NYSERDA Conference on On-Site Power Generation

I just spent two days at a NYSERDA conference about On-site power generation, which brought together solar PV, CHP and storage, in an attempt to inquire what could be done to achieve better integration and coordination among these market actors. The conference also at least acknowledged that there were many other technologies that could have been drawn in, but they just simply wanted to start somewhere. Still, we are in the Northeast, where 70% of building energy loads are thermal, and it remains amazing that solar thermal and heat pump solutions were not included in such a conference and trade show. We swam in between all the participants representing some dramatic efficiency measures, and the finance and economics to make projects better - we're making friends with all parties, because we shorten the paybacks of all On-Site Generation retrofit projects.

During the conference it hit me with even more force than usual how the entire energy retrofit business is a shambles that in large part is caused by the structure of incentives and regulation at both the federal, state, and local levels. At the same time, I am sincerely impressed with the REV process in NY State, which at least attempts to create a structure for energy solutions for the future, based on a clear awareness that the legacy regulatory structure is holding us back in the face of technology change.
Interestingly, this conference took place against the backdrop of all the uncertainty about the new administration and its energy policy, about which we know too little for now, as Bloomberg just reported in a major article that points towards a major shake-up. The good news was that I heard comments even from equipment vendors attempting overcome this confusion and take a longer view, such as one CHP vendor who pointed to the fact that they were at least discussing their solutions with clients in terms of long-term building values, which is of course the only valid perspective to have.

I got some welcome take-up for one of my own pet-peeves, that accountants should not be desinging energy systems. I advanced as an example of dysfunction how incentives and Energy Star ratings had promoted the use of tankless water heaters, but that in practice this was often a bad decision if a property owner found themselves a few years hence looking at either a heat pump solution or a solar thermal solution where DHW (Domestic Hot Water) storage provides the cheapest way to harvest energy. The premature decision to adopt tankless water heaters in that case amounts to throwing out the batteries with the bathwater. This is a typical example of how the 'energy efficiency' regulations themselves and the incentives cause capital destruction, in which property owners make decisions like so many chickens with their heads cut off. Sure, tankless water heaters may very well be very efficient by themselves, but that fails to take the overall building systems into account. The answer is that the only thing that will work in the long run is a carbon tax or similar solution, and not device-level incentives, so that the focus shifts to results, not how you get there. Politicians and accountants should not micromanage the design of systems, and make successful outcomes harder, not easier. Focusing on the results is the only way where engineers and economists can design the optimal solution that creates building value, and leave accountants and component-level tax-incentives out of it.  From that standpoint, it would be fine by me if the new administration just wiped out all incentives across the board, and let the markets sort it out - people would have to start thinking for themselves again.

Dysfunctions resulting from the incentive structure

The examples I have seen are many and varied, and anyone who has been around this industry for a while has seen the ridiculous results when tax- and other incentives and regulations dictate energy system design ahead of engineering and economics. My list includes:

• Tankless water heaters, even though they have valid application as backup in a renewable design.
• Condensing boilers in a back-up role where the heat-exchangers rot out if these don't run flat-out, yet the rules specify Energy Star boilers, which all come with heat-recovery. In short, in a backup role in a renewable design, 
• In general the incentives at the device level push over-use of certain devices, and this is often compounded by vendor greed, because they make more money over-specifying devices, instead of doing what's good for the customer. This can be seen in oversizing boilers or CHP or solar systems, all of which are commonly done. These equipment vendors sometimes take no interest in optimal outcomes for customers that can be realized through efficiency measures because they reduce the size of the systems they sell, even though they would sell more systems if they produced better economic outcomes for their customers. 
• Solar PV is the single most prominent example of a technology that thrives only because of incentives, but in practice it is a negative-NPV decision for most property owners in the Northeast, except for in specific design scenarios, particularly where it's combined with a heat-pump solution which by itself would increase electrical demand, but in combination could be very well an optimal solution in many cases. But the tariff structures and incentives are becoming an increasingly thorny issue here, particularly if grids are not designed for two-way traffic.

More Political Dysfunction ahead

The pendulum swings of politics are about to really upset the apple-cart of energy policy, as summarized in the Bloomberg article cited above, but there are limits even there, as summarized recently in a Forbes article by attorney Brian J. Potts: the new administration will have to pick favorites, for there are many clear examples of conflicting interests even among the fossil-fuel options. Another aspect that is a major unknown is what international response will be. Evidently, foreign investment in the US may suffer, and even US investors who are committed to a climate change vision may shift their investments outside the US as a result of regressive policies. Growing the US economy and dialing back energy policy may well prove to be incompatible. 

Needless to say the last word about our energy future has not been said, and for the real estate industry in particular, the fact remains that buildings will outlive the swings of politics, and smart decision making would focus on retrofits that make economic sense, and fortunately many renewable technologies are extremely valuable because they in fact eliminate major energy costs. Heat pumps with efficiency ranging from 200-250% for air source to 400-500% for ground source remain an attractive choice, and the applications for solar thermal, offering 4-5 times the energy output of Solar PV, are multiple. Solar PV without a subsidy regime to prop it up is not going to be very attractive in many cases, though it will be worthwhile in niche applications.

What will be interesting to see is how the states will respond, for increasing dysfunction at the federal level will shift the burden to the states. Will the Northwest reinforce its regional climate change efforts with Canada? Will California secede, or at least grow its climate leadership role?  Will New York and New England orient themselves to Canada more, where a serious climate change agenda is now a fact? We cannot ignore the fact that energy is the single largest industry in our industrialized society, and is key to our long-term welfare. 

The upshot is the major imponderables are the roles the states will play in energy policy, and the role the international community will play, the role that investors will play by voting with their dollars, and at the end of the day there is the fact that the Trump administration in no way has a mandate that would support the sweeping change it seems to be contemplating. So, the politico-economic outlook is definitely cloudy, and property owners must make their own long-term decisions, in which the only sane argument is to look 30-50 years out and ignore these short term swings. What remains is the fact that properties outlive political swings.

Creating Long-term Value

The simple must be, as always, that property owners must discipline themselves to look at energy retrofits as capital decisions, even though traditionally energy is treated as O&M (Operating and Maintenance) by most property owners. The reality is that the availability of many technology paths produce clear alternative scenarios for buildings, that must be evaluated as such as a long-term capital decision.

Site-Derived Renewable Energy (SDRE) is an alternative to the typical legacy energy plan that depends on buying energy from the grid (or oil, or propane deliveries, etc.), so the consideration of SDRE is a make-or-buy decision, but even within that, there are usually multiple scenarios which most often are mutually exclusive and have very different economic/financial outcomes. The unfortunate effect of the legacy incentive regime is that it is completely counterproductive to looking at long term capital decisions, for it tends to place the emphasis on short term payback at the equipment level, which can arguably be improved by incentives, but undermines the necessary discipline for long-term capital decisions. The prospect of dismantling various levels of incentives therefore shifts the focus from the short-sighted decision making that tends to create capital destruction, towards the long term decision making that helps property values and capital formation.

Hybrid systems are the future

At the convention I found myself happily technology agnostic, and plugging the idea that with some simple efficiency measures, we are able to take 20-30% of the energy demand out of buildings and shorten the payback of deep retrofits that include on-site generation by 20-50%. Needless to say we also have interesting financing partnerships developing, for shorter paybacks make financing easier. Most vendors welcome that conversation, but there are always a couple of regressive thinkers, who put the short term ahead of the long term, and their own commission check ahead of the customer's welfare, never realizing that happy customers will create referrals and more business. It drives home the point that property owners need to have the intelligence and advice on their side and look at the long term energy outlook for their buildings, at a holistic level, with at least a 30-year capital budget for energy provisioning.

Already, hybrid solar thermal cum fossil fuel heating systems are becoming the norm in places like Germany, and new solar thermal systems in this country are rapidly increasing the options, such as Zonbak, which is starting to ship in mid 2017. The future will be hybrid solutions in which the traditional silos will increasingly break down. You A/C does not have to be electric, it can be thermal, and your heating does not have to involve combustion, it can be largely or wholly thermal, with a little bit of electricity to keep it running.

In practice, some efficiency measures may be independent from structural retrofits, such as on-site generation, but in many cases it is not, and examples include both solar, and battery charging, and therefore BEV implementations. The fact is that harmonic noise is cumulative in a facility because of the shared neutral bus, and LEDs and solar inverters and battery chargers all inject harmonics into the electrical system, adding the load and therefore potentially increase the overall harmonic load, making harmonic filters every more critical. Are there other solutions? Yes, but they are more expensive, and on a facilities basis, the harmonic filters intercept the problem closest to the source, preventing deterioration of the whole circuit.

The benefits of harmonic filters:

10-30% reduced electrical bills,
20-50% shorter paybacks for retrofits.

Holistic Solutions Put Property Values Central

Selecting the right energy technology plan for your property with a life-cycle outlook and taking all the relevant efficiency measures into consideration at the same time, is the only valid way forward. The best advice amid the whole confused scenario is to keep your eyes on the ball, and that means to maximize long-term property values, and it's up to the political will to provide incentives to minimize environmental impacts. Both economizing water usages and minimizing GHG-emissions are part of the long term value picture, regardless if one administration or another changes the incentive regime. Don't let the vendor of solar panels, or CHP, or anything else be your only source of information, for at least some of them will sell you and oversized system. Don't put the incentives first. Good financing (including incentives) can make a good project better, but it can never make a bad project good. 

EPA Energy Star Home Energy Yardstick: a dangerous toy

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

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

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

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

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

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

Widgets over systems

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

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

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

Your Energy Star credit card

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

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

Your energy company to the rescue

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

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

Where's the plan?

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

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

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

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

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

The emperor's new clothes, energy efficiency?

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

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

Whole house, holistic energy planning

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

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

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

Conclusion: SDRE should come first

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

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

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

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

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

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

GHG reductions goals can only lead to more SDRE

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

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

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

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

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

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

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

From components to whole building projects

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

Green Finance reform

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

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

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

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

Education

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

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

Conclusion

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

NYC Energy Efficiency Paralysis - Open Letter to Mayor de Blasio

Energy Efficiency (aka EE) is the most confusing issue in the entire green dialog. It is about time that the FTC took action against anyone claiming that energy efficiency is green all by itself. It depends. If you make a fossil-fuel-based system more efficient, arguably you are reducing GHG-emissions somewhat, but that is seriously deceptive: you are simply extending the competitiveness of fossil-fuels, which is the opposite of what we want to achieve, if reducing GHG-emissions is the objective. If reducing GHG-emissions is what we want, that should be the focus, and Site Derived Renewable Energy (SDRE) is the only real answer.

Most programs nationwide are still stuck in the 1970's energy crisis. At that time, it was thought the issue was simply energy economics, which could be addressed by cleverly realizing that a dollar spent on reducing demand had more of an effect than a dollar spent on increasing supply. The environmental dimension, Green House Gas-emissions was not really on the radar yet. Also, there were not as many building-mounted renewable technologies available as there are today. But efficiency of fossil fuel systems has overstayed its welcome, and is not a major concern for a "green" future. Local Laws 84/87/88 need an overhaul for shifting the focus to SDRE, based on proper capital budgeting for energy infrastructure, not incremental spending on marginal efficiency of fossil fuel-based systems, which leads to capital destruction, not building appreciation--as explained in many ways on this blog.

PlaNYC was a Breakthrough of Sorts

PlaNYC was a breakthrough in beginning to take these issues seriously, but it was heavily compromised by the old efficiency paradigm, and ended up putting marginal energy savings front and center. At some point particulates emissions from #6 and #4 oil became another bad proxy for GHG-reductions. This was merely another diversion from the real issue, and the NYC Clean Heat program was the result, causing a rapid shift to natural gas, resulting in an ominous city-wide dependence on a single fuel. Moreover, by the time of this writing it is accepted wisdom that natural gas is about as polluting as coal, when you add in the losses of methane in production and transportation.

Renewable Energy in NYC under Mayor de Blasio?

We can only hope so. The time has come. I come from the school of hard knocks, having learned as a home owner that I unthinkingly spent myself silly on energy efficiency for two decades, without accomplishing anything. At long last, in recent years I finally began to think about the problem more seriously, and since then the issues have become clear to me. NYC has another chance with another administration. Will we move to the new paradigm? I decided that at the very least I should throw in a suggestion or two in the form of an Open Letter to Mayor Bill de Blasio.

Alternatives to PLaNYC: Pushing Renewable Energy

The open letter to Mayor de Blasio focuses primarily on the NYC Clean Heat program, and the very deleterious spate of natural gas conversions it has brought about. It touches upon the mistaken economics that have driven other elements of PlaNYC, such as Local Law 84 (actually, both LL84 and LL87). These regulations simply push efficiency, and thereby assure the opposite of what they would accomplish: they serve to extend the rule of fossil-fuels with marginal energy savings, and have building owners fritter away capital on incremental improvements, instead of investing it in SDRE.

Energy efficiency is mostly about guilt-free shopping, which is why manufacturers love the Energy Star label, but it does nothing to solve the GHG-emissions problem. Instead, it makes it more intractable by making fossil fuels economical longer. Below I am providing a series of explanatory notes to the Open Letter, some additional comments, and some references that may be helpful.

Notes and References for Open Letter

1. NYC Clean Heat is regressive: By now even the Sierra club is coming back from its advocacy for natural gas over coal (remember Bloomberg donated $50mln for that campaign in 2011?). The evidence is overwhelming that switching to natural gas is regressive for climate change. So converting buildings from #6 and #4 oil to natural gas was a subsidy to the gas industry, and capital destruction for the owners of buildings. SDRE retrofits could have given building values a serious boost, instead of just some small time energy savings at best.
2. The DaBX PlaNYC2020 report was an alternative plan to maximize Site Derived Renewable Energy, and make real reductions in GHG-emissions. We focused on NYC's old line C- and D-class apartment buildings, all in all some 15,000 buildings, a large percentage of which might be able to do such retrofits. We pointed out that these conversions should be done over 5-10 years to maximize the value of existing plant. We emphasized proper capital budgeting techniques to make the right long-term economic decisions.
3. The Urban Green Council later made a more general case with their 90 by 50 report describing generalized solutions across all major building types in the city. The report reinforced the important point that the optimal way of implementing retrofits is over time, by leveraging the economic life-cycle of building energy infrastructure components. Forcing everything to be done at once makes projects uneconomical. The report emphasizes generating renewable energy on site as well, but fails to understand the deleterious economics that result from the focus on marginal energy savings.
4. Geothermal energy is strategically important. It is in fact the single most powerful SDRE option for energy retrofits in NYC. New York's bedrock is an ideal substrate, and with 400% efficiency, nothing beats it: 1 joule of energy in (electrical) yields 4 joule output (heat). At a minimum, buildings can do a Domestic Hot Water solution, but the design needs to be optimized for harvesting of energy, either from time of use metering, or from wind turbines or solar PV. Whenever feasible, it should be part of energy retrofits because of the energy storage capability. In exceptional cases (if there are sufficient grounds), it may be able to provide the total BTU load for buildings. Remember insulation helps too!
5. Solar thermal is a hands down winner at 98% efficiency, and no PV should ever be considered (17% efficiency) if you can do solar thermal at all. The point of generating electricity is that it can be easily transported, but when generating renewable energy on site, you don't have a transportation problem, and retrofitting is becoming easier all the time, although on balance a thermal retrofit is harder than PV. There are many ways conversions can be done towards integrated HVAC even in older buildings, given today's hydronic air handlers, etc. With the forecasts of 3x more 90 degree days in summer by 2050, the time is now to start planning that transition, for buildings that don't offer centralized HVAC will be marked for demolition sooner or later. The old model based on window air conditioners is past its prime.
6. Hydronic heat is more energy efficient. Yet with the NYC Clean Heat program, in most cases, buildings have just switched from oil to gas, and continue to heat with steam. What is needed is a thorough understanding of the economics of conversion to hydronic systems, which in turn ties in with the potential for solar thermal and geothermal. Here is a report from NYSERDA, documenting up to 40% energy savings by switching from steam to hydronic systems.
7. Building mounted wind turbines are coming of age and typically offer more bang for the buck than solar PV, if the building has the right location to use wind energy. Then, there are hybrid solar PV/Thermal (PVT) systems which leverage the best of both solar technologies. In other words, SDRE, Site Derived Renewable Energy, is becoming increasingly realistic for retrofits, especially when considering that in a building you can harvest thermal energy in a variety of ways, as pre-heated hot water from geothermal or as high temperature process heat from solar thermal. All such designs solve the biggest problem of renewables, energy storage. Within a building, bridging the daily cycles does not need to be a problem.
8. Along the fourth dimension: timing is everything. One of the ways NYC Clean Heat is very regressive, is because it once more ignores the factor of time, and aims for a one time conversion for a short-term goal, which moreover now proves elusive, once we realized that the environmental benefit of natural gas is nil. The tie-in of this program with the NYSERDA MPP reinforces that short-term orientation. Long-term building economics dictate that you should generally not replace things before their time. What should be done is long-term planning for an SDRE retrofit, so that at every step of the way, you can pre-engineer the next steps. Both our DaBx PlaNYC2020 and the UGC 90 by 50 report advocate this longitudinal approach, but you need to make the plan first, otherwise you will be designing yourself into a corner.
9. Exemptions from NYC Clean Heat. Once it is understood that far greater advances in the reduction of GHG-emissions are possible with onsite renewable energy, the city should encourage exemptions on that basis, and give buildings 10 or 20 years to comply, provided they start out with a project that yields at least 30-50% reductions in GHG-emissions. Anything above 30% GHG-reductions can generally not be done with energy efficiency alone. The beauty is, that if it's planned right, SDRE will yield superior building economics, and thus increase building values, so that building preservation is ensured with SDRE conversions.
10. Building resiliency is a central point. In the new flood zones, building resilience is mandatory, and in a much more profound way than discussed here. Resilience is a value that ensures buildings can stay at least partially functional in an outage. The switch to natural gas has undermined building resilience in a disastrous way, and it should be reversed as soon as possible.
11. The disaster of becoming overly dependent on natural gas was amply demonstrated in the winter of 2014. Not only were heating bills going up, but more and more electricity is generated with natural gas also, and while january in the past was normally the low season for electrical rates, in 2014 rates were at an all-time high. For my own apartment the ConEdison (spot/variable) rates were ca 7 cents/kWh in 2012, 13 cents in 2013, and 22 cents in 2014.
12. NYC did not have any pipeline ruptures in 2014, as happened in the Midwest. But the city has a very constrained gas distribution system, depending on a few major pipelines, and there are no backup storage facilities (off-shore LNG anyone?). New York production of natural gas is also coming to a stand-still because of environmental concerns.
13. PACE financing is the obvious means that is in place already, and NYC will need it. It is politically a worthwhile project to support as long as it is tied to projects that accomplish at least 30-50% GHG-reductions initially. Once owners have the taste, and make proper long-term capital plans for energy, the potential for building appreciation is enormous. For at every level, if you can generate your own energy on site, that investment in SDRE is a permanent energy price hedge. 50% is really the optimal point to strive for in the initial project, since then the building is "over the hump" with dependence on fossil fuels.

Converting PlaNYC from communism to capitalism

PlaNYC as is, as well as other similar plans everywhere, operate in the central-planning style of the infamous 20 year plans of the former Soviet Union, which were designed to fail, as I've argued here. The mistake is to take the macro view of "energy efficiency" and then ram it down to the micro level with laws and incentives, instead of to engage the economic self-interest of property owners. Property owners should be in the business of maximizing property values, and government- the public interest- should incentivize reductions in GHG-emissions. Energy efficiency is not a proxy for GHG-reductions. Energy efficiency of fossil fuel systems makes GHG-emissions more intractable, so if we subsidize it, we indirectly subsidize the fossil fuel industry.

The energy benchmarking and audits of LL84/87 are a positive. The requirements to tinker with marginal efficiency improvements without totally rethinking the system is regressive, and bad policy. The market might take care of it - or at least need a lot less help than we're spending now on making building owners do things they don't want to do. Net zero construction has been healthier than any other area of construction for many decades, net zero or near zero buildings keep their values better than anything. Once we get building owners to perform serious renewable retrofits, the economics will force others to comply, or die. The simple fact is that with today's technology, 80-90% reductions are possible in many existing buildings, if the buildings follow a deliberate renewable retrofit strategy--the 90 by 50 report from Urban Green Council demonstrates the point. The first project should be in the 30-50% (GHG-reductions) range, and that is more than any energy efficiency project can do. Competitively, the pressure will be on.

Conclusion: Renewable Energy over "Energy Efficiency"

Once more, energy efficiency tends to mean making fossil fuel systems more efficient, and that is not a worthwhile goal for public support. PACE finance is an option that will enable the massive capital investments needed, to facilitate moving energy from liabilities to assets by means of SDRE. The focus needs to shift from energy efficiency of fossil fuel systems to site derived renewable energy and the city can exceed the parameters of PlaNYC completely if it does so.

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.

Energy Efficiency, Handmaiden of the Koch Brothers

We are still in an alternate reality, as in: "down the rabbit hole" in Alice in Wonderland, where planning the green future is concerned. Basically, we are stuck repeating the mistakes from 40 years ago, based on assumptions that might have been more valid than now. Be that as it may, they are no longer valid today. A new plan is in order.

When the grid was still THE GRID and Energy Efficiency the solution

Back in the day of the first serious energy price shocks, economists pretty quickly surveyed the energy landscape at the macro level, and figured out that the marginal dollar is more effectively spent on reducing demand than increasing supply. From that time forward the energy industry (oil companies plus the utility sector), adopted energy efficiency as an objective and participated in attempts to achieve those demand reductions, in order to keep its products economically viable.

After environmental damage (Green House Gas (GHG-) emissions) became more known as a cost of carbon energy, the energy industry hi-jacked the renewable future, co-opting green energy with a substitution of energy efficiency for renewable energy. Thereby "green" was now good for the shareholders of the energy companies, for it extended the franchise, and the do-gooders in the environmental movement fell for the snow job, and became the best allies of the carbon cowboys under the auspices of energy conservation, energy efficiency, or whatever other moniker will serve, anything that made people feel like they were sacrificing for the good cause...

All of this had its roots in a time when we thought that economic use of energy was the problem, and before it was widely known that GHG-emissions were the problem, and renewable energy the answer, but we have never adjusted our policies. Most importantly, what has also changed in the last 40+ years is the rapid development of renewable energy solutions that can be installed in properties, on the demand side of the grid.

The Energy Star Program takes the cake

The Energy Star program is the epitome of the problem of dysfunctional energy policy, because it focuses on the component level, not on the systems level. This may be valid when it comes to selecting a new fridge or microwave, but anything that is even potentially part of the permanent energy infrastructure of a property needs to be looked at on a systems level. Unfortunately, only too often these days, there are tax-credits for specific items of Energy Star rated equipment, and all-too often these get specified by bookkeepers and accountants even when the engineers know they make no sense.

The Energy Efficiency Trap

Energy Efficiency is actually an economic trap, and it is also an environmental trap, as is very convincingly argued by Prof. Steve Hallett in the book The Efficiency Trap. Economically and financially, energy efficiency is a trap because of the phenomenon of diminishing returns, which creates the perfect trap with which to lure suckers into uneconomic and eventually self-destructive behavior. Here is how it works:

1. In year one we finally grab some subsidized program that will offer us energy efficiency. So we did a certain amount of weather-stripping and insulation, a set-back thermostat perhaps, and other low dollar, high impact fixes. It reduces our bills somewhat.
2. In year two or three the bills went back up, because of price increases, so our "investment" in weather-stripping has been wiped out,
3. However we now look at what inefficient equipment we have and with help from the Energy Star program we figure out how we can further reduce our energy use. In reality we get that new fridge we always wanted, and some other gadgets, but we save energy, so we can shop without guilt. Nobody is calculating what the return on investment is.
4. Another year later, it's time to get serious, we have cumulatively spent a lot of money on energy efficiency, with little to show for it. But we know our water heater is coming to the end of its life, and the boiler should be replaced in a few years. So let's do the water heater this year. In comes a happy salesman with a tankless hot water heater. Energy Star rated, good for a 30% tax credit, and with a ten-year guarantee, and 5 year financing so we are spending less than the energy we now buy to heat water. Miracle of all miracles: a self-liquidating proposition. The salesman loves saying that, and we like it too: "Sign here, press hard, three copies!"
5. Two years hence we finally have to replace that boiler, so we shop for new Energy Star rated boilers (what else!). Our old boiler was 60% efficient, and the new one is going to be 95% efficient. More tax incentives, and self-liquidating financing propositions. Finally we're spending less on energy, but we're still paying off this equipment. By this time we may have a 25-35% reduction in energy consumption compared to the year we started working on this issue. Our oil or gas bills are going down, but our electrical bill is still stubbornly high.
6. The next year there seems little left to do. Replacing the windows? A twenty-five year payback convinces us otherwise. But, wait a minute, here comes another sales person, now with a solar PPA, for less than our average monthly electric bill, we can now really go green and help the environment, not to mention impress the neighbors. And we're saving 10% compared to paying the electric bill, and we already know the rates will go up anyway...

By the time you add all this up, we have spent a fortune on energy savings, and our energy savings result in an energy bill that is only slightly less than when we started taking into account the various payments. Our utility company and our oil company love us. They even send us certificates to congratulate us on how "green" we are. But the problem is, every next investment was bigger than the last one, culminating in the solar panel that was an $35,000 investment, and 10% reduction of the electric bill was only a 4% reduction of the overall energy bills, and we're paying for it over 20 years, but the actual payback is very slow, and in the meantime, the remaining energy portion of our bills keeps going up.

Why Energy Efficiency is a trap

In the six steps to energy efficiency above, there were several thresholds that were crossed. Instead of upgrading the boiler, we could have chosen a solar thermal solution, except it seemed expensive, and we had just eliminated the water tank two years earlier, not realizing that it could provide "free" energy storage, so what were we to do? Write off our brand new tankless hot water heater and scrap it? Of course not! So we upgraded the boiler. In short, we walked a path of successively larger investments, with less and less energy savings, and we still have an energy bill that is well over 50% of what we started with.

If we had done a systematic analysis at the outset, taking into account when various equipment would run out, we might have ended up with a new energy plan in which we perhaps also did some insulation first, but saved up some money to install either geothermal or solar thermal for HVAC and Domestic Hot Water (DHW). And we got some tax credits on those as well, but we ended up reducing our energy bills by 70-90%. Moreover, we eliminated most major sources of indoor air pollution (boiler, DHW), leaving only the stove. We could now convert to electric cooking, and replace the windows with new triple glazing, and get some heat-exchange ventilation. And we could end up with our old house being near net zero, certainly if we could combine geothermal with solar PV. Site Derived Renewable Energy (SDRE) permanently replaces subscription energy from the grid. It is also permanent part of the plant and equipment of our property, and raises the value.

Ten years later Site Derived Renewable Energy wins

In these two alternate realities for our lives, the energy-saving alternative had us walking into the efficiency trap. We reduced our energy but at a staggering cost, and we still have a significant energy bill left, and it keeps going up. In the second alternative, we bit the bullet and invested significant money in the early years, but it looked better with every passing year, for the payments did not go up, unlike the energy bills of the neighbors. This is the effect of Site Derived Renewable Energy (SDRE). In short, the value of the property goes up, and we are helping the environment by eliminating 70, 80 or 90% of direct carbon emissions from the house. Not only that, but a new development of net zero homes was going up nearby, and we were approaching that level for our own home, so the value of our property should hold up.

Conclusion: SDRE wins

SDRE means permanently replacing the monthly energy bills with our very own generating capacity, which we only buy once. It could be solar thermal, geothermal, wind, solar PV, various passive energy solutions, or a combination etc. It adds to the value of the property. In fact, our property's value now goes up with energy prices, and we won't have to worry about the carbon tax when it comes. Site Derived Renewable Energy should be prioritized over energy efficiency, and ratings of components should not distract us from the total design concept.

The Voodoo Economics of Energy Efficiency

Recent reports continue to draw attention to the notion that energy efficiency predicts lower mortgage default rates. Indeed, it seems obvious that energy-efficient homes are worth more, and that mortgage default risk on such properties should be lower. This is the same kind of analysis that was previously used to promote PACE bonds. It may be superficially right, in the sense that the relationship is observable and provable, but it misses the point, simply because a more categorical understanding is possible. Or, while these relationships may exist and seem statistically significant, correlation does not imply causation. There is no consistent approach to underwriting risk for energy efficiency, nor is there an analytically sound approach to explaining why or to what extent the risk of defaulting on home loans is reduced under energy efficiency. The following attempts to fill that gap by means of a simple example.

Energy Efficiency is Secondary

First, energy efficiency is not a primary objective, but a secondary one. The first order of business is a make-or-buy decision about on site generation with renewables (Site Derived Renewable Energy) versus a carbon energy subscription. The easiest way to see this, is to realize that you cannot save yourself rich, something everybody knows and understands. Let's look at four people, property owners all, and their different approaches, Mr. Tinkerer, Ms. Efficiency, and Mr. Analyst, and Ms. Intuition.

Mr. Tinkerer - Energy Efficiency Flying by the Seat of your Pants

• Mr. Tinkerer begins by "saving" energy without thinking, and thereby accepts the status quo. In his single family home he has an $300 electrical bill and an $700 oil bill, for $1,000/month combined.
• He then buys some gadgetry that reduces energy consumption and some insulation, and his bills goes down to $900.
• A year or two later, after some energy price increases, and more wear and tear, he is back to paying $1,000 a month.
• He keeps tinkering and spending money on Energy Star appliances and other energy-efficient products, but never realizes why he's not achieving serious energy efficiency.

This is a case of casually pursuing energy efficiency, and it is probably the most common. Mr. Tinkerer operates from the unexamined belief that he can save himself rich, but all he does is overpay for "energy saving" devices, without ever realizing that energy savings are not additive. Most of us dabble in energy efficiency in similar ways, it's a way to shop without guilt. It probably is a wash in the beginning, we spend as much as we save, but in the long-run we spend way more than we "save." Sometimes it's a lot more, for the savings do not add up, EVER.

Ms. Efficiency - Energy Efficiency by the Book

• Ms. Efficiency really goes hog-wild, and does everything she can to reduce energy consumption, year after year. The first year she spends $3,000 and creates a 20% reduction, i.e. she enjoys a 15 month payback on her investment.
• The second year (she still have 3 months to go to earn back that first investment), she spends $6,000 for a further 10% reduction. Simplistically, 10% of the remaining $800/month energy bill is $80, and therefore she now enjoys a 75 month payback, or 6.25 years.
• The third year she can't find anything else to do, she wants to do something major, and now she talks to SolarCity (or any other similar provider of solar pv on a PPA- or lease-basis), and they can provide her with a solar panel (nothing down!!!) and reduce her electrical bill by 10% (she's already very efficient), for a further 3% of her overall energy bills. It's a 20 year Solar PPA. So now her monthly energy bills are down to $698.40 in constant dollars, but there were a few price increases, so she's at $750/month for the year. However, now her roof is covered with a beautiful shiny solar panel! She sends a Christmas card to her mother, to show off the solar panel, and mom is duly impressed with how green her daughter has become.
• However, once she analyzes the figures correctly, that solar panel is a 20 year investment of $40,000 for a 3% reduction in her energy bills (10% on electricity alone), which means a payback of 154 years.
• She's still paying $750/month in energy bills (including the $200/month solar lease), and the prospects remain that prices will go up for the remaining $550 "energy" portion of her monthly payments. What has she won? To a financier it seemed things have improved, for $750 now is less than $1000 a few years ago, but that PPA commits $40,000 of her borrowing capacity, and the panel locks out most of her roof, for any alternative uses that might prove to offer better results.
• The residual energy portion of her monthly obligations continues to be above 50% of her starting figure.

In short, a categorical make or buy decision has to be made first before anyone starts on efficiency: do we continue to buy energy, or can we economically make our own. On site renewable energy generation is the alternative to buying energy in perpetuity. Energy efficiency only comes into consideration AFTER we make that make or buy decision, or else we falsify that decision, which is now commonly the case.

Energy Efficiency and Diminishing Returns

The example above shows the effects of diminishing returns, the successive investments show less and less savings, because the base is growing smaller. Ms Efficiency started out investing $3,000 with a return of $200/mo then $6,000 with a return of $80/mo, and finally $40,000 with a return of $21.60/mo (clearly she is paying more for every successive improvement, while here additional savings decrease). This is a losing battle, and it is the battle home owners are losing all around the country, as long as they believe in the "savings" paradigm.

Short-term, yes cash flows are improving, but a few energy price hikes can wipe that out, and the result is that eventually the improvements prove minimal or non-existent within a few years.

PACE Bonds and Mortgage Default Risk

The rationale for the creation of PACE bonds was to provide building owners with a means of financing major capital investments up front to do material retrofits in the energy infrastructure of properties. Unfortunately, the PACE bond camp has been hi-jacked by the energy savers also, and thus they have become yet another customer retention program for the energy companies, and the vendors of energy saving widgets, which was not the original idea. PACE bonds were designed to overcome the capital intensity of the switch to renewable energy, not to squander money on energy efficiency enhancements. Investment in renewable energy moves energy from liabilities to assets, and therefore would structurally reduce underwriting risk, if the economics are solid.

Enter Mr. Analyst - Investing in Site Derived Renewable Energy first

Here is how it should work: Mr. Analyst, with the same $1,000/month energy bill, invests significant money (maybe $140,000), and gets 20-year PACE financing that costs him $900/month, but he wipes out 85% of his energy bills. He gets a geothermal heat pump that provides his HVAC, and a solar panel that offsets most of the electrical load. The first year he gets a 30% tax credit on some of that investment, etc., which helps, but he ends up in a similar situation to his neighbor Ms. Efficiency. She went the energy savings route for the first 3-5 years, but then gradually Ms. Efficiency observes her bills nudging above $1,000 again. Mr. Analyst stays steady at $900/mo in payments, and his residual energy bill of $150 grows a little bit, but not a lot. And Mr. Analyst looks better with every passing year. Let's assume that equipment lasts 30 years. By that time the energy profiles of the two homes will be vastly different.

Ms. Intuition - Thinking Long-Term

Ms. Intuition in the meantime may be even smarter, she gets the same geothermal heat pump, and puts it on a time of use meter, running it mostly at night. She reads the papers, and she sees that solar panels today are 15-20% efficient, but there's some new invention every few months that promises a great breakthrough. She waits a few years, until solar panels have gone from 15-20% efficiency to 35% efficiency, and she now installs a solar panel that completely offsets her electrical use, and she ends up with zero energy bills. In short, she "ate" the electricity cost for a few years, but she gained a technology advantage compared to Mr. Analyst. Geothermal heat pumps are already 400% efficient -- returning 4 joules for every 1 joule you supply -- and are not likely to get any better. With solar PV there is another patent announced every week to increase the conversion efficiency, so it was a reasonable guess to expect that the efficiency of that technology would increase in coming years, and that waiting could be prudent. Notice also that the solar panel here enhances the investment in the geothermal heat pump and improves the value of that energy price hedge even further.

These are just examples. The numbers are rough, to show orders of magnitude, but the principles are clear. They show that the passive stance of "energy efficiency" and "energy savings" is often bested by a focus on generating your own energy wherever it is economical.

• We can't save ourselves rich, and energy efficiency might reduce underwriting risk somewhat, but there are better alternatives, such as investing in Site Derived Renewable Energy (SDRE) instead of energy efficiency.
• Energy efficiency is an operational expense, not an investment, it is short term in nature and mostly not part of permanent plant, but subject to wear and tear.
• Energy generation with renewable sources is an investment that adds to property values, by moving energy from liabilities to assets.
• Logically, in the short-term "energy efficiency" might be a self-liquidating proposition, which by definition would reduce the underwriting risk and the chance of mortgage default by the amount cash outflows are reduced, however these effects don't last, for easily provable reasons.
• Site Derived Renewable Energy (SDRE) is a clear and lasting energy price hedge, certainly if more than 50% of the energy requirement can be economically generated on site. In this case the performance of the property improves with every energy price hike, and thus there is a long-term reduction in underwriting risk, and we can expect a commensurate, but lasting reduction in mortgage defaults.
• SDRE also offers protection against a carbon tax, if it ever were to come. Again, energy efficiency cannot do that, even if it may temporarily reduce mortgage default risk. 

Current research into the issues of mortgage default rates fail to distinguish these structurally and financially very different alternative scenarios, while it is analytically clear that the one has a short-term effect, and the other adds lasting value to a property.

Conclusion - Investment in SDRE wins out over Energy Efficiency

Energy efficiency can be shown to produce improved cash flows in the short-run, and therefore should reduce underwriting risk and mortgage defaults. However, for good analytical reasons the longer term value of energy efficiency alone is uncertain, and a better option is renewable energy generated on site (SDRE), that is justified not only by the marginal savings of the equipment, but also by the lasting improvement of property values.