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.

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.