50 Ways to Kick the Energy Efficiency Habit

Energy Efficiency sounds good, but it makes lousy policy, because of the simple financial fact that as a strategy it produces diminishing returns. So, with the thought of Paul Simon's 50 Ways to Leave your Lover in mind, here are some thoughts on how to free ourselves from this collective insanity which is holding up the transition to increasing deployment of renewable energy and progress towards energy independence, not to mention building property values.

The motto for this list is the famous statement:

Premature optimization is the root of all evil. (Donald Knuth)

This comment from one of the world's most famous computer scientists is exactly to the point, for unless you do the capital budget and a long-term plan first, and you can see a clear timeline on what energy future you want for your property, you are operating without a plan, and capital destruction is sure to follow, as night follows day. All the "energy efficiency retrofits" suck asset values out of properties and transfer them to the financiers, instead of improving property values.

50 WAYS TO KICK THE ENERGY EFFICIENCY HABIT

1. Hop on the bus, Gus, but by all means do proper financial planning, and see for yourself. Failing to plan is planning to fail and you'll fall prey to incentives and be stripped of your asset appreciation.
2. Be honest about how much you've spent on energy efficiency. Shouldn't

   

   To the tune of: 50 ways to leave your lover

   your bills be negative already? If in doubt go back to point #1
3. You can't save yourself rich, not with money, not with energy.
4. Successive Energy Efficiency investments exhibit diminishing returns,
5. Therefore Energy Efficiency literally does not add up - it is NOT additive.
6. The reason you can't save yourself rich is diminishing returns.
7. Not only does Energy Efficiency not add up, it is not additive towards sustainability, instead it is a sure prevention of sustainability - again because of diminishing returns.
8. Energy Efficiency is not interchangeable with renewable energy in achieving sustainability, it is of value only if it is complementary to site-derived renewable energy (SDRE).
9. Energy Efficiency in a fossil fuel system, is like lipstick on a pig and it is mutually exclusive with renewable energy.
10. Premature Energy Efficiency is the best prophylactic the carbon economy has to offer against renewable energy.
11. In a proper capital budget for energy, it will be seen that 30 years of no (or very small) energy bills versus 20-30% energy savings with various energy efficiency programs often easily justifies the far larger CapEx for SDRE, but intelligent use of passive measures and efficiency will reduce the ICap (Installed capacity) for SDRE.
12. The corollary to this is that any would-be analytical models which emphasize energy efficiency and utilize payback analysis automatically move renewables out of range.
13. Every step into renewable energy increases building resilience, yet we offer subsidized programs to quickly convert buildings to natural gas, before anybody gets the idea of going renewable (NYC Clean Heat). OTG Conversions are public enemy number one from the point of resilience and sustainability.
14. If you count in the cost of the consultants on NYC Clean Heat, and various building resiliency studies, we could have converted half those 10,000 buildings to renewables already.
15. Energy Efficiency makes the problem bigger not smaller, and makes it dollar for dollar less likely we'll ever switch to renewables.
16. With gratitude to Steve Hallett & The Efficiency Trap - energy efficiency is much ado about nothing. This book is the behavioral corollary to the financial problem of diminishing returns, providing yet another reason energy efficiency does not add up.
17. Kudos to Steve Hallett & The Efficiency Trap again, energy efficiency expands demand. The mission is to build the alternative.
18. With every dime you spend prematurely on increasing efficiency of your fossil fuel system, you are postponing the transition to a renewable system. This is capital destruction.
19. Successive steps of a well engineered renewable energy transition in a property will show interdependencies, which demonstrate an engineering reason why energy efficiency and renewable energy are mutually exclusive, on top of the financial reasons, unless they are properly planned and leverage each other so as to produce profound synergies.
20. Many if not most NYSERDA programs are for the benefit of your favorite utility company, and/or manufacturers of equipment, at the expense of optimal asset value for property owners. You want to do your own financial model first before you use their programs to see what subsidies you could qualify for. The old adage applies: great financing can make a good project better, but it can never make a bad project good. Happy shiny sales people of energy solutions violate this rule all the time, such as when they ask you if you would like to see if you qualify for "free solar panels." Hold on to your wallet.
21. Most NYSERDA programs as well as direct utility incentives bribe property owners to do what's good for the shareholders of the utility, and necessarily not what's in the best interest of the owners of the property.
22. Most NYSERDA programs, ConEdison's Greenteam, and other similar programs with other utilities, are customer retention programs for the utility and have little or nothing to contribute to property values, nor are they green if they only target energy efficiency.
23. Tax incentives, and financing requirements based on Energy Star ratings of equipment, tempt property owners to specify the wrong equipment for the sake of short term gain, and they make good design harder, not easier. These incentives need to be restated on the basis of GHG emissions, and/or water use reductions.
24. Energy efficiency and Energy Star requirements for buildings are counter productive, GHG reductions should be used instead for law makers, and regulators, while property owners should maximize NPV based on a 30 year energy plan.
25. Green financing is falling into the efficiency trap and makes the capital blunder of financing short term measures with long term money. It will lead to instability, and it is another underwriting crisis in the making.
26. PACE bonds have become nearly irrelevant by embracing energy efficiency instead of renewable energy.
27. Green Finance including PACE bonds could ensure above market rate appreciation of the underlying assets ONLY by mandating renewable infrastructure, never by energy efficiency requirements.
28. All energy efficiency programs are a greenwash, because they achieve the opposite of what they set out to do, both environmentally, as well as financially.
29. Energy efficiency programs are a rationalization for the good feeling of sacrificing something for the common good.
30. Energy efficiency programs are another demonstration that logic and reason are the horse the emotions ride in on. The only satisfaction is emotional, nothing is being accomplished.
31. The use of marginal analysis in the form of payback on equipment justified by energy savings is irrelevant to property owners, and only of interest to the sellers of that equipment. Caveat emptor applies here, for most retrofits have engineering interdependencies that may lock you out of other options, and you need to understand the holistic view of a long-term plan for your property first.
32. Net zero is not necessarily the sole objective, but a direction. Again: energy independence of your property and even partial independence from the grid, ensures you won't be left stranded.
33. Selling back to the grid can be avoided by implementing heat pumps, particularly high efficiency GSHP (ground source heat pumps - 500% efficient!), but also ASHP (air source heat pumps - 250% efficient).
34. In renewable energy design, energy efficiency comes back in play and should be used to optimize installed capacity (ICap) requirements. Notice that if your energy is free, you can pick your capital tradeoff, if it is cheaper to install more capacity or insulate more. The bottom line is that in deep retrofits there is no payback period for efficiency alone, but the right use of passive measures and efficiency will reduce the overall payback of a project and make it easier to finance.
35. Implementing renewables (SDRE), means shifting energy from liability to asset.
36. Implementing renewables also means focusing on production, not reducing consumption as the predominant strategy.
37. The renewable strategy means playing offense, not defense with energy.
38. Net-zero and green construction is growing like mad in new project development, so existing homes are eventually headed for demolition and abandonment if they cannot come up with a renewable strategy. Search for net-zero and energy efficient homes, and you'll see what I mean.
39. Energy efficiency is a bottomless pit that will keep you in the poor house if you fall into it. Stop now, and make a financial plan to switch to renewables wherever possible.
40. Energy Efficiency is the addiction that covers up our energy addiction, so again it makes the problem bigger, not smaller. Energy is like methadone for heroin addicts: it makes the addiction manageable, but it is harder to kick.
41. If you are a renter, Energy Star appliances and other Energy Efficient Products are your best friend. For renters marginal payback of the equipment from energy savings is appropriate.
42. Whenever renewable energy is treated as a building block in energy efficiency, it will be undervalued and implemented incorrectly.
43. Avoid net metering whenever you can, except in emergencies. Plan your design to capture and use as much energy as possible in your property.
44. The 90by50 report from the Green building council is full of good ideas, but once again gets lost in the weeds of energy efficiency.
45. Manhattan is a heat sink, but renewables will mean the outer boroughs can become far more attractive places to live, while Manhattan will become the energy slum, with a small number of exceptions to prove the rule.
46. When buying a coop or a condo find out the energy plans, it will make at least a 10-20% difference in building values within 10 years.
47. It is time for tenants associations to work with landlords, even to the point of mixed ownership of energy plant if nothing else will work. Community solar is such an idea. It is high time to get rid of the split incentive. There is room for innovation here.
48. Write to your politicians to support the principles of the DaBx Renewable Energy Retrofit Portfolio Standard, and focus on subsidies for achieving reductions in GHG emissions, and try to get exemptions from all rules that stand in your way. Many well intended rules hold up the show because they are counter productive on a building level.
49. Evaluate all technology options that are suitable for your property, not just one. Solar thermal DHW and/or HVAC as well as heat pumps should top your list.  They are mature technologies, wind energy is often superior if you have the right location. Solar PV comes last unless you have space to waste. Don't forget green roofs, and other passive energy strategies either.
50. The reason they are giving away solar PV, is because it is your worst option, unless it fits your overall design and you have the space for it - which most residential owners don't. Solar PPAs are usually a really bad deal for almost all consumers. They are only better than doing nothing. Solar thermal yields up to 7 times the amount of energy per square foot.

Conclusion: renewable energy adds value

50 ways to leave energy efficiency behind, because it is a financial dead-end, the corollary to which is the phenomenon of The Efficiency Trap. Only renewable energy will offer rising property values, as well as dampen any loss of value in downturns, as was widely acknowledged by institutional investors during the downturn of 2008. Net-zero or near-zero properties are one of the best asset classes ever to own.

New York's Green Bank

New York's new Green Bank is another chance to start getting renewable energy right. This initiative appears to be driven by the concern that existing programs are not producing adequate development of renewable energy resources. No one however seems to have noticed that existing programs, both at the federal level (tax credits), and at the state level (NYSERDA programs, etc.), for the most part are effectively designed to prevent the widespread adoption of renewable energy.

Marginalizing Renewable Energy

Typically, existing programs, such as the NYSERDA MPP tend to marginalize renewable energy solutions for retrofits simply because they prioritize energy efficiency over green house gas reduction, and because they encourage small incremental change over the radical change to renewable energy infrastructure. The cardinal issue here is that technologies are evaluated serially in terms of their marginal energy savings, and the fundamental question of what type of infrastructure do we even want is not being asked. Analytically, energy efficiency fixes will win the day with this approach, and it seems to become simply a matter of which ones to pick.

The trap in this approach is that you unthinkingly start tinkering with a bad system, and you maybe throwing good money after bad, if there is an alternative that makes more financial sense. Therefore the property owner first needs to develop a long-term energy plan, and prioritize energy investments purely on the basis of how much they improve the value of his property. What currently takes place is paid for by property owners, but it serves the interests of the utility industry, not the owners of the property, and it sacrifices long-term property appreciation for short-term efficiency gains.

An unintended consequence of the approach of evaluating options based on marginal energy savings, is that cheap energy efficiency solutions will always win the day initially, and beat out the more expensive renewable energy options, That serves the energy companies, who are trying to achieve certain demand reductions, but economically it is most often to the detriment of property owners because it destroys the potential of long-term asset appreciation with renewable energy. A nefarious side effect is that a property becomes committed to the path of energy efficiency, which has diminishing returns, so the future is a dead-end. With renewable energy there is always an upside for you can frequently do follow-up improvements that will further enhance the value of the renewable energy option, producing synergies and compounding financial returns.

We need to go back to square one, but do it in a way that harmonizes with the normal aging and replacement cycle of major plant, typically the boiler of HVAC system. A 30 year capital budget for the building should be developed to evaluate the options. If this were done, the adoption of renewable energy solutions would be progressing way faster than is now the case. Simply put, thirty years of no energy bills will most often beat the typical 20-30% reduction in energy use that is now often achieved by these retrofit projects, as long as it is feasible in your property.

Underwriting Standards can make all the difference

The opportunity that arises with the new Green Bank is for establishing underwriting standards that would avoid all these  problems. It would be very simple to demand as part of the underwriting requirements for loans that properties produce a model for green house gas reduction based on the EPA's ENERGY STAR portfolio manager, and combine that with a 30 year capital budget that shows how the project produces asset appreciation. Suddenly, the old approach of energy efficiency would look paltry by comparison, limited only by  whats economically feasible in a building because of its features and location etc. Moreover, any investments in energy efficiency of the building now will produce compound returns to assets. Most importantly, in most cases one might now choose different types of energy efficiency measures at least in many cases. So the two paths are mutually exclusive both from a financial standpoint and an engineering standpoint.

Open Letter to Governor Cuomo: the Green Bank and Underwriting Standards

My recent Open Letter to Governor Cuomo raises these issues in a systematic way. From a standpoint of governance of what could become a major and very influential economic institution, the adoption of sound underwriting standards will have a decisive influence on:

• The speed of reductions in Green House Gas emissions
• A speed-up in recovery of real estate values
• Development of a sound secondary market for paper based on such lending

The last point is possibly the most important one financially, because by setting the tone through its underwriting standards, the uncertainties of valuing paper for energy retrofits could be cleared up, and it should be noted that both NYSERDA and the Commonwealth of Pennsylvania have experienced difficulties in placements, which in my view is attributable only to the absence of a rational financial/economic base for valuing papers that represent "20-30% energy savings over last year." That just does not cut it when on the margin it's net-zero construction that is the only real growth sector in markets nationwide, not to mention world-wide.

Indirectly, the Green Bank could therefore eventually have an influence on mortgage underwriting standards as well, and set the tone for PACE programs, which should abandon their disastrous focus on energy efficiency, and focus on the twin objectives of asset appreciation and reductions in green house gas emissions. The biggest reductions will come from retrofitting all types of clean energy, solar panels, wind energy, geothermal heat pumps, and other forms of heat exchange and recovery, and hydro power. Passive construction methods also have their role to play.

Conclusion:

The Green Bank of New York could wield historic influence through prudent underwriting standards and shift renewable energy retrofits into high gear, to accelerate reductions in Green House Gas emissions, and help shore up property values, building resiliency, and economic competitiveness.

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.

Leveraging NYC Clean Heat for Renewable Energy Retrofits

The NYC Clean Heat program is one of the many examples of good intentions gone wrong, for by and large it misses the opportunity to push the city towards renewable energy. Instead, it is diverting capital to a temporary fix, leading to NYC boiler conversions to natural gas, when far better options might be available, better for the city, for the tenants and for building owners. Large numbers of C- and D-class apartment buildings, particularly in the outer boroughs, such as the Bronx, which typically are burning #6 or #4 oil would have an easy time shifting towards renewable energy instead of to natural gas (or even biodiesel).

It is true enough that natural gas is less polluting than #6 residual oil, or even #4, but from the standpoint of building preservation. However, these buildings would be generally more viable economically in the long-term by switching to renewable solutions.because renewables offer a permanent energy price hedge, and lower maintenance costs. The only way to get buildings out of the economic trap of energy price hikes is renewable energy. Probably 50-75% of buildings in this particular class are capable of making the switch.

The right use of The NYSERDA MPP

To make the transition to gas attractive the NYSERDA MPP program offers a wraparound for overall efficiency upgrades to buildings, and which is in many cases not the best option if it leads to merely making a fossil fuel system more efficient, instead of switching to a renewable alternative. The financial methodology of that program is geared to making the existing infrastructure more efficient, not to evaluating alternative solutions.

The idea should be to make the transition to economic sustainability and increased competitiveness with renewables. Only if a renewable solution is not in the cards, is the marginal reduction of CO2 and particulates emissions helpful, but again, not if it distracts us from the major goal of switching to clean energy and becoming energy independent. If the NYSERDA MPP is used to finance a conversion to natural gas, it misses its potential, as long as an alternative is possible for a particular building. Very simply, 30 years of no energy bills will beat 30% savings any time. Owners sacrifice future value of their buildings if they make the wrong choice.

Obviously, if we can make it to a renewable energy infrastructure, we are going to outperform the mere switch from oil to natural gas. Thirty years of no energy bills will always beat out a 30% energy savings, if you can do it economically. The thing to do would be to pursue an exemption from the Clean Heat conversion, and do a 30 year energy plan for the building, such that the first phase qualifies you for the NYSERDA MPP program.

MAJORING IN A MINOR

Both NYC Clean Heat and the NYSERDA MPP focus on a secondary objective first and thereby falsify capital decisions, and cause capital destruction. Naturally, in some buildings there is no renewable option, so that's bad luck. Anyone who has done any financial modeling or operations research work can tell of how bad it can be if you major in a minor, if you optimize a system for a secondary objective, not the primary one. For a building, the primary function should be the long-term Capital Asset Value of the building. The renewable energy building will be worth some 10-20% more, hands down, in 5 or 10 years, than its fossil fuel (or even biodiesel) burning twin. The exact spread will depend on energy prices, of course.

Energy Efficiency is the secondary variable that can either make a fossil fuel system more efficient (not green!) or make a renewable energy system more economical (very green). The confusion in the public dialog is that energy efficiency is misrepresented as green, which is merely a way of greenwashing fossil fuels. Energy efficiency is only green if it helps you make a renewable system economical, and in that case there is a direct compound return, because e.g. better insulation will reduce the installed capacity needed.

An alternative conversion program

Here is the outline of the renewable energy strategy:

• Make sure that phase one of your plan meets or exceeds the criteria for NYSERDA's MPP.
• Get an exemption from the Clean Heat conversion program because you are going renewable.
• Typically, the first step is to take Domestic Hot Water (DHW) off the boiler, and implement either a geothermal or a solar thermal solution, which will typically achieve a 25-50% reduction of your BTUs for heat and hot water. (Because heat is seasonal, but hot water is year-round).
• With your exemption you should get a clear agreement that for economic reasons your are doing the next step (heat) when you need a boiler replacement.
• By doing this, you have bought another 5 or 10 years of economic life for your boiler, because it'll be off-line in summer.
• At the end of the economic life of the boiler, you then can go to either a renewable or use the best fossil fuel solution available then.
• For details, see www.dabxdemandsidesolutions.com

It should be noted that the City has recently begun studying geothermal energy, which is important for this program and has already provided a powerful solution to many buildings. Also wind energy should move to the top of the agenda as more suitable designs are appearing on the market which are geared for installation on buildings.

 A long term renewable energy plan

The trap of all programs that focus on marginal efficiency improvements, such as the NYSERDA MPP, is that they focus on only ONE point in time, and ignore the long term plan for a building. The truth is that the path of energy efficiency, which is prioritized in the NYSERDA MPP, in most cases shows the quickest returns from some effiiciency gains, but if you did a 30 year CAPM analysis of your building, you would see that subsequent investments in energy efficiency face strongly diminishing returns. By comparison the renewable energy plan is more capital intensive up-front, but usually superior, because you get 30 years of (nearly) no energy bills, not merely a 30% reduction in consumption.

We should also note that if subsidized finance is used to switch buildings to natural gas, that would have otherwise been capable of switching to renewable energy, that is really an indirect subsidy of some energy company, and of the fossil fuel industry in particular.

Conclusion

The need to switch away from #6 and #4 heating oil, should be leveraged for converting to renwable energy, not natural gas, whenever it is feasible. Owners who do will see at least a 10-20% increase in building values over the next 10 years, if they follow through.

If you do a proper 30-year energy plan for your building, with a good understanding of the engineering interdependencies, two things will become clear:

• if your building is suitable, a good renewable energy solution will beat out mere "efficiency" of a fossil fuel solution.
• And, number two, you can use some of the programs that now exist to help secure financing for your conversion.

NYC Clean Heat provides the motivation, and the NYSERDA MPP can be used on behalf of a conversion to renewable energy.

NYSERDA MPP is a financial trap for property owners

Energy efficiency on a carbon spewing pig is like Green Paint

The venerable NYSERDA MPP, the Multi Family Performance Program is an investment trap for building owners, and the reasons are simple. It is designed for the benefit of energy providers, not building owners. To put it differently, it is a customer retention program for your energy companies. It is designed to incentivize owners to do what's good for their energy providers, instead of what's good for their buildings. Apparently by and large building owners are happily walking into the trap for all of energy punditry applauds energy efficiency without realizing that it is creating the next energy crisis, not preventing it. Everyone seems to assume that saving resources is always a virtue, and more savings adds up to better economic performance. But nobody checks the math, apparently.

Historically, never mind the good intentions, the NYSERDA MPP program, and all of NYSERDA has been born from the "accepted" macro-economic obfuscation, which passes for "policy advice" or even wisdom, that on the margin the investment in energy efficiency offers the highest returns for incremental energy investment for our society. This seems to be true, even obvious, but it's a case of figures lie and liars figure. The simple fact is that if you make a system more efficient, you prolong its life, and you extend its usefulness. So if the system was a fossil-fuel-based energy system to begin with, what better idea than to get your customers to invest in making themselves more efficient customers, using their money, not yours. One of the incentives will be subsidized financing. Subsidized by who? By the utilities through a levy on their customers.

NYSERDA MPP serves utilities not building owners

In short, it should be no surprise that the NYSERDA MPP program, good intentions aside, operates chiefly for the benefit of the shareholders in energy companies, and is to the detriment of buildings and building values. The reason this is so, is that its primary focus again is on energy efficiency, not on green energy at the building level. And the methodologies of the MPP program are focusing on getting owners to do what is marginally beneficial to the grid with an incentive system of subsidies and cheap financing.

Nyserda MPP negotiates owners into a corner

The unstated, but implicit, assumption is that energy efficiency is additive, and somehow will result in energy independence, and better economic performance. It is not, in fact it is an investment sinkhole for any building that would have been capable of switching to renewable energy. And in the multifamily sector in NYC 50-80% of buildings are. The reason this is so is that INITIALLY energy savings always offers good payback, but there is no effective follow-on investment, so the owners of buildings are painting themselves in a corner from an investment point of view, because of diminishing returns. Any subsequent investment in efficiency is facing an increasing hurdle of diminishing returns, because the basis for the savings is constantly reducing, and ultimately hits a limit, which may be say 35%, and even if it's 40 to 50%, eventually there's no place to go. In short, like with any investment, you have to wonder about the exit strategy. There is none. The next energy price hike will simply wipe out the savings of 15-25% that are typical of these programs, and the owners of the buildings are back to square one.

NYSERDA MPP can be Useful be useful in conjunction with green energy

The smart way of using the NYSERDA MPP program, or other incentive programs, are to do your own economic analysis first, and then figure out how to leverage the incentives. Do not let the utility company or their agents drive your program! The only sane way to approach these decisions are to take a comprehensive look at energy in your building and to set up a 30-year analytical model on a CAPM basis with the base case being your existing fossil fuel driven energy model, with incremental spending on energy efficiency, and the alternative case or cases being to switch to green energy, generated IN your building.

What you are likely to find is that if you achieve the same say 25% improvement in energy by self-generating it, and using energy efficiency secondarily to beef up your investment, you will have superior returns. For, on a 30 year basis, you will see that the 25% efficiency investment is likely to be wiped out within five years by energy price hikes, whereas the green energy investment has permanently eliminated the energy cost of 25% of your BTU load, and you have a follow-on strategy to add more renewable energy generation at the building level. Wind turbines for buildings are now becoming a serious option. Solar PV is improving all the time, but Solar Thermal is usually the best option. On a larger, utility level, there was just a study that PJM stands to save $7bn/year with windpower, all the while people are complaining that we have no grid parity???

Time shows green energy superior to energy efficiency

The fundamental, if unintentional, deception of the NYSERDA MPP lies in the fact that it focuses on a single point in time: now. It sets people up to evaluate technologies on the basis of marginal contribution to the cause of efficiency, which digs you deeper and deeper into the hole of dependence on energy by subscription. Once you do a 30 year model, the payoff of green energy becomes obvious, because you are permanently wiping out a portion of your energy bill, and it's value goes up with every energy price hike. This is why you should do the 30 year model first, and figure out later how you can leverage incentives. NYC's Clean Heat program leverages building owners into the NYSERDA MPP program, in order to get financing for switching to natural gas. In the vast majority of cases, making that switch simply lops 10% or more from the future value of the building compared to the green energy alternative, if there was one.

Conclusion

Energy efficiency is NOT additive, but shows diminishing returns. Green energy produces compound returns, the NYSERDA MPP tool can be used right, but most often it suffers from focusing on the wrong objectives, and impairs building values.

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.

Throwing out the Batteries with the Bath Water

For the last few decades, there has been a gradual shift in understanding that the end of the fossil fuel era is at hand, and not necessarily because we run out - although there are of course vested interests who would like to sell us every last drop of oil, and every last lump of coal, not to mention whatever gas remains. The paradigm shift however, is about understanding that the fossil fuel era is at an end because of diminishing returns. In short the unintended consequences like CO2 emissions and other problems are the manifestations of that shift. The cost of the commodities themselves is going up because of increasing scarcity, and the cost of the various nefarious side effects are weighing more heavily all the time as well.

The other side of the shift is the increased creativity in the development of alternatives, both in terms of the technologies and in the complete frame of reference in which we operate with energy. However this process is nowhere near complete, and in the transition sometimes ridiculous misalignments come into play. One example of this is the storage of Domestic Hot Water which I have been writing about on this site. We are only just starting to understand that renewable energy means that that buildings can generate some or all of their own energy, and that the most typical renewable sources, wind and solar, are both of the peak load variety, i.e. they produce power when the weather is favorable, not necessarily when we turn on the switch. Therefore energy storage is an absolutely crucial design element in harnessing these sources. This issue has been part of the smart grid conversation for years, and we continuously hear how expensive batteries are.

Meanwhile the buyers of tank-less hot water heaters (unless as a backup heat source), are throwing out the batteries with the bathwater, or, to be more precise, by eliminating storage of Domestic Hot Water (DHW), they are eliminating the cheapest form of energy storage available in residential living, and one that is of crucial importance if we ever want to make our buildings energy independent with renewable energy. The focus in this case is on eliminating the BTU loss from hot water storage, never mind the fact that with modern insulation, these losses are negligible, and yes some space is being reclaimed. This however ignores the fact that hot water is the most natural energy storage solution, which we get practically "for free," if we realize that with various renewable technologies it is cost justifiable as part of the hot water provisioning for the premises.

This particular issue is quite absurd in its consequences. There are super efficient tank-less hot water heaters, with Energy Star labels, and they are marvelous, if heating hot water were the problem, except it is not, and therefore tank-less hot water heaters are not the solution. Rather, they are the problem. The absurdity becomes complete when we realize that there are tax incentives for tank-less hot water heaters, which means that the US government thus provides a subsidy for the postponement of our renewable energy economy by another twenty years or so, and building owners are torpedoing their best options for making their buildings energy independent. In short the very concept of the super efficient tank-less hot water heater, is of value primarily if the only option for a residential building is in consuming energy, and economizing by consuming less of it. This is the utility model, and the utility companies, gas and electric, as well as the oil companies represent this economic model, and the traditional incentives are all geared to energy efficiency more so than to energy independence.

The new model however is that energy is becoming a technology business, and buildings can increasingly generate their own energy locally, at the building level. As a result the economic value of DHW storage is now as an energy store, which enables the use of peak-load generating technologies like wind and solar. This solves the storage problem only in the form of heat, which is the largest energy demand in residential construction. In as far as the demand is for electricity, some form of battery is unavoidable if you want to rely on peak power, and come either partially or wholly off the grid.

As I have seen demonstrated over and over, the plumbers of the world do not understand that Hot Water is now going to be a freebie, and a happy by-product of this shift in energy infrastructure, in which buildings increasingly produce their own energy. This shift is particularly dramatic in existing residential construction, but   that is exactly where the greatest economic opportunity is. Accordingly, if the government wants to achieve energy independence, the incentive programs, from tax incentives to special finance programs (such as the Multi-family Performance Program from NYSERDA was one), need to take the new realities into account.

The mere accumulation of energy efficiency, which seems the only option in the utility model, is also the best guarantee that we stay in the fossil fuel economy forever, and therefore would be disastrous. Yet almost all incentive programs, with the best intentions, make this totally self-defeating assumptions. Energy independence does not happen unless you plan for it. The renewable energy economy and the utility model are two radically different economic constructs, and "energy efficiency" as a goal remains the child of the utility   model, and will prevent us from ever getting to energy independence and a renewable economy. As a dear friend pointed out recently: "You cannot cross the Grand Canyon in two easy steps." We are now at the point that we need to wean the baby from the breast of the utility companies and the oil companies, and the baby will cry at first, but to become independent, it is absolutely necessary. And there is money to be made from this energy conversion, once it is properly understood as a business opportunity.