you need to look at how you get there, and this is where efficiency comes in. With subscription fuels (fossil fuels and derivatives), efficiency pays off in reduced bills down the road, in green energy generation, efficiency pays off in reduced capital costs, because you need a lower installed capacity, and improved project returns.

Stop going off the grid with an energy star tankless hot water heater

The tankless hot water heaters is the poster child of the Energy Star program, and it is one of the worst investments you can make. This issue is emblematic for why efficiency should be considered second, not first. Since hot water is such a large portion of your energy bills in residential living, this is an easy target, and the federal government makes it worse by providing tax incentives for this type of Energy Star equipment, but home owners are in many cases stealing from themselves in the long run with lower asset appreciation. Assuming the tankless hot water heater is more efficient, all you are getting is lower energy bills, but you will still have energy bills. Such incremental investment in energy efficiency make you a better customer of your utility, at the cost of reduced appreciation of your major asset, your house. The shareholders of your utility thank you.

To see why, all you have to do is a 30 year CAPM evaluation of the project, which should be your planning framework for ALL energy decisions in your house. A solar hot water heater is a bigger investment, but once you take the 30 year horizon into account, you will see that it results in near ZERO energy bills for hot water (and yes, you could use a tankless hot water heater for backup, but a regular gas or electric water heater will do). Solar also has NO maintenance costs, while your tankless hot water heater probably needs to be replaced in 10 or 15 years. And by the way that backup heater does not need to be energy star rated, that's a waste of money. You'll use that backup heater perhaps for 15-20% of your BTU requirements for hot water.

Your tankless hot water heater may reduce your energy bills somewhat, perhaps even 15 or 20%. In other words, if you do your 30 year CAPM evaluation, you will have one or two replacements of that tankless hot water heater,  and 15 or 20% lower energy consumption, but the price can still go up or down with energy prices, and the cost of the grid (the DELIVERY cost of your gas or electric) keeps rising faster than inflation. Even the best tankless hot water heater can only reduce your energy bills, not eliminate them.

Off the grid with CAPM, not equipment payback

Before you start doing anything about energy upgrades in your house, make yourself a 30 year financial model based on the Capital Asset Pricing Model (CAPM), taking energy costs into account, and then figure out exactly what your best options are. If people did their sums right and did not allow the IRS to make their investment decisions, they'd be a lot richer, and their homes worth more. Next time a visiting salesman comes to your home, if he's pitching his latest energy-saving thingmajig with a superior payback period, and worse yet, with tax incentives, katy bar the door and do your own analysis first. He is stealing property value, value appreciation of your property, with your signature, even if he is armed with tax incentives and the blessings of the energy star program. A tankless hot water heater does not green energy make, nor will it get you off the grid.

Federal Incentives to Prevent Renewable Energy in Residential Construction

OK, that was just a bit tongue in cheek, but it is actually serious, and it raises issues of unintended consequences, which are not always easy to address. However, it is urgent that home owners, and building owners come to grips with it, for it will materially impact the value of their real estate holdings in the future.

It all revolves around a theme that is pervasive on this blog, and that is sub-optimization. You could spend a lot of money on energy efficient appliances and still not create an energy efficient solution. The whole gist of the Energy Star label (when it works as intended) is to focus on the individual function, and make that as effective as possible, but buying everything Energy Star-rated will not solve your problem, and may in fact cause you to spend a lot more money than necessary, thus sub-optimization leads directly to capital destruction (aka stupid investments). A big example is the issue of tankless hot water heaters that I've raised on this blog, which is a hopelessly suboptimal solution because renewable hot water solutions are so easy and plentiful. Eventually there are others, and they all boil down to one and the same thing, which is the systems approach, the holistic approach in which the building is central, and not the equipment. The focus is on operating cash flows, and long term building values. Thus, if you can implement solar DHW, it may pay to look your washing machines and dishwashers to make sure they can take in hot water, in lieu of heating cold water. For never mind how efficient is their heating element, if they can take in water from your solar thermal installation.

Once you put the building central, you can look at integration of various technologies, and implement them even in sequence, if necessary, something now, and something else five years from now, when you're done paying for what you installed today. This kind of preplanning is entirely possible when you figure out the engineering and economic interdependencies, and do not fall for the temptation to implement something now which will prevent you from doing the next logical step five years from now. If you are only looking at the available incentives and the Energy Star ratings, and let them prevail over proper engineering and planning, you are very likely to make these mistakes, which will cause you to spend the same dollar two or three times over over the life of your house or building. The incentives, as much as the ever so well intended Energy Efficiency ratings look only at the level of the individual function of subsystems.

Besides planning ahead your engineering integration of a whole house/building system, the general principle is not to overspend in places where it really does not pay off, for the highly efficient variants of products are often not only more expensive, but sometimes less reliable. Simpler is better in that case. Another examply of where you should break the mold is the reverse, namely you should probably overspend on LED lighting where it conerns far out of the way lighting. If you only look at the difference in energy savings, LEDs are still hard to justify for most applications, but not in out of the way spots, where their longer lifetime pays off in reduced hassle and maintenance cost. LEDs last two or three times (or more) longer than the alternatives, and by looking at both energy savings and maintenance savings the picture changes the more they are in hard to access locations.


By the same token, many forms of subsidy and incentives are geared to the use and installation of Energy Star rated equipment, and again there is no guarantee that this results in an optimal design from the standpoint of energy economics of the building, be it a home or an apartment house. The simplest example is that of the back-up water heater for a solar thermal, or geothermal hot water installation. For this function it may not at all be worthwhile to buy an Energy Star rated piece of equipment. The other example is the installation of solar pv systems financed by your local utility against a Power Purchase Agreement (PPA), which is a low yield investment, which extends their franchise, but is suboptimal from the standpoint of operating cost of your building, since even the worst solar thermal system offers a higher yield of energy than Solar PV.

The fundamental error is that energy efficiency and renewable energy are treated as interchangeable, when they are not. Energy efficiency is not additive to energy independence, but renewable energy is. Energy Efficiency should rationally be funded either directly from savings or by PPA from your utility or oil company, not from public money. Renewable Energy, if it is engineered sensibly, is the only thing that deserves public stimulus because it achieves energy independence, raises real estate values, and is a permanent improvement. There may be exceptions when energy efficiency is the only option, depending on the nature of the buildings, in which case policies should be flexible enough to support it.

Official Correspondence regarding Tank-less Hot Water Heaters

To the Secretary of Energy, Mr. Steven Chu:

quote

Subject: Misuse of Energy Star Label in "legititmate" applications
Date: Sun, 28 Mar 2010 09:09:24 -0300

Dear Mr. Chu:

Besides some of the outright hoaxes under the Energy Star label, there are occasionally problems of disastrous misuse of the label, which may seem perfectly legitimate on the surface.

Perhaps the biggest "legitimate" hoax under the Energy Star label is the oxymoron of a Tankless Hot Water Heater with Energy Star Rating, which qualifies for tax incentives to boot, but which positively undermines the
architecting of a renewable energy future.

The problem here is one of sub-optimization, and is in this case quite disastrous in nearly all applications of Hot Water Heaters. Namely, DHW storage is the cheapest most effective form of Energy Storage imaginable,
and switching to a tankless system is a ruinous decision from an energy management standpoint, since it means throwing out nearly "free" batteries, that would allow a property to harvest cheap energy, be it off-peak grid power, via time-of-use metering, or peak-load power such as wind or solar.

Conversely tankless water heaters may be quite valuable as backup power, in situations where renewable peak power is used, however in that case the Energy Star models should not be used, as they introduce needless maintenance issues if they only fire up a few times a year. So for that application, actually the non-energy star models are preferred, because they will last longer and are therefore dollar for dollar more effective and likely to be more reliable.

This issue is big enough that it deserves top level attention. There are geothermal heatpumps which can generate DHW with 400% efficiency, and as long as you design water storage large enough for intra-day use during peak power, you can run these off-peak on the grid, or alternatively with peak loads such as wind or solar, and have "free storage," and I'm using "free" advisedly, for the analytical point is that the water storage is cost justifiable from the DHW application alone.

Even large organizations, like NYC Housing Authority, have used stimulus funding to install tankless hot water heaters, and thus undermine their own long-term renewable energy future. It is time for this fallacy to stop.

Of course more generally there is always a risk of sub-optimization, if the attention becomes focused on the component level. Thus there is need for wide use of system-level Energy Star ratings, which could offset the
type of abuse of the rating here. It is too silly that stimulus money should be used to prolong the carbon intensive energy economy, instead of enabling the renewable energy future.
unquote

To which the unfortunate reply was:
quote

EXEC-2010-005700

Dear Rogier Fentener van Vlissingen,

Thank you for contacting the U.S. Department of Energy.  I understand you have concerns about ENERGY STAR qualified tankless hot water heaters.

ENERGY STAR is a joint program of the U.S. Department of Energy (DOE) and the U.S Environmental Protection Agency (EPA) designed to help all consumers save money and protect the environment through energy efficient products and practices.  In an effort to ensure that only products meeting the program requirements can receive an ENERGY STAR label, the EPA and DOE are further strengthening the certification process.  For an outline of these steps, please view:

ENERGY STAR
News and Announcements
EPA, DOE Announce Changes to Bolster ENERGY STAR Program (April 2010)
http://www.energystar.gov/index.cfm?c=news.nr_news&news_id=http://www.energystar.gov/cms/default/index.cfm?LinkServID=E77FB9F2-96D9-EAAD-6B3C6ECF0D9E4808#c_B4A3256E-188B-36F7-215E56FDB1D2450C

If you have further questions about ENERGY STAR product ratings, please contact ENERGY STAR directly through the contacts listed on the following web page:

ENERGY STAR
Contact Us
http://www.energystar.gov/index.cfm?c=contact.ct_index

You may be interested in reviewing rulemaking activities and regulations regarding energy efficiency for residential water heaters available through the DOE Office of Energy Efficiency and Renewable Energy’s (EERE) Building Technologies Program:

U.S. Department of Energy
Office of Energy Efficiency & Renewable Energy (EERE)
Building Technologies Program
Appliances & Commercial Equipment Standards
Residential Water Heaters
http://www.eere.energy.gov/buildings/appliance_standards/residential/waterheaters.html

The federal tax credits for energy efficiency are congressionally mandated. Products that qualify as a federal energy efficiency tax incentive were set forth in the Energy Policy Act of 2005. On October 3, 2008, former U.S. President George W. Bush signed into law the Emergency Economic Stabilization Act of 2008 to extend many of the energy efficiency tax incentives first enacted in 2005 that expired at the end of 2007, or that were scheduled to expire at the end of 2008. On February 17, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 which includes several provisions modifying and expanding the scope of the energy efficiency and renewable energy incentives:

The Tax Incentives Assistance Project (TIAP) Legislative Language & Pending Updates
http://energytaxincentives.org/general/legislative.php

To inquire about possible changes to the list of eligible products, please contact your local congressperson.

For information on how energy related stimulus funds are being implemented in the state of New York, you may wish to contact your state energy office or view New York’s recovery website.  Below you will find your state’s energy office contact information as well as a link to your state’s Recovery Act website:

New York State Energy Research and Development Authority
Energy Efficiency Services
17 Columbia Circle
Albany, NY 12203-6399
Phone: (518) 862-1090
http://www.nyserda.org/

Recovery New York
http://www.recovery.ny.gov/

As you mentioned geothermal heat pumps, you may be interested in viewing  the following websites:

U.S. Department of Energy
Office of Energy Efficiency and Renewable Energy Energy Savers
Geothermal Heat Pumps
http://www.energysavers.gov/your_home/space_heating_cooling/index.cfm/mytopic=12640

Geothermal Heat Pump Consortium
The Consortium is a national non-profit trade association of the geothermal heat pump industry.
http://www.geoexchange.org/

U.S. Energy Information Administration (EIA)
Geothermal Heat Pumps
http://www.eia.doe.gov/cneaf/solar.renewables/page/heatpumps/heatpumps.html

Western Area Power Administration
Geothermal Heat Pumps
www.wapa.gov/es/pubs/fctsheet/GHP.pdf

Sincerely,

Amy Foster Parish
EERE Information Center
Office of Energy Efficiency & Renewable Energy (EERE)
U.S. Department of Energy
http://www.eere.energy.gov

unquote

Oh well, so off I go, now to write to the Energy Star program directly... to be continued.

On Sub-optimization with Energy Star

The Energy Star program is getting a lot of scrutiny lately, and no doubt that is helpful to make the program better and a more meaningful rating of actual performance of equipment we buy. However, there is another aspect to Energy Star, where it can be seriously misleading, even if all the performance data are correct. Collectively we are still a dysfunctional family when it comes to achieving a workable renewable energy economy, in lieu of merely extending our fossil fuel dependence in the name of "energy efficiency."


The example is similar to the issues we have recently seen on Wall Street. If incentive systems are such that they reward short term claims of profit, on investments on which the profits are in the distant future and by no means assured, the sales incentives of the "bankers" and "traders," really boil down to a modern version of "après nous le déluge," or, if you will: "Take the money and run." It boils down to sub-optimization where one party can game the system. I saw some examples of the same at the time of the build-up of MCI-Worldcom, when some of the sales people in that organization were able to collect double commissions, because the internal sales tracking systems were not integrated. It seemed, looking from the outside in, as if that company was in no hurry to correct the situation, while their sales people were drinking up their ill-gotten gains. Later it dawned on me that these double bookings of course perversely supported an inflated stock price, which it seems was the goal of management.


Similar issues of misaligned incentives happen with Energy Star, and it comes to light in some cases when you are designing systems based on integrating many components. It comes to light in strange ways. One of the strangest may be the case of tank-less Hot Water Heaters, which are wonderfully engineered, and highly efficient devices, and there have been a lot of them installed with moneys from the ARRA (Recovery Act), with the tax-incentives which are available in this area, and yet in almost all cases does this choice undermine a long term green energy strategy, and it boils down to a needless prolonging of burning fossil fuels to heat water. 


One of the central problems with generating energy from peak load capacity, such as solar- and wind-energy, is the problem of storage, and in any residential construction, you usually have daily usage of very predictable volumes of hot water. Thus a renewable energy solution becomes vastly more economical when it supplies all or part of the hot water for a building, thus allowing the storage of energy. The entire concept of the smart grid revolves around solving the energy storage problem and the very concept of tank-less hot water heaters runs counter to that trend, moreover a well insulated water tank is now so efficient, that the loss of BTUs from storage is insignificant, whereas its value for harvesting and storing energy in this fashion is extremely high, and strategically crucial if we want to solve our energy problems any time soon. 


Arguably a tank-less heater could make a good backup if hot water comes to depend on peak load capacity such as wind or water, but in that case the condensing, modulating high efficiency models are not worth the extra cost which gets them their energy-star rating. The greater complexity of those designs brings maintenance problems with it, which are aggravated if the equipment runs very infrequently, and so the Energy Star label is exactly what you don't want.


In short, high efficiency, Energy Star-rated tank-less hot water heaters are more likely part of the problem set, and not part of the solution set when it comes to solving the energy problems of residential living, be it in apartment houses, hospitals, dormitories, etc. as they undermine the achievement of building-level energy independence, and gratuitously postpone a renewable energy economy by another twenty years. They are however the best friends of your local gas company. You may even win awards for your energy efficient building. Economically however, you will have shot yourself in the foot with a bazooka. It is high time we bring out a proper understanding of marginal economics to this area of endeavor. Maybe installing these systems should require a very expensive license, to make sure all feasible renewable alternatives were exhausted first. OK, that was tongue in cheek, I guess.