Improving Real Estate Value with Clean Energy

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

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

Value, not cost

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

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

The bottomless pit of energy savings

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

Successful transitions to Clean Energy are holistic

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

Resiliency, clean energy and real estate values

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

Debunking "the fifth fuel," "negawatts"

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

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

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

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

Conclusion

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

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

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

Geothermal Heat Pumps Strategic Renewable for NYC

It is time to revisit geothermal heat pumps, and the battle of renewable energy versus energy efficiency. It has been noted with some regularity on this blog that NYC Clean Heat, and its comrade in arms the NYSERDA MPP are destroying real estate values in NYC, and not contributing much to reducing GHG reductions. I was an early advocate for geothermal heat pumps as the single most strategic renewable technology for energy retrofits in NYC buildings, and in April of 2013, then Mayor Bloomberg finally commissioned a serious study of geothermal energy for New York.  We had been advocates (with my consulting firm DaBX) since 2011 at least in our PlaNYC2020 report, and then hurricane Sandy did its bit to promote geothermal heat pumps. It is time now to demonstrate why not only does geothermal have "certain advantages," but is actually the single most important strategic renewable energy technology in the city.

Multi-family Buildings and Geothermal Heat Pumps

In general, if you are looking at any building, energy that you can generate on-site with renewable energy technology (Site Derived Renewable Energy, or SDRE) has numerous advantages. Most importantly, financially, if you analyze long-term (say 30 years) cash flows, thirty years of no cost energy often beats out the "savings" of 15-25% that are achieved by most energy efficiency overhauls. This pays for the heavy capital commitment up front.

1. The first advantage is that you have no transportation losses.
2. A second efficiency factor is that because there are no transportation losses, you can often save the conversion to electricity and pure thermal technologies win the day, because heating and cooling are the larger part of the energy budget, often 75%.
3. On top of that, if you are operating with pure process heat, you have a pretty economical way of storing that either at high temperature (i.e. process heat from solar thermal), or as pre-heated hot water (from geothermal).

A geothermal heat pump is 400% efficient: for every joule of energy it uses (electricity), it returns 4. To take the simplest application in a building, for Domestic Hot Water (DHW), it was traditionally provided by a coil in the boiler, and the efficiency of such systems is typically in the range of 45-75%, in particular because those boilers were oversized relative to the need for hot water, and the need for hot water is year round.

Why the NYSERDA MPP marginalizes Renewable Energy (RE)

The NYSERDA MPP is built on a set of mistaken assumptions and foolish economics. It bundles a set of energy efficiency programs and incentivizes the building owner to deliver efficiency retrofits that score above (currently) 15% gain. It all but marginalizes renewable energy. It all results in owners trying to find the cheapest way to qualify for the incentives, and technologies are selected based on their marginal energy savings, just to get the incentives, in terms of advantaged financing etc. The program focuses on energy efficiency (EE), which always yields high returns at first,  but suffers diminishing returns later, and it is biased against renewable energy (RE) projects, which are capital-intensive at first, but come with a "long tail" of free energy.

The Math of Geothermal Heat Pumps

Here is the typical math for a geothermal heat pump in the DHW application - based on the assumption that the prices for the BTU inputs (oil, gas, electric) are all the same:

1. Old situation: DHW from a coil in the boiler - oil/steam, usually 60% efficient (between 45-75%)
2. New situation: DHW from geothermal heat pump (electric, 400% efficient), and natural gas secondary heat cum backup at 95% efficient, in about 70/30 proportions, so that the combined efficiency is 0.7*400+.3*.95 =280%+29%= 309% efficient.
3. Let's round it off: 60% efficient vs 300% efficient
4. Therefore, if the Btu pricing was all the same that would be the comparison, meaning in case OLD our marginal energy cost is 1.67x the Btu demand, and in case NEW it is 0.33x the Btu demand. In other words the marginal Btu input of the new system is ca 20% of what it would be under the old system.
5. In real life this picture is then complicated by the pricing differences between oil/gas/electric,  but the point is clear, the innate efficiency of the solution is staggering.
6. We should emphasize again, if we can generate any of our own electricity, with wind energy or solar PV, we can store it as pre-heated hot water, and get a higher return than selling it back to the utility.

Geothermal Heat Pumps: The Math of Effective Btus

Again, this beautiful equation will evidently have different outcomes depending on the actual pricing of the different energy sources.

1. We were buying oil to heat the hot water, and the Btu value of #6 fuel is approximately 153,000 Btu per gallon. In the winter of 2014, in NYC, a gallon of #6 goes for $4.00, therefore, the cost per 1000 Btu is 2.61 cents.
2. We are substituting this with electricity, which in the winter of 2014 in NYC, goes for about $0.25 per KwH, and the thermal value of a kWh is about  3,214 Btu. The cost per 1000 Btu therefore is ca. 7.78 cents; and with natural gas as a secondary fuel, which goes for about $1.25 per therm (100,000 Btu) and therefore costs ca 1.25 cents per 1000 Btu.
3. For argument's sake, we needed 1,000,000 Btus for a given quantity of DHW, and the comparison now becomes: Old style (oil/steam): 1.67 x $0.0261 x 1000 = $43.59, and New style (geothermal plus gas): (0.7 x 7,78 x .25 + 0.3 x 1.25/.95) = 1.36 + 0.39 = 1.75 cents per 1000 Btu, or $17.50 for 1,000,000 Btu.
4. Now, if we can generate some of that electricity ourselves with a wind turbine or with solar PV, we have the benefit of storage, which gives us a higher return than selling it back to the grid, and we are compounding our savings.
5. In short, most building owners got taken to the cleaners when they invested lots of money in converting to natural gas, and made some small savings and efficiency improvements, but long-term they are still at the whim of energy prices. Their buildings have become LESS resilient. With DHW being 30-50% of Btu requirements in the typical apartment building, the geothermal solution would be a hands down winner, and perhaps a first step towards a mostly renewable heating and cooling solution...
6. From the standpoint of clean energy and reducing GHG emissions, we are now servicing 70% of this Btu requirement (DHW) with electrically driven geothermal heat pumps, with 400% efficiency. In short, 75% of the 70% is GHG-free, representing over 50% of this requirement is now free of GHG-emissions.

What really happened...

The conversion to natural gas under the NYC Clean Heat program, combined with the NYSERDA MPP has been neutral event for GHG-emissions because, while gas burns cleaner, the production and transportation losses of methane make it about as bad as coal for overall air quality, although within city limits there would be some reduction of smog.

Only very few buildings made the conversion to geothermal hot water systems, and when they did, these systems were most often wrongly designed, as just water heaters, and not with a view to pre-engineering whole building energy solutions, in which boilers might eventually be replaced with a solar thermal plant, at most with only a simple boiler for backup.

In most cases, conversions were from oil to gas, which reduced building resiliency, for we are now in a city that is wholly dependent on a single fuel, and if you watched the news tonight, one pipeline explosion could cause a tremendous amount of havoc, as they are finding out in the Mid West.

Conclusion

Energy efficiency programs mean that building owners are paying for making energy from the grid more economical, instead of investing in their properties and generating their own energy with (mostly) thermal technologies. Though finally geothermal heat pumps seem to be getting some more recognition, it is clear again that energy efficiency gets prioritized by current programs at the expense of renewable energy, and ultimately to the financial detriment of building owners.

The Fallacies of Energy Efficiency Loan Securitization

Green finance is struggling, judged by the apparent difficulty in the placements of securitized energy efficiency loans, recently by both NYSERDA (NY) and Pennsylvania.

"The market" is always a funny thing, but generally it does work, and, assuming it is working as it should in this case, clearly the message is that the emperor has no clothes on, or at the very least we are not quite sure of the state of his dress. This is in line with some of the observations I have offered in this blog on the state of green finance in general and the NYSERDA programs in particular.

At the crossroads: Energy Efficiency versus Renewable Energy

Following the logic of my proposed Green Finance principles, in essence "energy efficiency" securities are a wasting asset in the extreme. Number one, there is a false appearance of "market beating performance" based on the theoretical better ability to pay because of cash flow improvements thanks to energy efficiency. This is true in the short-term, but very deceptive in the long-term, and it is in effect an investment trap, that might snap shut during the run times of these loans.

The typical 20-30% efficiency improvements are irrelevant in the market because:

1. The improvement is easily wiped out by one or two energy price hikes. Note that even natural gas is now coming off its lows, and note also that in NYC in particular, transportation and delivery is 60-70% of energy bills, and rising faster than inflation as far as the eye can see. The US EIA reference case to 2040 shows flat to mildly rising cost of electricity, and gently rising costs for natural gas and residual fuel.
2. The energy efficiency improvement is further made irrelevant if far greater improvements are feasible - which is the crux of renewable energy, that we can get 70-90% reduction in fossil fuels in the majority of buildings that are now converting to natural gas under the NYC Clean Heat program. As soon as even a few buildings pursue the alternative, the buildings with some marginal energy savings become irrelevant.
3. Even more so, net-zero construction is gaining ground very rapidly, and while it may seem only "marginal," to lay people, it is not from an economic standpoint, for the sustained growth in net-zero construction for the last 20+ years will become the implied reference for energy performance of building portfolios, and NOT the 15, 20 or 25% 'energy savings' over last year. That's mostly narcissistic, not substantive.
4. A further material weakness in the concept of "energy efficiency" loans, as it is practiced today, is that they risk financing short-term improvements with long-term money.
5. The specific investment trap arises because of the diminishing returns on the path of energy efficiency: there is little or no follow-on opportunity after the first 20-30% improvement, and when a building subsequently needs to switch to renewable energy anyway, the initial "investment" in energy efficiency is largely a write-off.

Where the rubber meets the road: Green Finance Politics

The complete political muddle around renewable energy and energy efficiency has resulted in a situation where the dialog has been spoiled by running the two topics together, when in fact they are mutually exclusive, and totally different investment paths. In general there is too much top down reasoning, and too little recognition of the notion that we are a capitalist society, and that the building owner is in the business of maximizing the value of his property, and the regulator should be providing rules and regulations, carrots and sticks, to direct this process towards the public good.

The current regime of incentives is geared towards the energy industry, or towards the manufacturers of specific equipment, but existing programs don't provide the framework or the incentive for property owners to behave rationally. In practice what happens with programs like the NYSERDA MPP, is that building owners try to figure out how they can qualify for the least amount of expenditure. The issue of diminishing returns in energy efficiency upgrades is in effect covered up by the very model the NYSERDA MPP uses, and it sets up an investment trap for property owners.

Why PACE bonds ran afoul of Fannie and Freddie

Green Finance based on Renewable Energy does add up.

PACE bonds should be the poster child of green finance. When the big showdown happened a few years ago between Fannie and Freddie over PACE bond financing, the issue was entirely about the notion that PACE bonds would get priority in case of bankruptcy, and the fact that there was precious little assurance that the programs would achieve greater asset values. Eventually the PACE camp was somewhat able to make the case, but only weakly, because again the confusion over energy efficiency was never far away. The point of PACE is that renewable energy does increase property values, and comes with a greater upfront capital expenditure than your run of the mill energy efficiency program.

If PACE programs are developed with a laser focus on renewable energy, and drop energy efficiency to the second tier status where it belongs, they will be focusing on permanent improvements to properties, and moving energy from liabilities to assets. PACE will promptly become indispensable, and municipalities will support it more and more because it can help them with GHG reductions and Clean Air Act compliance. If energy efficiency is wrongly prioritized, the impact on GHG will be more muted.

How to make Green Finance viable

The one and only constructive solution in green finance is to require that property owners have long-term energy plans. In a world where net-zero construction is the fastest growing segment of new construction for twenty or more years going, net-zero is becoming the de facto benchmark and 20, 25, or 30% improvement over last year will quickly become irrelevant.

To achieve this I have recently published a proposal, which would streamline the whole process, and would make green finance seriously viable, instead of the current muddle. The DaBx Renewable Energy Retrofit Portfolio Standard is a simple and straightforward guideline which would ensure a solid foundation for green finance with a minimum of fuss.

Conclusion:

Green Finance runs into valuation problems as long as it conflates the energy efficiency of carbon based infrastructure with renewable energy alternatives. Renewable Energy produces compound returns by leveraging synergies with different technologies and efficiency measures. If energy efficiency becomes the priority and is applied to a carbon-based energy system, it produces diminishing returns, and competes with renewable energy: the two are not additive, but mutually exclusive. To harmonize the two, green finance should focus on renewable energy first and treat energy efficiency as a subordinate objective, which it is.

NYSERDA MPP and Diminishing Returns

The NYSERDA Multi-Family Performance Program, aka the  NYSERDA MPP, is an ostrich approach to the problem of diminishing returns on energy efficiency spending; it deals with an investment problem by sticking its head in the sand. To put it a different way, when it comes to a traffic light, which is red, and then knocks out the light and proceeds through the intersection. Specifically, the problem is the diminishing returns from investing in energy efficiency measures, and the designers of this program adjusted the program so this problem does not get in the way.

Energy efficiency done serially

Diminishing Returns Example:

1. Your initial consumption was 100, let's assume you had 4 options, and you prioritize.
2. Your first "investment" of $5,000 produced a 10% reduction. Your base is now 90. You paid $555 for every percentage point reduction. Payback was less than a year.
3. The next "investment" of $25,000 produced a further 10% reduction but now off a base of 90, so the combined result is a 19% reduction in consumption, and your base is now 81. You paid $2,500 for every percentage point reduction. Payback was about 3 years.
4. The third "investment" of $35,000 also produced a 10% reduction on the remaining 81, or 8.1% off the original number, and your new base is 72.90, and you achieved a total "savings" of 27.1%. You paid $4,321 per percentage point reduction. Payback was 4 years.
5. The next best option is $55,000 also producing a 10% reduction, but now on a base of 72.90, for a return of 7.3% savings off the original, or $7,534 per percentage point reduction, and it is not worth doing, so we leave well enough alone. Don't even ask the payback.

Note, some smart fools could try to change the order, and do #5 first, and then #2 might not look so bad. Is that a solution? Watch how NYSERDA solves this conundrum:

NYSERDA MPP: Obfuscating diminishing returns

The MPP program and anything designed like it--and the model is fairly common-- "solves" this problem by shuffling it under the rug, namely it stipulates an overall target, of say 30% (the program targets 15% or better with higher incentives with subsequent levels of achievement). In other words the various subsidies are used to overcome the issue of diminishing returns to the building, and incentivize the owner to do what's good for the utility, never mind if it's good for asset appreciation of the building.

To go back to the prior example, the NYSERDA MPP model works with an aggregate savings, and an overall savings target, and incentives to make sure that 5th project gets done to get the property to over 30%. The bundled approach obfuscates the problem of diminishing returns. The incentives serve to disguise that the 5th one is not economical.  The thinking behind it is very evidently to incentivize owners to do what's good for utilities (and equipment manufacturers).

Renewables versus energy efficiency

The Energy Efficiency Merry Go-round

With the NYSERDA MPP, you cannot come back for ten years. In the meantime they pray that some other innovation comes along for even more "efficiency." However the conundrum of diminishing returns will be even greater, for after you once upgraded your boiler from the old clunker that was 50-60% efficient, to one that was 95% efficient, what are you going to do? Go to 96% efficiency? No, unless it blows up you're not going to replace it.

In short the problem never gets any better, and what you should have done was to figure out how to get off the merry go-round. If only in one part you were able to switch to renewables economically, you'd be ahead of the game. In an apartment building or a residence the obvious candidate is geothermal hot water, followed by total geothermal HVAC. Solar thermal is next in line.

Make sure you evaluate the renewable options in the context of a 30 year capital budget, and pre plan every next step, so that you pre-engineer for subsequent expansion. Depending on the nature of your financing, You may do a total renewable retrofit in one go, or incrementally over as many as 10 years. Notice that with a renewable retrofit, you usually enjoy compound returns from different project phases.

Investment implication of diminishing returns

Directly relevant observations from this problem are:

1. The NYSERDA MPP should serve only as a cheat-sheet to see if you can qualify for the incentives and the subsidized financing, but you need to do a proper capital budget first, and if the renewable options work in your building, you will wildly exceed NYSERDA's targets. Most consultants in the area come from the standpoint of energy efficiency, and they do not represent the interest of capital formation in your building, but they work for the benefit of the utilities and the equipment providers.
2. Clearly, either investing or underwriting on the basis of energy efficiency or energy savings is a dicey business proposition, as a 30% improvement is easily wiped out in one or two energy price hikes.
3. In general the framework of the NYSERDA MPP is not about investing at all but about operational savings, and inappropriately uses long-term money for short-term fixes, thus potentially worsening the financial stability of buildings. Banks and PACE bonds both are missing the mark here with financial solutions. The difference between the Titanic sinking in 5 or 10 minutes does not an investment make.
4. Conversely, only investment in renewable solutions effectively can significantly boost the capital value of the building permanently, and could legitimately qualify for long-term financing.

The framework of the NYSERDA MPP and energy efficiency in general combined with using payback as a criteria, means that owners are doing the minimum to get the NYSERDA subsidies, which is even against their own long-term interest, if there is a viable renewable energy retrofit available for their buildings. To put it differently, because the tabular presentation of an aggregate result generally is mistaken for a financial model, buildings are in many cases making sub-optimal decisions with it, and the presentation hides the diminishing returns. Nobody in their right mind would invest in a sinking ship, just to delay the speed with which it's sinking.

Conclusion

The NYSERDA MPP is regressive, and mostly inappropriately used to substitute for a capital budget for energy retrofits. By doing so renewable energy options are sacrificed to energy efficiency, and there are no follow-on investments because of diminishing returns.

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.

From Liability to Asset with Renewable Energy

To move something from the liability column to the asset column is a dream opportunity and an art form that occurs only once in a great while in business. It is the operational way to asset appreciation. The renewable energy revolution will facilitate a complete metamorphosis of some buildings, and leave others behind in the dust. Because we remain stuck in the old model, people are slow to discover it, and moreover there are many brakes on the system, rules and regulations, and tax incentives, and other programs which falsify the decisions. It is easy to see in newer, net-zero (or close to that) buildings, it is harder to see the opportunities in existing construction. Changing the paradigm is never trivial, because the resistance of the old system is so tremendous. We have been used to it for so long.

In NYC there are numerous initiatives to try to push us in the right direction, but many of them tend to backfire in terms of the transition to renewable energy. By creating massive incentives that focus on "energy efficiency," or even on clean air, renewable energy is swept under the rug. It will take savvy investors to realize the opportunities that do exist, and to not squander money on marginal efficiency improvements, but instead to focus on the long-term prospects of switching to a renewable energy infrastructure.

Marginal operational improvements versus investing in renewable energy

The existing focus on energy efficiency and clean air works out to be a customer retention program and an inadvertent subsidy for the fossil fuel industry, and along with the common practice of evaluating technologies piecemeal on the basis of payback of the equipment, rather than value-add to the NPV of the building as a whole, it raises the hurdle for renewable energy.

Whole Building Plans for Renewable Energy!

If a renewable energy solution has a payback of seven years, it loses out against a raft of quick fix energy efficiency solutions, because as long as payback of the equipment is substituted for proper financial modeling, the quick fixes will win out. But once you do a proper 30 year capital budget and a financial model, it will quickly turn out that 30 years of near zero energy bills will often beat a mere 30% reduction of energy bills. The only challenge then is how to get there economically.

In short, any renewable energy plant we can integrate into a building is directly constructive to long-term asset value, for it replaces a liability with a permanent part of the asset, which is the building, and in some cases it may even move energy into the revenue column. Programs like the NYSERDA MPP have virtually institutionalized bad financial planning among building operators, for they reinforce the bad habit of focusing on marginal improvements based on payment of equipment, compensated by subsidies including subsidized financing to incentivize building operators to do the things that are good for the utility and not for the building, and by limiting the conversation to some small improvements at one point in time the whole long-term financial planning for the building is ignored, including the fact that there's no follow-on strategy once you have started investing in energy efficiency alone.

NYC Clean Heat favors fossil fuel

Never mind the short-term argument that the switch from #6 and #4 oil to natural gas reduces emissions, the point is that if this prevents buildings from switching to renewable energy, it is prolonging the fossil fuel era, and prolonging the period of CO2 emissions. It is my estimate that 50-75% of buildings affected by NYC Clean Heat could make the transition to renewables economically and gradually within 10 years, but instead, subsidized finance is wasted on an interim fix of transitioning to natural gas. This is capital destruction, at least in the case of those buildings that could have realistically switched to renewable energy instead. Obviously, a switch to renewable energy would also help NYC meet clean air standards much more permanently in the long run.

In short, the NYC Clean Heat program in as much as it will do these things, will in the long-term undermine NYC's objectives of meeting Clean Air standards and ensure failure. The renewable alternative is being overlooked, but would lead to strong asset appreciation of the buildings. The reasons are partly wrong financial modeling by owners, and partly incentives that make it more attractive to make the wrong choices.

Asset appreciation should drive renewable energy adoption

Taking buildings even partially off the grid with renewable technology, replaces a liability (energy bills) with a fixed asset (generating capacity), and once an existing building starts a process of renewable energy conversion, the follow-on investments show potential for compound returns. Example: your new wind turbine could drive your geothermal hot water plant, and have enough power left over to supply the common areas as well as some of your tenants. Another example is that if you can convert to hydronics and/or heat pumps, you could eliminate all window A/C's and supply cooling to tenants cheaper than it would be with window ac's, and make money doing it (BTU metering).

Most old line apartment buildings could be cash positive in energy with renewable technology over ten years. Underwriters should take note. Also, false proxies such as specifying energy star equipment should be eliminated from underwriting. Instead a proper long-term energy plan should be the focus.

The majority of old line apartment buildings are suited for most forms of Clean Energy, from Geothermal to Wind Energy, to Solar. The magic is in integration. For more information, see www.dabxdemandsidesolutions.com

Conclusion:

Only renewable energy is directly constructive to asset appreciation, if it can be done economically. Energy efficiency of a fossil fuel system merely attenuate the correlation of energy pricing with building values, and is a mild support in the short-term and useless in the long-term, because there is no follow-on investment strategy after the first few rounds of energy efficiency improvements, and particularly if the focus on energy efficiency prevents renewable energy alternatives.