Federal Incentives to Prevent Renewable Energy in Residential Construction

OK, that was just a bit tongue in cheek, but it is actually serious, and it raises issues of unintended consequences, which are not always easy to address. However, it is urgent that home owners, and building owners come to grips with it, for it will materially impact the value of their real estate holdings in the future.

It all revolves around a theme that is pervasive on this blog, and that is sub-optimization. You could spend a lot of money on energy efficient appliances and still not create an energy efficient solution. The whole gist of the Energy Star label (when it works as intended) is to focus on the individual function, and make that as effective as possible, but buying everything Energy Star-rated will not solve your problem, and may in fact cause you to spend a lot more money than necessary, thus sub-optimization leads directly to capital destruction (aka stupid investments). A big example is the issue of tankless hot water heaters that I've raised on this blog, which is a hopelessly suboptimal solution because renewable hot water solutions are so easy and plentiful. Eventually there are others, and they all boil down to one and the same thing, which is the systems approach, the holistic approach in which the building is central, and not the equipment. The focus is on operating cash flows, and long term building values. Thus, if you can implement solar DHW, it may pay to look your washing machines and dishwashers to make sure they can take in hot water, in lieu of heating cold water. For never mind how efficient is their heating element, if they can take in water from your solar thermal installation.

Once you put the building central, you can look at integration of various technologies, and implement them even in sequence, if necessary, something now, and something else five years from now, when you're done paying for what you installed today. This kind of preplanning is entirely possible when you figure out the engineering and economic interdependencies, and do not fall for the temptation to implement something now which will prevent you from doing the next logical step five years from now. If you are only looking at the available incentives and the Energy Star ratings, and let them prevail over proper engineering and planning, you are very likely to make these mistakes, which will cause you to spend the same dollar two or three times over over the life of your house or building. The incentives, as much as the ever so well intended Energy Efficiency ratings look only at the level of the individual function of subsystems.

Besides planning ahead your engineering integration of a whole house/building system, the general principle is not to overspend in places where it really does not pay off, for the highly efficient variants of products are often not only more expensive, but sometimes less reliable. Simpler is better in that case. Another examply of where you should break the mold is the reverse, namely you should probably overspend on LED lighting where it conerns far out of the way lighting. If you only look at the difference in energy savings, LEDs are still hard to justify for most applications, but not in out of the way spots, where their longer lifetime pays off in reduced hassle and maintenance cost. LEDs last two or three times (or more) longer than the alternatives, and by looking at both energy savings and maintenance savings the picture changes the more they are in hard to access locations.


By the same token, many forms of subsidy and incentives are geared to the use and installation of Energy Star rated equipment, and again there is no guarantee that this results in an optimal design from the standpoint of energy economics of the building, be it a home or an apartment house. The simplest example is that of the back-up water heater for a solar thermal, or geothermal hot water installation. For this function it may not at all be worthwhile to buy an Energy Star rated piece of equipment. The other example is the installation of solar pv systems financed by your local utility against a Power Purchase Agreement (PPA), which is a low yield investment, which extends their franchise, but is suboptimal from the standpoint of operating cost of your building, since even the worst solar thermal system offers a higher yield of energy than Solar PV.

The fundamental error is that energy efficiency and renewable energy are treated as interchangeable, when they are not. Energy efficiency is not additive to energy independence, but renewable energy is. Energy Efficiency should rationally be funded either directly from savings or by PPA from your utility or oil company, not from public money. Renewable Energy, if it is engineered sensibly, is the only thing that deserves public stimulus because it achieves energy independence, raises real estate values, and is a permanent improvement. There may be exceptions when energy efficiency is the only option, depending on the nature of the buildings, in which case policies should be flexible enough to support it.

Strictly Kosher Renewable Energy Planning for Building Owners

The unfortunate reality is that most building owners large and small, if they buy into renewable energy at all, focus on the technology, not their building(s), and they are getting hosed financially, and even if it is a tax-deductible hosing, which is only a small consolation in the end. The single biggest failure of renewable energy is faulty analysis of the building level energy economics and engineering.

Vendors obviously and understandably focus on their technologies, which all of them in good faith or otherwise, believe to be a solution - no scratch that - THE solution. Equally obviously none of them are, for if there were any one solution, our energy problems would be over. Governments compound the problem by providing various incentives and programs to stimulate the development of renewable solutions but which generally suffer from various unspoken assumptions, and often inadvertently such programs produce unintended consequences which actually sabotage an economically viable renewable energy economy.

The way the market functions is this: the assumption is that we can never stop burning fossil fuels, so the de facto point of departure for most incentive programs, is that within the subscription model of energy (fossil fuels) the best we can hope for is reduce energy consumption, and become "energy efficient." Some programs even offer certificates you can hang on your wall or on your building, testifying to how efficient a customer you are for your local utility or oil company. These incentive programs in themselves work very well some of the time, but as part of the unintended consequences they in fact create a treadmill of capital destruction, in which cumulative energy efficiency investments run smack into the wall of deminishing returns, for contrary to the popular belief, energy efficiency is NOT additive, and does not lead to energy independence. We simply become more economically sustainable energy junkies, and the economies we achieved will soon be undermined by the relentlessly rising energy prices.

Nevertheless the majority of the market dances to the pied piper of energy efficiency, and never looks to energy independence let alone energy production and making money with energy. Yet this is what is vitally needed: a paradigm shift from energy consumption to energy production, and a concomitant change in investment outlook.

Vendors also make the problem worse, because they typically present their equipment as if they were free-standing investments, and try to compete on the shortest payback, helped by ever popular government incentives and other goodies, so that if you have only $50K to spend you'll pick the project with the fastest payback. In many cases you'll lock yourself out of the best energy strategies, and if you ever do find out, you'll end up investing the same dollar two or three times over. My favorite example these days is the "high-efficiency" Energy Star-rated tankless hot water heater. Of course it is very efficient in burning fossil fuels, but that's only relevant if burning fossil fuel is your only option, and not if harvesting (nearly) free energy is a viable alternative. It may be a great choice if your business is to sell hot water by the gallon on the street corner, but it's a lousy choice if you are the owner of a property, particularly a residential one, because Domestic Hot Water (DHW) is actually a natural storage of energy, and essentially "free" to the extent that it can be justified by Hot Water provisioning. Conversely depending on how we integrate energy in the building, and harvest peak load generating capacity (renewable energy), it may end up that analytically, the DHW is "free," because that storage capacity becomes materially important to the economics of building-level energy generation.

In short, the way to judge these investments is to view them as intra-marginal investments in your property, and evaluate their lifetime effects on the property's operating cash flow. Now that gas hot water heater may be cheaper to purchase, and more efficient than what it replaced, but it still has a nasty habit of burning gas, while the property next to you invested some more money, installed solar hot water, and almost completely eliminated their fuel bill for hot water. The storage of Domestic Hot Water meanwhile allows you to harvest the peak power from the sun, or the wind and store it as heat, eliminating even more energy bills. Over the 30 year lifetime of the solar system the neighbors would end up buying three gas hot water heaters, and pay the gas company every month. In short, as the owner of the building, you are not in the business of selling hot water on the corner, but improving the energy independence of the building, improving its operating cash flows, and eventually making money from energy, and that should be your vantage point, taken over the lifetime of the relevant technology, not judged by payback of an isolated piece of equipment. Proper analytical hygiene would also demand that also the price risks of oil, electric, and gas, including potential carbon taxation, are taken into account, compared to free energy which comes with a greater capital investment, but little or no subscription energy costs.

To put it differently, most available incentive programs really exist to extend the franchise of your local utility or the oil companies through "energy efficiency," but they do little for your business, or at the very least, they lead you eventually always to make the wrong investment decisions. Thus the Kosher financial recipe is to develop a long term strategic energy plan first. If you have a sound plan from an engineering and economic standpoint, it will give you increasing energy independence, and improving profitability, not merely energy efficiency and a pat on the sholder from the CEO of your utility company. Energy is becoming a technology business and a capital investment - a business opportunity - and it will gradually stop being an operating expense. Financially it is becoming a make or buy decision. Those who fail to notice this, will see the value of their real estate decline precipetously, for since it can be done, it will be done, and buildings without utility bills, and very low fossil fuel consumption will be worth more than the equivalent buildings, however "energy efficient," but still on the subscription model of energy. Our buildings are like babies about to be weaned off the breast of the subscription model of fossil fuels. As a society we are now at the stage of resenting it, but going back is no longer an option. We now need to learn how to walk.