Renewable Energy Policy in the Soviet Republic of New York

Back in the 60's we used to laugh at the 20 year plans of the former Soviet Union, but now we are doing the same things in our renewable energy policy, or what goes for it. To stay close to home for me, plans like PlaNYC (Née 2030, but the target date has been dropped from the nomenclature recently in apparent anticipation of missing the deadline), and its outflows (local laws 84/85/86/87), including the NYC Clean Heat program, all are examples of planned failures, because they drive policy at the detail level from macro-economic views which ensure that average results become the norm and real progress is stymied, because by aiming for "average," below average, or worse, is what comes out.

The problem in this case also goes back to the federal level, the lack of a coherent energy policy, and the way energy incentives have been structured traditionally. In the end, all of this goes back to the beginning of the energy crisis of '73 and the macro economic view that it was cheaper on the margin to reduce energy demand than to increase supply (power plants). Cheaper to insulate your house than to build a new power plant, etc. Energy efficiency thus became sanctified and became a national pastime, regardless if it is good for you or not.

N.B. This is written with a view to New York State, but the same most likely applies with only minor variations to every state of the Union.

The Energy Efficiency Fiasco

Naturally, increasing efficiency of the systems we do have, which are by and large carbon-based energy systems, adds up to making the carbon economy more efficient. If at the same time we realize that we want to wean ourselves from carbon energy, and switch to green energy, then we do not want to just invest our money in making the old system more efficient. In short, if we pursue efficiency of the existing carbon-based system, we are talking ourselves out of the alternative, green energy. Hence the ConEdison GreenTeam should be renamed the BrownTeam. This is what has happened with energy policy in general and specifically with the various incentives, which tend to favor either energy companies manufacturers of certain equipment, if they are focused on simplistic concepts of energy efficiency.

On the whole, renewable energy has literally been marginalized, by treating it as an option to make our energy system more efficient, and comparing it to other efficiency investments. By framing the comparison in this fashion, renewable energy becomes a marginal phenomenon, and is analytically shuffled under the rug, as I have demonstrated in detail in this blog earlier in the case of the NYSERDA MPP program.

The thing we need to do is realize that we have two competing energy paradigms, carbon-based energy and green energy, and that they come with very different opportunities and challenges. Since we already know that carbon-based energy is going to lose, and should lose, our programs need to encourage green energy, and not carbon-based energy, as is most often the case today. Until then, the NYC Clean Heat program should be renamed the NYC Slightly Less Dirty Heat program. We need to stop talking about renewable energy, and start doing something about it--our current programs mostly are preventing it from happening.

Energy Efficiency and Ossified Incentives

The biggest problem with various incentive systems and programs is that they are targeted at too low a level of detail, and it ends up with engineers not being able to specify the right systems because the accountants in the crowd see a bigger tax deduction that year with some other technology, and the accountants don't understand long term economics of the property. This ends up with the blind leading the blind, and has been analyzed in depth in this blog. The alternative that would set green energy free is a portfolio standard for renewable energy retrofits, which I have proposed recently with my consulting company DaBX Demand Side Solutions, Inc.

Green Energy: Square Pegs into Round Holes

The show has been held up by the public focus on "grid parity" and other such irrelevancies, and nobody seems to have noticed the sustained growth of net-zero construction in the last twenty years or more. In short, on the margin, clearly a combination of renewable technologies and energy efficiency is found to be economical, we just have to get serious about doing it at scale, and again, here is where a streamlining of incentives is necessary, so that green energy is no longer marginalized as an "energy efficiency" factor, but given the lead role that it should have. Renewable energy retrofits for existing buildings is where it is at, as proposed by the Urban Green Council in its 90by50 report, and by my own consulting firm in our DaBx PlaNYC2020 report, published in 2011. By now numerous other reports are emerging addressing parts of the issue.

Renewable Energy Policy that Works

Arguably you can not discuss renewable energy policy without having some acquaintance with the pros and cons of the German approach. For one thing they have their priorities straight: first comes the make or buy decision: am I going to buy my energy (gas from Russia, oil from OPEC, etc.), or make my own? Energy Efficiency is only a secondary goal after that, but obviously greater efficiency will reduce the absolute amount of installed capacity needed.

The details do not matter, we are never going to emulate Germany here, but, the Portfolio Standard for Energy Retrofits is one potential component of policy making, and incentive systems which would yield vastly improved outcomes, particularly as soon as property owners really take on board the fact that renewable energy moves energy from the liabilities column to the assets column, and that therefore if they learn to be smart investors, they will steadily improve the asset values of their portfolios.

Green Energy to the Fore

We should abolish the faulty policy frameworks like the NYSERDA MPP which treat renewable energy as a component of energy efficiency. It should be the other way around. Energy efficiency of carbon-based systems is better than nothing, but it will get us nowhere fast, and with the growth of net-zero buildings, building values will eventually start to reflect this. So, if policy making continues to fail, eventually the market will do the job, but it will be a lot more painful than constructive policy making would be.

Conclusion

By framing green energy as an energy efficiency opportunity, it has been systematically marginalized, and renewable energy policy failure has resulted. It is time to bring renewable energy out of the shadows, and understand it as an alternative to carbon-based energy at the building level. Financially, green energy technology offers compound returns in implementation, whereas energy efficiency offers diminishing returns and the two are competing concepts. Renewable energy policy can only succeed if green energy technology is brought to the fore, and energy efficiency is understood as the secondary issue that it is. 

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.