Energy Efficiency: The Cart Before the Horse

Energy Efficiency is almost universally being mistaken for a primary objective, but it is not. It is purely a secondary issue, a secondary objective. You first have to know what it is you are making more efficient, so the first question is: Do I make my energy or buy from the grid? Anyone who has operated complex systems knows that if you optimize for a secondary objective function first, you can get really disastrous financial outcomes. Yet, this is what we are doing as a society by focusing on energy efficiency first. We are not asking the first question first: Make or  buy? - do I want to make my energy, or do I want to buy from the grid? Energy efficiency does not beget sustainability.

If you started with a fossil fuel system, and you make it more efficient, you will simply get a more efficient fossil fuel system, and you will continue sinking in the endless energy bills that will remind you regularly of the joys of fossil fuels. Sooner or later the energy price hikes will wipe out the so-called "energy efficiency" which you paid a lot of money for. Once you have started down the path of energy efficiency, you have really invested yourself into a corner, and you'll be looking for a sequel, but diminishing returns will be facing you every way you turn. Energy efficiency does not beget Business Sustainability.

If you are making an investment today in fossil fuels, or even biodiesel, you are investing more money in a dead-end technology, for you are committing to paying energy bills forever. Moreover, with current developments, if you are investing in e.g. 15 year equipment, during its lifetime you are sure to have to deal with carbon taxation as well. Besides which, for both electricity and gas, the cost of the delivery and transportation is liable to rise faster than inflation, if you follow the track record of price hikes by your local utility. Make it as energy-efficient as you like, it does not add up to sustainability, even Energy Star is fool's gold.

Energy efficiency: how the trap is sprung

Here is how the energy efficiency trap works. Day one your energy bills were 100%, and we found some investments which enabled us for reasonable money to reduce our consumption by 28%, and therefore our base is now reduced to 72% of what it was. The projects we evaluated looked as follows:

1. For $25K we gained 20%, and that was reasonable, if our bills were $100,000/year to begin with, for this investment obviously had a one year payback.
2. Unfortunately, we then ran out of easy solutions, so the next phase was an $50,000 investment to get us the next 10%, but it works out to only 8% in reality, because our base has now come down. In short, this next project phase really has a 6.25 year payback ($8,000 in annual savings, vs. $50,000). Fortunately there was some incentive in the form of low-cost financing from our friendly gas company, that made it all a little better so we did it anyway.
3. However by year 5 the energy price hikes have wiped out the efficiency gains, and monetarily we're back in the same boat, we're consuming less, but the bills are back to the old level, so we start looking for another project.
4. Lo and behold we are lucky, and we find another $75,000 project, which saves us another 8%. 8% of $100,000 is $8,000, so our payback on this one is just shy of 10 years. We decide to forge ahead, for evidently energy prices will keep rising.
5. The next best project after that would cost us $100,000 and give another 8% improvement. Examples of this type of project are the notorious window replacements and the like, with 20 year paybacks.
6. The diminishing returns become more visible if you work on the basis of consumption, so you start with 100, and a 20% reduction leaves you 80%, the next 10% reduction is 8% off the original, and you're down to 72%. the next 8% reduction is 5.76% off the original, so you're down to 66.24% from the original, and the next 8% works out to 5.3%, leaving you at 60.94% of the original. So you are dealing with ever larger "investments" for ever decreasing returns.

In short, every next energy efficiency project gets worse in terms of financial results, and I continue to do just enough to keep the pain tolerable, and my friendly drug dealer... (oh sorry, utility company) is always there with financial incentives to make it just worth my while, and obviously retain my custom for another number of years. Customer retention is good for utilities, but not for property owners. This is not sustainability, but a dead-end. The point is this: in an older building you can always find one or two energy efficiency projects that will get you a reasonable financial result, or so you think. If you do not think ahead to the mounting cost of the follow-on steps, you will go along with it.

The renewable alternative, sustainability in practice

The renewable energy alternative starts with a MUCH larger initial investment, perhaps $150,000 or $200,000, and a long "payback," however, if I analyze it over a 30 year period, I begin to see that my remaining energy bills are immediately lower, let's say 65% versus of 100%, so I picked up 35% compared to 28% in the energy efficiency model.

However, if I do my 30 year plan properly, I will know in advance what my next options will be, and it might well be that there is a follow-on strategy, which because of renewable energy synergies that could pay off in spades. So in year 5, when energy prices wiped out the efficiency savings of the first model, with 39% cumulative price hikes, with our lower base of 65% of the original level, we are now at a $90K annual bill, compared to the efficiency alternative, which is back up to $100K already. But, now I can find an incremental $300K investment which wipes out my remaining energy bills to 20% of what they were, in short, I am picking up $72K in savings per year to pay for it. We are starting to have compounding returns, and again if we do a proper 30 year plan, we'll see that this next investment hugely adds to the NPV of our building. And I'm avoiding the risk of carbon taxation.

Renewable Adds Up

• Sustainability wins.
• Renewable energy does add up to sustainability, it's just a matter of finding the proverbial "low hanging fruit."
• By prioritizing energy efficiency, we face diminishing returns, and we never achieve sustainability.
• If we prioritize renewable energy and energy independence, every investment in efficiency (e.g. the building envelope etc.) pays of in reducing the capital expenditure for installed capacity. We enjoy compounding returns.
• Make a 30 year plan to establish the proper sequence of projects, for there will be engineering interdependencies.

ENERGY EFFICIENCY VERSUS RENEWABLE ENERGY: APPLES AND ORANGES

The identical building across the street which invested in energy efficiency is starting to experience exponentially longer "payback" periods due to diminishing returns, whereas our building with the renewable energy infrastructure is starting to realize synergies, and compounding of returns, all of which is going to come back in building value, for in year six the renewable building will have remaining energy bills of $18,000/year, whereas the efficiency building after its latest "upgrade" in year five, has bills of $92,000/year.

Again, if these buildings were identical, the "energy efficiency" building will now be worth at least $500,000 less than the renewable energy building. Now, the owner of the renewable building is starting to get excited, and he invests another $300,000 in Wind Energy, wiping out 75% of his common area bills, and supplying electricity at a profit to his tenants, which makes him net profitable on energy, and by year 8 of his renewable energy project, his building is now worth $1,000,000 more than the "efficiency" building. Again, compounding does work if you can integrate these various phases into a coherent plan.

Mutually exclusive alternatives

Because of engineering interdependencies, switching tracks once you have committed to the energy efficiency track, likely means you wasted at least 50% of your investment, in other words the hurdle that prevents you from switching tracks gets progressively bigger with every generation of upgrades to the renewable energy building, for the gap in operating results now grows explosively. This is again why you decide first if you want to make your own energy or buy from the grid. If your building is suitable, you should perhaps let the energy companies keep their financial incentives to themselves.

Conclusion:

Equipment vendors and energy companies will focus on energy efficiency and payback periods, which is good for their shareholders, but not a decision criteria for the value of your building. With renewable energy, greater energy efficiency of my building pays off by reducing installed generating capacity, and therefore reduced capital investment. Renewable energy produces compounding returns with successive projects over time.

NYSERDA MPP is a financial trap for property owners

Energy efficiency on a carbon spewing pig is like Green Paint

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

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

NYSERDA MPP serves utilities not building owners

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

Nyserda MPP negotiates owners into a corner

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

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

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

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

Time shows green energy superior to energy efficiency

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

Conclusion

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

Off the grid in four easy lessons #4

Off the grid is a direction not a destination, and the principal instruments to get there are financial analysis and economic modeling, not technology. So never mind the government has no energy policy, just a rag-tag group of programs and incentives that tend to confuse people more than help towards a solution. Never mind that utilities and oil companies do everything they can to seduce real estate owners to remain happy carbon customers till the cows come home with all kinds of energy efficiency solutions. It is up to the property owner to make sense of them, and the principal tool you have is the Capital Asset Pricing Model, aka CAPM and once you start studying it, and looking into the various technology options you may have regardless of what your starting point is, you will be amazed. Research CAPM, study Internet resources, including CAPM Free Questions.

Energy Efficiency and equipment payback - the trap to be avoided

To recap from earlier posts: energy companies (utilities, oil companies, etc.), and vendors of equipment will inevitably try to get the attention of real estate owners with investments in  energy efficiency, which are to the benefits of their shareholders, and NOT of the real estate owners. The nature of energy efficiency is that the first investment always looks very good, and typically offers outsize returns (on the basis of payback), and 99.99999% of owners do not stop to think that they are committing to an investment path that perpetuates their indentured servitude to carbon energy. The vendors capitalize on these insights by selling their "solutions" based on marginal analysis of energy savings, always showing a wonderful payback for their equipment, and waiving around Energy Star labels, tax incentives, or other subsidies. If they are successful, you've invested your money in remaining the customer of your energy company forever. This is voluntary vendor lock-in. Various tax incentives, but also NYSERDA, Energy Star, CPC, PACE, and most mortgage providers will steer you wrong because their programs are useful only if your own CAPM analysis says so. Don't run your financial future based on someone else's say so.

The morning after effect comes in when you want to do the next "investment," which is worse but you'll probably still do it. Some day you'll have to realize that diminishing returns mandate that you'll never ever find another investment as good as the first one. The cynic might say these are not investments at all, but operational savings. Even various form of PPAs offered by energy companies tend to suffer the same analytical defects and will benefit the shareholders of the energy companies more than the home owner. Caveat Emptor!

Off the Grid with CAPM

Getting Off the Grid starts with the one and only thing that every property owner should do first, last and in between: make a 30 year financial model of your property, and use it to model your own strategic energy plan, always comparing the base case as the investment in energy efficiency based on the existing infrastructure, with the alternative case using green energy. Again, energy efficiency will never get you off the grid, green energy will, if you figure out the right way of implementation. The first decision is a make or buy decision about energy: should you buy it on a subscription basis, or generate your own. Watch values of net zero properties for reference.

It is never ever what the salesmen will tell you, nor should you let yourself be confused by tax incentives, NYSERDA programs, PACE and/or other energy efficiency finance. They will all steer you wrong, to the detriment of the long-term value of your asset, your property. Study the energy economics of your property first, before you figure out what incentive programs are to your long-term advantage. You will repeatedly find that financing mandates, e.g. of Energy Star equipment, may benefit the energy industry more than it benefits you. Don't buy it unless it actually helps improve the long-term value of your property. Financial sanity starts with CAPM!

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OFF the Grid: The basic assumptions about the relevant cash flows

Here is a list of the major cash flows and assumptions you need to document:

1. For starting asset value use Zillow, or a similar service.
2. Identify ALL forms of energy you use - it may be two or three.
3. Make a 12 month model so you start to see seasonality, you will therefore have 360 cash flow periods.
4. Track both consumption and pricing.
5. Notice that in deregulated states it probably makes sense to split the cost of delivery and supply. In many cases, certainly in NYC, delivery is 65% of your utility cost per kWh or per Therm, and rising inexorably ABOVE the rate of inflation. For my gas it is 95%, because I use so little of it.
6. Identify specific inflation rates for all your energy component costs and rates.
7. Track reasonable assumptions for maintenance (i.e. annual costs, but also periodic replacements, such as a boiler or water heater that may last 10 or 15 years).
8. Make a base case (A) based on your existing energy mix, with incremental investments in energy efficiency. You will start to see how these investments will get wiped out by ongoing price hikes, let alone spikes such as have happened from time to time.
9. Make a case B based on renewable energy. Try to identify the rationale for a strategy to eliminate one fuel completely (oil or gas), or as near as you can get to it.

Experiment with such a model until you are comfortable. Until you are, you are not ready to begin shopping for energy solutions.

Off the Grid: Sane assumptions for getting there

As much as possible try to think of projects to coincide with maintenance things you'd have to do anyway. In other words, if in five years you would have to replace your boiler, that may be the timing for switching to geothermal, or solar thermal, or some other combination, and you may only need a very small boiler for backup. Or, if your roof needs to be replaced that may be a time to improve on insulation, and/or solar or wind installations. You do not want to install a set of solar collectors with a 20-30 year life expectancy on a roof that only has 5 years of life left in it.

Avoid tankless water heaters like the plague. Domestic Hot Water storage is a very efficient energy store, you may need it in your design later on.

CAPM: valuation issues

Study the energy independence profile of homes in your area. With net zero homes and buildings growing, energy costs will increasingly become important in valuation. If a few homes in an area are energy independent or close to net zero, that will start to diminish the values of all other properties.

Be prepared to learn a lot. Both good and bad. The renewable energy path is more capital-intensive, but it will increase your property value more. You will find opportunities with compound returns because of synergies. Keep studying what is going on in your market, and never ever listen to a sales rep coming with payback periods, and various incentives. He or she is stealing the value of your home.

Off the grid in four easy lessons #3

Getting off the grid is a direction, and it does not have to be an absolute destination, not everybody can have a net zero house, particularly on a retrofit basis, but the goal is to spring free of the trap of burning fossil fuel, and paying for energy ad infinitum on a subscription basis. That slavery is symbolized financially by the fact that if you start making your fossil fuel-based (subscription) energy household more efficient, you are in effect ensuring that the value of your property remains dependent on fossil fuel - you never get out of the hole. With every dollar you invest, you are making it harder to switch to renewable energy. Effectively, you are cementing your dependence on the fossil fuel system, and its predictably unpredictable price hikes, with every dollar you "invest," and the long-term value of your property remains hostage to external fuel supplies and pricing. Therefore, as long as there is a renewable energy alternative, that should have top priority. Off-Grid Real Estate is easier if you build it from scratch, but on a retrofit basis, the design objective becomes simply making a long-term green energy plan, based on a proper financial model of your property, and planning your investments in such a way that you gradually slip out of the noose of carbon energy and build up the long-term value of what is for most people their major asset in life, their house. Your journey to net zero has begun. The design goal here should be anything over 50% energy reduction, which cannot usually be done with energy efficiency.

The energy efficiency trap and the green energy answer

Prioritizing energy efficiency projects is a trap, because of diminishing returns. Salesmen for various energy efficiency technologies, or even for renewables, will try to sell you their equipment on the basis of a payback period, never mind if it makes sense for the value of your home. They come waving Energy Star labels and tax incentives or other programs in your face, but their interest is selling their wares, not increasing the value of your property. That part is your responsibility. The first "efficiency" investment may be $3,000 with a 3 year payback, and you think great, this reduces my energy bills by 15%, fantastic. Then the next best opportunity is $10K with a 6 year payback, based on another 15% reduction. By this time your bills are 85% of what they were, so now your overall reduction is another 13% off the original at best. And the next investment you can find is another $15K, which would reduce the remaining 72% of your bills by another 10% (or 7% off the original), and the payback now is 15 years, and you judge it not to be worthwhile. So if you're lucky you've reduced your energy bills by 28% until the next price hike, and then you can start all over again. You keep paying your oil bills or your utility bills stay in hock to carbon fuel. This is called diminishing returns, ever bigger investments for ever lower returns. Your goal is walking away from you, and your investment path amounts to capital destruction in terms of the value of your property. There is another dimension to the efficiency trap: The Efficiency Trap: Finding a Better Way to Achieve a Sustainable Energy Future. The perverse side effect is that if a resource becomes more efficient, people use more of it. So again, don't start making a fossil fuel system more efficient, but first pursue green energy alternatives to make your property energy independent. OFF THE GRID: HEAT PUMPS AND OTHER MULTIPLIERS In green energy,

Green Energy is Power

the basic technologies most people are familiar with are wind turbines, solar PV, and solar thermal, but another important technology is heat pumps, starting with geothermal. A good geothermal heat pump may have a Coefficient of Performance of 4.0 (COP), and it could handle HVAC and Domestic hot water pre-heat, and possibly a snow-melt system, or heating your pool water. If you can power it with wind energy or solar PV, you win big, for again it produces four times the heat output of what it uses. If you must use power from the grid, perhaps you can put it on time of use. More and more wind turbines are coming to market which are suitable for mounting on buildings. Other great adjuncts to help you towards net zero, are heat exchange ventilators. The more you can eliminate combustion from your house, the tighter you can make it, and heat exchange ventilation can retain the heat or cooling, and still provide fresh air. Try to eliminate gas or oil from the house entirely, that will allow you to tighten up your building envelope. Cook with electricity, not gas. The old standbys are insulation, windows, roofs, etc. Notice that in the renewable energy model, improvements to the building envelope reduce the installed generating capacity, and tend to reduce your up front capital requirement, while in the carbon energy model they pay for themselves over time from energy savings.

Towards net zero: Breaking dependence on fossil fuel

What matters in a retrofit is that you have a long-term plan, based on a 30 year model of your property, in which you can compare the various options. Net zero does not have to be an absolute goal, but avoid the investment trap of energy efficiency if you can help it at all. If you are methodical about the steps you follow, the payoff will be breaking the 50% barrier of energy reduction and eventually coming closer and closer to net zero, and you are adding to the value of your property as you go along. Most importantly, with a green energy investment plan, you will end up finding synergies and compounding returns, so that two components which might individually seem unattractive, might provide superior returns when put together, such as the heat pump with the wind turbine, etc.

Off the grid by plan, not by accident

When you set up your model, use the original condition as a starting point, and systematically compare an alternative A and B, in which A is the efficiency model, and B is the green energy/net zero model. Use 30 year cash flows, and include maintenance, replacements, fuel costs and so on. Alternative B is the renewable energy model. Try to see if you can eliminate one fuel from your house entirely (oil or gas). In a green energy model this will have a multiplier effect, because you are eliminating a major source of indoor air pollution. Notice that the renewable energy project will be more expensive up front, but the reduction in your energy bills will be far greater, and, you may have serious synergies between different aspects, a heat pump run on the grid may be expensive to run, but run on 70% wind or solar it may be a winner. Synergies like this will move you off the grid gradually and propel you towards net zero. There is a reason utilities and oil companies like you to invest in energy efficiency, and even offer cheap financing and other incentives: they retain you as a customer. Every step towards energy independence increases the value of your home. 

Of Hamster Cages, the Grand Canyon, and the Climbing of Mount Olympus

Energy Efficiency is a commendable thing, but I like to question its sometimes guileless application, which can product less than desirable results. As I point out repeatedly on this blog, energy efficiency, when applied in a fossil fuel framework, runs into the law of diminishing returns, and at some point it leads to capital destruction, because you spend yourself into a corner you cannot get out of, and in fact you are making the switch to renewables harder, not easier. Thus Energy Efficiency is not additive to Energy Independence. Everyone knows we can't save ourselves rich, but the same people blithely assume energy is the exception to the rule. It is not.

The following then is a thought experiment, for an imaginary old building of 100 apartments in an old city, like New York, with a steam heating plant burning oil, a coil in the boiler for hot water, etc. On day one, today its total fossil fuel consumption is 100, then some technology is implemented with a 10% efficiency improvement is implemented and it drops by 10 to 90. But the next improvement of 10% is now applied to the 90, and thus the improvement is only a further 9 points to 81, based on the original scale. The next improvement of 10% only moves the market 8.1 points to 72.9 on the original scale. And so on.

If we assume that we prioritized these investments based on their relative paybacks, selecting the first one first, etc. we will say that the paybacks are deteriorating for every next decision, and this function runs into a limit, because of diminishing returns. The end point of a fossil fuel based system, however efficient, is always a system burning fossil fuels. That limit might be an impressive improvement over past practice, but nevertheless the bills keep coming. Depending on what technologies are being implemented, there may also be an engineering interaction, because e.g. the function of certain controls might overlap, and you find that a 20% reduction, and a 10 % reduction result in about a 23% real reduction, or even less than expected based on the numerical analysis above. In short there are both arithemetic reasons and engineering reasons why 2+2=3 in this scenario, again we have diminishing returns for every subsequent investment, and we are painting ourselves into a corner.

The remaining fuel consumption (be it gas, oil, or electric), is subject to various price pressures, which in all likelihood will outrun inflation for the foreseeable future. In other words, let's say an overall 35% improvement in efficiency was achieved, this will inevitably eaten up by price creep for the irreducable remainder. For oil there are immediate price pressures, because of increased refining requirements in NYC. There might be some form of carbon taxation, and other pollution taxes. Gas is now the darling of fossil fuel, but even there, there are storm clouds on the horizon, and it has the same cost pressures on the delivery cost as does electricity. In the case of electricity, the cost of delivery is now 65% of the bill. Because of aging infrastructure, and the horrendous cost of upgrades, it is set to outrun inflation as far as the eye can see, and the other 35% of the bill is hostage to fossil fuel energy prices in general, as long as fossil fuels dominate. In short, every reasonable case would show a tendency for these prices to continuously outrun inflation. In short this scenario is the hamster cage of energy efficiency, if it is applied within a fossil fuel based framework.

Some of the improvements to the building envelope, to water consumption, are likely to be of equal value if we had developed the building with renewable energy, however in some respects technology selections and decisions might have been different in that case, for if it becomes a capital trade off against installed generating capacity, the evaluation for upgrades to the building envelope is far more straightforward than if it were against a forward string of "energy savings" which are discounted to the present. Depending on the energy systems in a design, different approaches to the building envelope might be selected than in the fossil fuel dominated case.

More importantly, the above defensive strategy ends up in capital destruction in the long run, exactly because of diminishing returns, and the fact that a fossil fuel based system somehow continues to burn fossil fuels, and be the victim of price increases. There is no way out of the trap of "efficient consumer" of energy, it merely cements the dependence upon subscription energy costs in all forms, as it stretches them as far as possible. This strategy does paint the investor into a corner, and the best you can expect is that your local utility sends you a certificate of honor for what an efficient customer you are. The point is, they get to keep you as a customer. But wait, it gets better.

The alternative to the above "energy efficiency" scenario is to choose a path towards energy independence. Energy efficiency plays a role here too, but it is more secondary, for the first order of business is selecting the generating technology or technologies. The generally accepted view is that renewable energy is not yet economical. Fortunately, there are some incentives, etc., and simply put, some buildings are more suited than others. So if you own the Empire State Building the focus is on energy efficiency, and renewable energy plays second fiddle. However, if you own an old line 5-8 story apartment building, like in the example we are discussing here, there might be a path towards a successful renewable strategy.

A renewable energy strategy takes a different mind set, and it takes more capital up front. Or, as an investment banker friend put it: You cannot cross the Grand Canyon in three easy steps -- I had to think about that image a while, but then I saw it: on the second step you fall to your death, so you must have a bridging strategy which takes the first three steps at once. The "Grand Canyon" of this situation is the shift - a paradigm shift - from consumption to production. It means starting to think about energy as a capital asset and therefore a profit center in building management, no longer as a business expense. The technologies are rapidly evolving to enable this type of thinking. Energy is becoming a technology business, and building-level generation is going to become the norm, be it that retrofitting old buildings, which were designed in the era of fossil fuels, is often a challenge, so the thing to do is to pick the right type of building to do these things. For most building portfolios, this will initially be a matter of pearl diving.

Also, along the lines of the things we said above about energy efficiency, if the building was recently overhauled based on the current common practice of emphasizing energy efficiency, then we've actually widened the Grand Canyon, because we've doubled down on our bet on the fossil fuels, which may not be the winning bet... There's no logic to this, other than, it seems to be what everybody does, and everybody assumes that renewable energy is not yet economical, and most folks are overlooking the possibility on that assumption, or if it is being attempted, renewable technologies are plugged in as a partial replacement within a design that is driven by the fossil fuel model, and most of the time that does not produce the desired results. However, by integrating technologies, in the right buildings hybrid solutions are possible which definitely allow a gradual development towards a renewable energy model, with energy as a profitable activity of the building.

The energy independence strategy will hinge on a comprehensive rethinking of energy use in a building, a very deliberate and extensive use of energy efficiency, as well as a long term plan which respects the interdependence of different generating technologies, so that and initial investment will lay the foundation for shifting into an energy production posture, and will be improved by subsequent enhancements. Conversely, if renewable energy is implemented without a long term energy plan, very likely the wrong sequence will be chosen, and the risk will be spending the same dollar two to three times over over the long run. In short, to get an initial bridgehead to the other side, it would behoove us to search out the narrowest point across, with more or less friendly features. By properly pre-planning for the interdependence of technologies in the context of a long term energy plan we will be making sure that we eventually do reach the top of Mount Olympus in the way of the classic Greek notion of making sure that our every step goes in that direction. The result will be a progressive accomplishment of energy independence. Independence from the grid, and 80-90% reduction in direct fossil fuel consumption is within reach in some cases in perfectly ordinary buildings, though the economic case is not yet easy, however once the foundational investment is made it gets easier, for different from the above "energy efficiency"scenario, the value of our investment now goes up with every price hike for fossil fuels, for here 2 + 2 =5, if you have got the engineering right. In five to ten years this approach should therefore yield improved property values by maybe 10 or 20% or more compared to the energy efficiency retrofit, who will be facing the same old problems in five to ten years, as energy pricing and "grid creep" catch up to them. The renewable energy choice will then be the only option, but the gulf is likely to be wider, because to some degree the same dollars will have to be spent twice.

To put it a different way, as is familiar to seasoned investors, all else being equal, investing for growth beats investing for efficiency and "savings," which is by definition a dead-ended strategy, something that becomes intuitively obvious by a reductio ad absurdum - anyone can see that 100% efficiency is impossible, just like you cannot save yourself rich. The strategy is clear enough and on a tactical level it boils down to finding the narrowest place to bridge the Grand Canyon, and to be like General George S. Patton who went back to square one, by selecting his route through Brittany and ultimately to Berlin based on Caesar's routes, where he could naturally ford rivers, so that the Germans could not stop him by demolishing bridges.

The Lessons of Lamborghini Applied To Energy in Buildings

Lamborghini underwent an interesting paradigm shift with their latest new model, the limited edition Gallardo LP 570-4 Superleggera  and the lessons of their design considerations are relevant to what is going on around energy usage in buildings. The "Eureka" came when they finally understood that investment in more horse power was running smack into the wall of diminishing returns as it was becoming exponentially more expensive as it became less and less effective, while reducing weight was so much more effective that at that level of performance carbon fiber became a totally affordable option by comparison in seeking to raise performance.

In buildings the reverse paradigm shift needs to happen. We have been overemphasizing energy efficiency, without looking into energy production sufficiently. Often because energy efficiency investments tend to be smaller, and more easily justified, and no one seems to realize that in the process we cheat ourselves out of the investment decision to produce energy in the first place and become at least somewhat energy independent. Simply put, since money tends to have some resource constraints (costs and availability), by nickel and diming ourselves into a stupor with more and more energy efficiency, we will ensure that we will never invest in energy production and energy independence because the more efficient we become at burning fossil fuel, the lower are the returns on investing in renewable production. So energy efficiency is the lullaby which will make us once again the perfect little victims for the next energy price spike. Still the energy efficient buildings which do not invest in renewable production will eventually be worth less than the equivalent buildings which do because of the rising value of eliminating recurrent subscription costs of energy.

Seen in this light, energy efficiency is not a worthwhile goal unless it is truly the only option, and the basic make or buy decision of renewable energy production versus the alternatives should be considered first, lest we cheat ourselves out of ever making it. The way current policy and incentives reward energy savings on a par with renewable energy causes a metastatic cancer in our energy posture as a country, in which we continue to tinker with becoming simply more efficient addicts to fossil fuel consumption without ever making the switch to energy independence through renewable energy production. The way out of this delusion is to ask which building is worth more, this energy efficient building, which shaved 25% off their energy bills or the equivalent building next door which is e.g. 50, 60 or 70%% energy independent. Now it all comes down to a real estate decision, not an energy saving decision, and if you think you are in the real estate business, that is likely to be your better investment posture. And again, decision made, you can improve on it with energy efficiency.

Or, to put it differently, energy independence produces a higher property values than energy efficiency, and the order in which we consider these options matters a lot. As soon as some of the market adopts an energy production posture building values of those that don't will be depressed. Every investment in energy production is a direct price hedge, while energy efficiency for fossil fuels only attenuates the price risks. Politically the upshot is that the national interest in energy security coincides with a maximal use of renewable energy at the building level, and current incentives produce wildly suboptimal results. For real estate owners it is hard work to make the right energy decisions in spite of incentive systems which are very seductive, and make the wrong investment decisions seem plausible.

Energy Efficiency is Not What It's Cracked Up To Be

A building is a system, and just like you can't save yourself rich, you can't achieve energy independence by endless investments in energy efficiency, for they are not additive, but instead, they run into the brick wall of diminishing returns on investment. Energy efficiency extends the franchise of the fuels involved, and needs to be seen in that context. They belong in the utility model.

To set up a methodology of justifying capital investment at the building level based on energy savings is counter productive to the extent that it locks us into the subscription models of fossil fuel use. The implicit and unexamined assumption of fossil fuel burning creates buyer lock in, and prolongs dependence on those fuels. This is not to say energy efficiency is not important. It is. However, energy efficiency is a secondary issue not a primary one.

We need to go back to square one, and that is the question what energy do we need? How much do we need as heat, and how much do we need as energy (electricity). After that we should look into however much energy can be generated at the building from renewable sources, solar, wind, and geothermal. Those decisions are make or buy decisions. Then comes the trade off decision of energy efficiency, namely how much can we lower installed capacity through energy efficiency. This will cause a much more constructive view of energy efficiency. It will also produce more of a systems look at the whole building.

Naturally, part of the consideration is also how can we successfully harvest peak load energy such as solar and wind energy, and in residential construction Domestic Hot Water (DHW) storage is our friend, and not the enemy, as long as we use well insulated storage tanks, to harvest our intra day needs of heat energy. Thus tankless hot water heaters are a no-no in almost all cases and should be stripped of their Energy Star ratings, because they lock us in to excessive use of peak cost energy, since they work on demand by definition, and the whole notion of the smart grid is learning to store energy and diminish on-demand usage. These devices represent a false economy which in the long run will lower the value of your building by more than any savings they could ever produce.