DaBx Renewable Energy Retrofit Portfolio Standard for Multi-family Buildings

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

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

Criteria – the building shall:

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

Notes for renewable energy conversion of multi-family buildings:

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

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

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

Conclusion

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

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

DaBx Renewable Energy Retrofit Portfolio Standard for Multifamily Buildings
by Rogier Fentener van Vlissingen is licensed under a
Creative Commons Attribution-NonCommercial 3.0 Unported License.
Based on a work at http://www.vliscony.com.
Permissions beyond the scope of this license may be available at http://www.dabxdemandsidesolutions.com.

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.