New York's 2014 Energy Plan - GHG-reductions ahead

Green Finance reform should be the central focus of our climate change efforts, for under proper analysis reducing Greenhouse gas (GHG) emissions goes hand in hand with improving property values. The 2014 New York State Draft Energy Plan indicates a paradigm shift. The stated benchmark objectives are:

• 50% GHG emissions reduction by 2030
• 80% GHG emissions reduction by 2050

There is only one way to get anywhere close to that, and that is with massive adoption of renewable energy (RE), and in particular Site Derived Renewable Energy (SDRE), and green finance needs to catch up. Typical energy efficiency (EE) projects have been all the rage, tend to be in the range of 15-25% improvement. We will now need to focus on projects of 50% GHG emissions reduction and higher, otherwise we are dragging down the numbers. It also means we should focus on the demand side, for you can only go so far on the supply side, and green power generation is not an overwhelming case yet, but on the demand side, the economics are very powerful. It will just take time to develop the right opportunities. The draft 2014 NY State Energy Plan is an auspicious beginning for this paradigm change.

GHG reductions goals can only lead to more SDRE

I published my comments to the draft energy proposal on Scribd, here:
http://www.scribd.com/doc/217064925/DaBx-Comments-on-NY-State-2014-Draft-Energy-Plan

The good news is that the commitment to these GHG emissions reduction goals forces a radical change towards renewable energy.

50+% GHG emissions reduction: change happens on the margin

1. Change happens on the margin
2. We have limited means. (Think bringing $10 or $20 billion to a trillion dollar problem).
3. Therefore on the margin projects with better than 50% reductions in GHG emissions compete against projects with 15-25% "energy savings" and nominally GHG reductions in the same range. We should ignore the fallacy that natural gas reduces GHG emissions. Therefore we should furthermore only entertain SDRE projects with over 50% GHG-reductions.
4. Once we model a retrofit on the basis of a 30 Year cash flow model, it will be clear that there are plenty of SDRE projects that can achieve the 50+% GHG reductions target, and there is tremendous potential for sound projects that will be financially superior to EE projects. EE investment projects have been typically evaluated on component-level payback from marginal energy savings, sometimes in a bundled approach like NYSERDA's MPP. However, under a proper cash flow analysis, the long tail of 30 years of no energy bills will in many cases overcome the initial capital hurdle. Proper finance can do the rest.

Again, if we want to make progress towards these New York State energy goals, we cannot afford EE projects, but only SDRE retrofits. And, we cannot do it without reforming what now goes for green finance, and develop a more robust green finance 2.0.

The case for energy efficiency as a goal in its own right has been thoroughly discredited, and we'll be in the business of teaching old dogs new tricks. Building owners and many "consultants" in energy efficiency have been trained to look for opportunities for marginal energy savings. The approach has been helter-skelter, and a seemingly more systematic approach like NYSERDA's MPP just hides the problem and makes it worse. Many savvy building owners have always known that energy efficiency does not add up. It does not - simply because of diminishing returns. No matter how much you spend, you never get "there," and nobody knows where "there" is anyway. The new paradigm is: Green finance achieves GHG reductions with SDRE investments paid for by energy savings.

There is an unstated assumption in the current policies that focus on energy efficiency. That assumption is that you can always switch tracks later, and implement renewable solutions. This is not true, because in any given property, you will have often designed yourself into a corner you cannot get out of without writing off a good part of the work you have done in the name of EE. So the switch often becomes prohibitive if you did not plan ahead. Hence the need for proper planning first, and that means a 30 year technology plan for SDRE for any property.

From components to whole building projects

The other major change must be to always look at whole buildings, or even blocks, districts, communities, regions, etc. A holistic approach is a must, and overall GHG reductions are the goal. For the time being this is made harder because incentives are still at the component level, not at the building level. Component level incentives cause accountants to engineer energy systems, with disastrous results. The Baucus tax proposal has the right idea of one single incentive, based on GHG reductions, but, as drafted, it leaves out the demand side, which is the most important part. The idea is right but should be extended to the demand side.

Green Finance reform

Green finance in one part is the financing of major capital projects, and that is proceeding apace. What today goes for "green finance" for energy retrofits is completely compromised by the over emphasis on Energy Efficiency, and in most cases just a rebranded form of ABL (Asset-Backed Lending), against energy savings, all of which goes back to Amory Lovins' idea of the "fifth fuel," and the subsequent mythological creation of the "negawatt," leading us to think that "energy savings" is an investable asset. This approach is like painting lipstick on a pig, and in the extreme it takes forms like EDF's "Investor Confidence Project," which encapsulates these easily falsifiable, and unfounded assumptions that EE is somehow additive towards the solution into a seemingly impressive framework that unfortunately rests on a false assumption.

PACE financing compounds the problem even further by misusing the beautiful investor protections it provides on EE projects, and thereby undermining its own long term relevance. And PACE will become irrelevant if it does not refocus to over 50% GHG-reductions, and that means SDRE projects. The name PACE means Property Assessed Clean Energy, and its potential is now being wasted on EE projects, which merely serve to prolong the agony.

The over-emphasis on energy efficiency is completely self-destructive, and analytically unsound, it lacks a basis in fact, both economically, financially, and environmentally. It is already being falsified in the market place by net zero construction, but for retrofits, as soon as there are significant securitizations of 50% and above GHG reduction financings, the EE investment craze will come to an ignominious end. The typical 15-25% "energy savings" from EE projects, which come with diminishing returns, i.e. no follow-on strategy, will inevitably make way for the 50+% GHG reduction projects which will offer compound returns, and an ever improving follow-on strategy, not to mention asset appreciation of the underlying property with every energy price hike.

The time has come for green energy finance reform. Once the analytics of Energy Efficiency are properly understood, the nomenclature "green finance" should be limited to SDRE projects with over 50% GHG reduction, and never for EE projects which are a financial and environmental dead end, and in effect an indirect subsidy to the carbon fuel industry. This shift automatically entails a new focus on maximizing asset values for building owners.

Education

Along with all of this, there is a massive need for education, and objective and independent information. While I was finishing up this blog, my partner, Bruce Lorentzen, EE, wrote to me as follows:

Last week  I was a judge of faculty and student research projects at Univ. of Bridgeport.  I was amazed that a professor with a PHD was presenting a study on microgrids and he was a proponent of PV.  This was alarming in that he had within his research, heat storage.  I challenged him on why he was wasting precious land and rooftops and only being 15% efficient.  He then admitted that perhaps solar thermal was better.  I then offered that with 400% efficient heat pumps, he had the opportunity to reduce pollution by at least 75% whereas PV only reduces by 15%.  We must educate the educators!!

Conclusion

Energy Efficiency is not a proxy for GHG reductions, and should not be a policy goal. It is an indirect subsidy to carbon fuel, and achieves the opposite of what we want. The new paradigm for green finance is achieving GHG reductions with SDRE investments paid for by energy savings.

DaBx Renewable Energy Retrofit Portfolio Standard for Multi-family Buildings

DaBx Renewable Energy Retrofit Portfolio Standard for Multi-family Buildings - 06/12/13

Purpose: This document sets forth proposed criteria for existing multi-family buildings to transition to a renewable energy infrastructure and qualify for financial incentives such as might be proposed by financial institutions for green mortgages and special energy retrofit financing. It provides both consumer protection and assurance of asset appreciation of the property. It therefore assures the property owner of the soundness of their plan, and firm prospects of asset appreciation, and the underwriters of appreciation of their collateral.

Criteria – the building shall:

1. Initially, achieve a 25%-50% reduction in emissions, with 50% or more of the reduction coming from renewable generation.
2. Achieve a reduction of 50%-75% of total building emissions within 10 years, with 50% of the reduction coming from renewable energy generation.
3. Provide a comprehensive energy plan for 30 years on a net present value basis, comparing against the existing infrastructure, with commensurate efficiency enhancements, with the reference case from DOE for energy price inflation.

Notes for renewable energy conversion of multi-family buildings:

1. Financiers and lawmakers should target incentives for reductions in emissions, with a 50% renewable standard, in order to build asset appreciation in real estate. Energy efficiency is an operational savings, and when mistaken for primary design criteria leads to capital destruction. Renewable energy moves energy from liability to asset.
   * Relevant links: Renewable Energy and Asset Appreciation, Energy Efficiency and diminishing returns.
2. It is suggested that this standard be adopted as basis for exemptions from existing rules, such as the NYC Clean Heat Program, but also of the Energy Star requirements, and eventually tax incentives should be adjusted accordingly. Until that time, building owners must work around these counter-productive rules.
   * Relevant links: NYC Clean Heat, Energy Star counter productive.
3. If subsidies are on equipment, they benefit energy companies and manufacturers, not building owners. If subsidies are on buildings for achievements in emission reductions, they stimulate demand for equipment just the same, but will focus on asset appreciation, instead of risking capital destruction.
   * Relevant Links: compound returns from renewable energy,
4. Notice that within the bandwidth of each phase, incentives could be used to stimulate higher achievements in emission reductions.
5. Notice also that by providing up to a 10-year horizon for such a plan, things can be phased in on the back of normal replacement cycles in lieu of forcing uneconomical replacements. Typically this program would extend the economic life of the old boiler. Depending on the type of financing available and economic replacement cycles, the results can optionally be achieved all at once or spread over 10 years. Moreover newer technologies can be adopted, by allowing phased implementation.
   *Relevant links: Leveraging NYSERDA's MPP on behalf of renewable energy.
6. In the long-term Energy Star requirements for subsidized financing or tax incentives, should be abandoned as they can conflict with good design and economics. Longer term all incentives for specific technologies should be phased out in favor of incentives for renewables in buildings, i.e. also at the federal level (IRS). Only the results matter, not the technologies used.
   *Relevant links: Energy Star requirements giving false signals.
7. Note that also public safety is improved by buildings coming partially off the grid. Some buildings may even end up with an energy surplus. Indoor air quality will improve with the removal of combustion sources. Tenants will enjoy a higher quality of life and lower energy costs if buildings can generate energy at a competitive price level, while landlords get another revenue stream. The split incentives between landlords and tenants will be a thing of the past. Using energy in the building or even selling energy to tenants at retail is more attractive than selling it back to the grid at wholesale.

By focusing any improvement incentives on individual properties, with appropriate benchmarks, a far more rapid and wide scale adoption of renewable energy is assured, along with significant appreciation in real estate values.

NB In this document, references are included to posts on this blog to document the issues.

Conclusion

The portfolio standard proposed here, seeks to ensure asset appreciation from implementing renewable energy in multi-family properties. The proper focus for regulators is reducing GHG emissions. Solar energy, wind energy, geothermal energy, or any form of clean energy all have a role to play. Multi-family buildings provide the best opportunity for conversion to renewable energy with an assurance of asset appreciation, particularly the older, simpler buildings. When all types of renewable energy technologies can be brought to bear, the compound returns resulting from synergies among technologies will ensure asset appreciation.

Renewable energy delivers asset appreciation through compound returns from successive investments, and multi-family buildings have the capacity of providing better quality of life for tenants and better financial returns for landlords.

DaBx Renewable Energy Retrofit Portfolio Standard for Multifamily Buildings
by Rogier Fentener van Vlissingen is licensed under a
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