Financing Energy Retrofits and Capital Destruction

Creative finance solutions for energy retrofits abound, but most underwriters, including alternative financing programs such as PACE bonds, fall for the generally accepted delusion that energy efficiency should get top priority. This is a mistake - majoring in a minor - which increases underwriting risk, instead of decreasing it, for several reasons:

• If you start out with "energy efficiency" of an existing installation, that is not an energy retrofit at all, for you blithely accept that the design that was in place was the best one possible, and you are merely upgrading it, as in with more efficient versions of the same technology. The point of an energy retrofit is to use newer technology, which may necessitate a different design. An efficiency improvement in most cases is not a capital investment, but an operational expenditure.
• Since many of the newer technologies are about generating energy with solar, wind, geothermal, or even hydropower, they all imply a different model, and different designs. Specifically they enhance the capital asset, the building, with independent generating capacity. Financially they are also a permanent price hedge against energy price increases.
• Energy efficiency upgrades are also by nature short-term, they usually only achieve about a 30% improvement, which is easily wiped out by a few price hikes, therefore such upgrades should not be financed with long-term money, let alone be subsidized.

As demonstrated in earlier posts, financing energy efficiency with long-term money in most cases is a mistake, because the typical 30% or so improvement is all too easily wiped out by one or two price hikes, and because of the issue of diminishing returns, there is no follow-on strategy, and therefore it is financially unsound. Financially, energy efficiency is a horrible dead-end and should be avoided like the plague: again, it increases underwriting risk if it is pursued at the expense of an existing renewable option. As a strategy, investing in energy efficiency should be an absolute last resort, if you can't do anything better.

Renewables are an immediate and permanent asset of the building, regardless if you use solar, wind, or geothermal, or hydro-electric, plus any improvements to the building envelope now come back to you directly in terms of reducing the installed capacity you need. Renewables are an immediate energy price hedge. Because of diminishing returns, "investment" in energy efficiency is financially a shaky proposition, while renewables immediately raise building value.

Energy Retrofits Gone Wrong

Energy retrofits that prioritize energy efficiency amount to capital destruction, assuming there was an economically viable renewable option available. Thus underwriters of financing for buildings who focus on energy efficiency first are in most cases likely to be deteriorating their portfolio and needlessly increasing underwriting risk. This is long-term money for a short-term benefit, and that does not make for financial stability of the asset. Even PACE bonds have completely missed this issue, and all programs that I know of focus on energy efficiency first.

With proper financial planning, which is to say a 30 year capital budget for energy upgrades to a building, it will become very visible that renewable options are financially superior, for 30 years of zero energy bills will outweigh 30% energy savings. Or to put that differently, renewables may initially have a longer payback, but, properly evaluated, the renewable solution with a 7 year payback, may be superior over its life to a 4 year payback on an efficiency component, which "saves" 10%. The renewable energy equipment comes with zero energy bills, or in the worst case some 10-15% in back-up from a fossil fuel source.

How to underwrite energy retrofits

renewables improve value

The bottom line is that responsible financiers should demand a 30 year CAPM analysis of energy retrofits to the building, which could include an installation that could be spread over several years, and obviously realistic measures for maintenance and operating costs, noting that O&M are typically lower for renewable energy than for fossil fuel. Further, underwriters should rate projects based on the percentage of energy that is derived from renewables. The higher it is, the greater the financial stability of the building. My consulting firm DaBx Demand Side Solutions, publishes the DaBx Renewable Energy Retrofit Portfolio Standard (DaBx RERPS)

Conclusion: renewables reduce underwriting risk

Financing energy efficiency means financing short-term operational improvements with long-term money; energy retrofits with renewables reduce underwriting risk and improve the asset value of the property.

NYSERDA MPP and Diminishing Returns

The NYSERDA Multi-Family Performance Program, aka the  NYSERDA MPP, is an ostrich approach to the problem of diminishing returns on energy efficiency spending; it deals with an investment problem by sticking its head in the sand. To put it a different way, when it comes to a traffic light, which is red, and then knocks out the light and proceeds through the intersection. Specifically, the problem is the diminishing returns from investing in energy efficiency measures, and the designers of this program adjusted the program so this problem does not get in the way.

Energy efficiency done serially

Diminishing Returns Example:

1. Your initial consumption was 100, let's assume you had 4 options, and you prioritize.
2. Your first "investment" of $5,000 produced a 10% reduction. Your base is now 90. You paid $555 for every percentage point reduction. Payback was less than a year.
3. The next "investment" of $25,000 produced a further 10% reduction but now off a base of 90, so the combined result is a 19% reduction in consumption, and your base is now 81. You paid $2,500 for every percentage point reduction. Payback was about 3 years.
4. The third "investment" of $35,000 also produced a 10% reduction on the remaining 81, or 8.1% off the original number, and your new base is 72.90, and you achieved a total "savings" of 27.1%. You paid $4,321 per percentage point reduction. Payback was 4 years.
5. The next best option is $55,000 also producing a 10% reduction, but now on a base of 72.90, for a return of 7.3% savings off the original, or $7,534 per percentage point reduction, and it is not worth doing, so we leave well enough alone. Don't even ask the payback.

Note, some smart fools could try to change the order, and do #5 first, and then #2 might not look so bad. Is that a solution? Watch how NYSERDA solves this conundrum:

NYSERDA MPP: Obfuscating diminishing returns

The MPP program and anything designed like it--and the model is fairly common-- "solves" this problem by shuffling it under the rug, namely it stipulates an overall target, of say 30% (the program targets 15% or better with higher incentives with subsequent levels of achievement). In other words the various subsidies are used to overcome the issue of diminishing returns to the building, and incentivize the owner to do what's good for the utility, never mind if it's good for asset appreciation of the building.

To go back to the prior example, the NYSERDA MPP model works with an aggregate savings, and an overall savings target, and incentives to make sure that 5th project gets done to get the property to over 30%. The bundled approach obfuscates the problem of diminishing returns. The incentives serve to disguise that the 5th one is not economical.  The thinking behind it is very evidently to incentivize owners to do what's good for utilities (and equipment manufacturers).

Renewables versus energy efficiency

The Energy Efficiency Merry Go-round

With the NYSERDA MPP, you cannot come back for ten years. In the meantime they pray that some other innovation comes along for even more "efficiency." However the conundrum of diminishing returns will be even greater, for after you once upgraded your boiler from the old clunker that was 50-60% efficient, to one that was 95% efficient, what are you going to do? Go to 96% efficiency? No, unless it blows up you're not going to replace it.

In short the problem never gets any better, and what you should have done was to figure out how to get off the merry go-round. If only in one part you were able to switch to renewables economically, you'd be ahead of the game. In an apartment building or a residence the obvious candidate is geothermal hot water, followed by total geothermal HVAC. Solar thermal is next in line.

Make sure you evaluate the renewable options in the context of a 30 year capital budget, and pre plan every next step, so that you pre-engineer for subsequent expansion. Depending on the nature of your financing, You may do a total renewable retrofit in one go, or incrementally over as many as 10 years. Notice that with a renewable retrofit, you usually enjoy compound returns from different project phases.

Investment implication of diminishing returns

Directly relevant observations from this problem are:

1. The NYSERDA MPP should serve only as a cheat-sheet to see if you can qualify for the incentives and the subsidized financing, but you need to do a proper capital budget first, and if the renewable options work in your building, you will wildly exceed NYSERDA's targets. Most consultants in the area come from the standpoint of energy efficiency, and they do not represent the interest of capital formation in your building, but they work for the benefit of the utilities and the equipment providers.
2. Clearly, either investing or underwriting on the basis of energy efficiency or energy savings is a dicey business proposition, as a 30% improvement is easily wiped out in one or two energy price hikes.
3. In general the framework of the NYSERDA MPP is not about investing at all but about operational savings, and inappropriately uses long-term money for short-term fixes, thus potentially worsening the financial stability of buildings. Banks and PACE bonds both are missing the mark here with financial solutions. The difference between the Titanic sinking in 5 or 10 minutes does not an investment make.
4. Conversely, only investment in renewable solutions effectively can significantly boost the capital value of the building permanently, and could legitimately qualify for long-term financing.

The framework of the NYSERDA MPP and energy efficiency in general combined with using payback as a criteria, means that owners are doing the minimum to get the NYSERDA subsidies, which is even against their own long-term interest, if there is a viable renewable energy retrofit available for their buildings. To put it differently, because the tabular presentation of an aggregate result generally is mistaken for a financial model, buildings are in many cases making sub-optimal decisions with it, and the presentation hides the diminishing returns. Nobody in their right mind would invest in a sinking ship, just to delay the speed with which it's sinking.

Conclusion

The NYSERDA MPP is regressive, and mostly inappropriately used to substitute for a capital budget for energy retrofits. By doing so renewable energy options are sacrificed to energy efficiency, and there are no follow-on investments because of diminishing returns.

Look Ma, We've got a Solar PPA!

A solar PPA seems to be a wonderful way to start converting to solar energy, if you have a roof with the right exposure. Not so fast. Solar PV is probably one of the worst options for property appreciation, if you consider the alternatives. I know, happy, shiny salesmen are coming through your door with free solar panels, just asking when they can install them? Why is that not a good deal? After all, you're saving on your power bills? It says so right here in black and white! Again, not so fast. A bit of caveat emptor is in order.

Solar PPA: follow the money

The Solar PV Model

As with any good crime story, the answer is always: "Follow the money." In this case here is how solar PPA's really work, and why they are not to the benefit of real estate owners in the vast majority of cases. First, here's the economics of a solar PPA for the power company:

1. An energy company offers a building owner a "free" solar panel. That concept should tip you off right away.
2. They cash in on all the tax and other incentives, not the owner of the property.
3. They get to claim that solar PPA panel as a credit for them towards their fulfillment of the green portfolio standards in the state.
4. They get to retain a customer for 20 years. Nothing else would do that in this age of deregulation.
5. They occupy valuable roof space for their benefit, for a very small cost. In essence they are renting space on your property for free, that might have a higher value. Owners give up potential property appreciation.

WHY SOLAR PPAS SWINDLE CONSUMERS OUT OF ASSET APPRECIATION

The simple answer is, the property owner is locked out of putting that space to better use for 20 years, even if vastly better options exist, and they do. A few examples will suffice:

1.  Generally, the efficiency of solar PV in converting sunlight to energy is 15-20%. Solar thermal is arguably at least 700% more efficient. The technology itself is about 500% more efficient (up to 98% efficiency vs. 15-20%), and it allows for storage of energy in the form of process heat, which effectively gives it even greater utility.
2. Modern, building mounted, wind turbine designs in many cases have even higher returns than solar PV, and, if the location is suitable, should probably be evaluated first.
3. Roof gardens are another competing solution, and it should be noted they could possbily exist side by side with solar thermal on a canopy of evacuated tubes, but they would be locked out by solar panels.
4. In general, these offers tempt building owners to make decisions on emotions, after all a solar panel on your roof tells the neighbors how green you are, but they run afoul of the need to first make a capital budget for your property, and have a well thought out energy plan, if you are going to attempt a conversion to renewables to any degree, or come off the grid entirely. Before you make yourself an energy plan and a capital budget, you should not make snap decisions about any of these components regardless if they are free or not, and you certainly should not lease hundreds or thousands of square feet of your valuable roof space for mere pennies.

All of these cases point to the fact that the value of that space may be far greater than what an owner get out of it with a solar PPA, so these agreements are a theft of potential building appreciation, which you could realize by doing a real energy plan. The square area you are giving up to the provider of the Solar PV, might have been enough to put a solar thermal installation that could have provided all the heating and cooling for your entire house for the next thirty years, which is a lot better than the pennies you save on your power bill with a solar PPA. In short, it might be cheaper to just make a $50,000 donation to the shareholders of SolarCity, but pass up the PPA.

Make your own green energy plan

If you own property you should definitely look at the potential for investing in green energy infrastructure, but to do so requires some thought. You need to make yourself a 30 year energy plan, even if you are planning to sell your property in 10 years, for an effective green energy solution will really come back to you in the form of property appreciation. However, there are a number of interdependencies going on, and you have to figure out in what sequence you should do things.

It is possible that you decide at some point you have space for that solar PPA, but now it becomes a financing option for a part of your plan, but again, chances are the solar PPA is the worst alternative, or very nearly so, for your valuable roof space, since its low efficiency means that it occupies a lot of space. A proper plan will guarantee future property appreciation with every energy price hike.

If you do that 30 year plan with a view to property appreciation, and you do have space for that Solar PPA, fine. Figure out if that's the most advantageous form of financing. You should evaluate a solar PPA vs lease, and really research the benefits of it with a Power Purchase Agreement Calculator. Of course there are PPA Agreements for other technologies as well, but your job is to FIRST have an overall plan, otherwise you will compromise your financial future. You may be leaving 20% of the value of your property on the table. So, make your own capital budget for energy retrofits, it is your property appreciation calculator.

Conclusion: solar PPAs are not your first choice for property appreciation

As one of the best con-artists I ever met used to say, logic and reason are the horse the emotions ride in on. A solar PPA grants the right of use of the roof space on a building to an energy company, and it makes a good show of green energy, at the expense of potential future property appreciation.

Greenwashing Galore, in Energy and Otherwise

Greenwashing is a derogatory term which is gaining some currency because of all the marketing hype. Even the FTC has recently beefed up its marketing guidelines to prevent greenwashing, and who knows, may go after offenders. The criteria are interesting, and should be grounds for some rethinking of certain business strategies. Greenwashing lawsuits are on the rise.

If you call your product or service "green" you need to be able to back it up with specific benefits and verifiable claims. There goes the ConEdison GreenTeam. There is nothing green about them that I can tell. On this blog I have discussed in-depth how energy efficiency and green energy are not synonymous, and even often mutually exclusive, even if green energy must incorporate energy efficiency in its own right. Clearly, the implied claim rests on the more general confusion that 'energy saving' is somehow green, let alone interchangeable with green energy in achieving sustainability.

The implicit assumption in many programs is that renewable energy and energy savings will add up to create sustainability, but that is only the case in very limited circumstances, and requires proper economic analysis and engineering. In most cases, the opposite is true. Does it make any difference if the Titanic goes down in 5 minutes or 10? Do you want to invest in that proposition? This is about rearranging the deck chairs on the good ship and it has no relevance to any meaningful concept of sustainability. This approach is all about appearances, it is a mere marketing ploy, because energy savings merely increases demand, so it expands the franchise. If in doubt, check out the recent book by Steve Hallett: The Efficiency Trap: Finding a Better Way to Achieve a Sustainable Energy Future. This book is the behavioral corollary to the problem of diminishing returns with "investing" in energy savings, which arguably is not an investment at all. It is unclear why property owners should foot the bill for becoming better customers of their energy providers if they have other options.

Energy Savings do not add up

The confusion generally starts from the top, for even at the highest levels the confusion that all energy savings and energy efficiency is 'green' is nearly universal. Besides Steve Hallett's behavioral argument that efficiency expands demand, the sad economic fact is also that energy savings is a dead-end street from an investment standpoint, because of diminishing returns. On top of that, because of good engineering reasons, energy efficiency and renewable energy are often mutually exclusive. In many cases, the energy savings incentives reduce the adoption of renewable energy, and are thus anathema to sustainability. Accordingly, for the most part, institutions like NYSERDA are often really a customer retention program for the energy industry.

• Energy efficiency of a fossil-fuel burning energy infrastructure prolongs the use of fossil fuel by extending its economic attractiveness.
• Energy efficiency is only green in the context of renewable energy.
• Incentives based on energy efficiency are a waste of money, for they postpone the switch to renewables, and subsidize energy companies and equipment manufacturers at the expense of property owners. Energy companies could legitimately offer incentives for investments in efficiency on the basis of customer retention, but public moneys should not be used, nor levies on customers, like the NYSERDA funding through the SBC.
• Energy savings in a fossil fuel context may arguably be green, if there is no feasible alternative, then it's simply the best alternative. But as long as economically viable renewable alternatives exist, any semblance of a green claim for any energy savings that displace viable investments in sustainability are a patent lie.
• Any financing or tax incentives that promote specific equipment or equipment standards (such as Energy Star) as prerequisites for qualification for subsidies, or even financing at all, should be outlawed if they distract from the overall project and force property owners to make sub-optimal decisions. However well intended, this type of tokenism amounts to greenwashing.

Greenwashing: falsifying claims

• Tankless hot water heaters are nearly always a bad idea, and certainly should not qualify for an energy star program. Domestic Hot Water storage is one of the cheapest and most affordable energy storage solutions in renewable installations. Both with solar thermal and with geothermal, heat can be stored, for geothermal in pre-heated water, and for solar thermal as process heat, or also as preheated water for consumption. Tankless hot water heaters should only ever be used where we are unable to access either of those two technologies.
• Solar PV PPAs, are nearly always a bad idea, and a gross consumer swindle. A nice shiny solar array on your roof saves you pennies on your electric bill, and shows the neighbors your house is "green," but it deprives you for 20 years of valuable real estate, which could have been put to better use with either wind power, which in many cases has better energy yield, or solar thermal which has 700% higher efficiency (because of 500% higher output and the ability to store energy). Property owners are simply getting bamboozled by would-be energy efficiency experts, aided by various incentive programs.
• Generally any program, such as most PACE programs, NYSERDA MPP, (and equivalent programs in other states), and special, subsidized financing for energy retrofits, which mandate energy savings to trump renewable energy really lure property owners into making substantially bad decisions, without ever considering better alternatives.

How energy savings kills renewable energy

Green Fools Only

Energy savings claims, and the appeal to "green" mainly trade on emotional appeal, but they are simply a sales tool for equipment manufacturers and for energy companies. In the selling process, there is a whole energy savings and energy efficiency industry that has sprung up, some contractors, but many of them posturing as consultants, who in essence posture as if they are helping building owners, but between employing the false objective of energy savings, and the high school level financial modeling based on the payback of equipment, the economic decisions that property owners should make are dumbed down to the point that owners sacrifice the potential for property appreciation by embracing ineffective programs.

As long as we are modeling energy savings as a one time objective at a given point in time, and employ equipment payback as the criteria, and falsify the decisions further with incentives,  we are bamboozling property owners into inferior economic decisions, which limit the potential for property appreciation. The simple fact is renewable energy is not an energy savings technology, but an investment in generating capacity, and a permanent upgrade of the asset, which would require a proper capital budget. It is a proper investment decision. Energy savings is not really an investment but an operational expense, so it is bizarre that in effect energy vendors are getting owners to be liable for investments to ensure that they continue to buy their energy, as in solar PPAs. In other words, by using payback as a criteria, presentations are always handicapped in favor of quick energy savings fixes, and the more capital-intensive renewable energy choices drop to the bottom of the list, because the 25 or 30 years of no energy bills do not enter the equation, and people are fooled by the fact that it takes a few years more to pay off the equipment.

The methodologies that are used handicap renewable energy and are backhanded subsidies to the fossil fuel industry.

Conclusion

Energy savings does not add up to sustainability. It has green pretensions but it cannot deliver. It may or may not technically violate the FTC's rules for green marketing claims, but it does the opposite of what it claims. Prioritizing energy savings in existing fossil fuel based infrastructure serves to postpone sustainability, and is de facto a form of greenwashing, and deprives property owners of superior options.

Compound Returns from Renewable Energy

There are many ways to look at our energy conundrum, and to understand why we're so dysfunctional, and not getting the job done with renewable energy. As argued here repeatedly, one of the primary obstacles is putting the cart before the horse with honorable sounding secondary objectives, which obfuscate sound financial decisions. Energy efficiency, energy savings and clean air standards are examples that cause such distortions, and lead to policy failure. They are secondary objectives, not primary ones. The worst policy failures are resulting from confusing energy efficiency with renewable energy, and treating them as if they were interchangeable, or worse yet, additive, when they are often mutually exclusive in practice.

The effect of majoring in a minor by putting these secondary objectives first, is to postpone the switch to renewable energy indefinitely, and to subsidize the fossil fuel industry at the expense of property appreciation. Therefore it produces the opposite of energy independence and undermines any attempts to ever meet Clean Air standards, such as New York City pretends to want to do. Energy Star, NYSERDA MPP, NYC Clean Heat, PlaNYC, various tax incentives, are all examples where false priorities foul up sound financial decision-making about renewable energy. Collectively they have more to do with why we are not making the progress that we claim to want than anything else. They are examples of policy failures. Their ally is the fallacious financial practice of property owners making energy decisions based on payback of equipment, instead of net present value add to property values.

In short, government incentives have assisted property owners in making more bad decisions about energy faster, by rewarding them to ensure they keep making the wrong decisions, and the beneficiaries are the fossil fuel industry primarily, and to a lesser degree the manufacturers of energy efficiency equipment. It all comes at the expense of property values, so owners of real estate are destroying their capital asset base, to the extent that there are renewable alternatives that make economic sense, and in many, if not most cases, there are. False priorities supported with government incentives amount to government sponsored capital destruction in our economy, and serve to prevent the switch to sustainability. In NY State there is even an Energize New York Finance Handbook, and an exam to make sure you learn how to destroy your property values even quicker, using other people's money (but you're still liable). There is even an entire not for profit industry to help you manage your property into the toilet, such as "Energize New York, comfort and savings for your home."

Sustainability is only sustainable if it is also profitable

Adam Smith's invisible hand arguably does not always work, but sometimes it does. And here we have a capitalist society, embracing soviet style 20-year plans to make sure we prevent the invisible hand from working... But the good news is, there is a way to sort it out on an individual level, though eventually the whole structure of false incentives will have to be revised.

Every property owner can, with a simple spreadsheet make a 30 year energy plan for their property. And if you are lazy, you can make it a thesis project for your kid. It does not matter if you're going to sell it sooner than that or not, for if you invest wisely, it will come back to you when you sell it. After all, real estate simply has a long economic life, but if your analysis shows that your property is a wreck, and incapable of being made somewhat energy independent, sell it quickly while the going is good. The energy companies and the government will keep you in the poor house by confusing your decision-making and keeping you a slave to the energy companies longer than you have to be. Proper financial modeling is the way out, he process is a simple 30-year NPV analysis of all energy decisions about your property. Do not ever give in to the energy efficiency argument, it will keep you in bonds to carbon energy forever. Salesmen of energy efficiency and Solar PPAs are stealing appreciation of your property from you.

If you do that 30-year CAPM model, you will not easily make wrong energy decisions again. Never allow yourself to be seduced by the sellers of energy efficiency, and any government incentives, or subsidized finance from your energy company (talk about the fox watching the chicken coop). Remember always: Good financing or incentives can NEVER make a bad project good, it can ONLY make a good project better.  Hang that on your kitchen wall before you start talking about anything to do with energy in your property. Now for the good news: Renewable energy pays, because of compound returns.

Compound Returns from Renewable Energy Make Sustainability So

Payback of a piece of equipment may be useful as a quick and dirty calculation to see if it could have promise, but you need to have a coherent, holistic energy plan first, or else you will be cheated out of your money, and squandering it. The obvious mistake is if you start using equipment payback for your actual energy plan, such as models from NYSERDA and similar organizations elsewhere tend to do. Incentives are then added to the mix to make other objectives more attractive to property owners, either from a societal standpoint (and most often indirectly benefiting the energy companies and/or the manufacturers), or for the energy companies directly, and then if you add up all these wrong decisions and you score enough points in their system, you are rewarded with subsidized finance to help you destroy the value of your property faster. The shareholders of the energy companies thank you.

But now you know. And armed with your 30-year energy plan for your property, here is what you do: You do your model first. You focus on selecting the technologies that make the most long-term sense for your property. And next you figure it out with the NYSERDA MPP model, or your Energize New York application, or whatever is appropriate in your case, and you now figure out backwards how to maximize your use of incentives, and how to exceed their standards so that you do qualify for the subsidized financing, including PACE bonds. But never follow the methodology of these institutions, for it will destroy your property value. Your own economic energy plan must be king, meeting their objectives is a secondary criterion that gets you the financing you want, but you must take ownership of the plan.

Here's the payoff: on your list of potential things to do you might have a geothermal heat pump and a wind turbine, with paybacks of 8 and 7 years respectively, and they are kind of at the bottom of your list. But then you find out, when you integrate it in your model, that the heat pump allows you to store output from your wind energy in the form of pre-heated hot water. By doing so, you no longer have to sell excess energy back to the grid at wholesale rates, so you are now improving the payback on your wind turbine. Put together, they might have a 6 year payback, but again, the 30-year projection tells all.

Or, you were evaluating a tankless hot water heater with a 3-year payback and a solar thermal system with an 8 year payback, but your thirty year model reveals that the solar thermal system works out better in the long run, in part because with solar thermal you can harvest process heat, and if you take that effect into consideration, it may turn out that it's a better investment than tankless hot water heaters. Thirty years of no energy bills beats 30% energy 'savings' hands down. And of course solar thermal beats out solar PV because it produces 5x more energy per square foot, and on top of that allows storing process heat. All of which you would never see in a payback analysis, but you will see it in your 30-year model.

Or, you were evaluating a geothermal hot water against solar thermal hot water, and it turns out that on a payback basis solar thermal won, but then you started to look at your integrated model, and you could put your geothermal heat pump on a time of use meter, and integrated it with self dimming LEDs (100% dimmable!) for premises/common area lighting, and suddenly the geothermal hot water system won, and now you could look if you could drive your HVAC from geothermal also.

Sustainability through compound returns

Examples abound where the thirty year model shows you synergies of two (or more) technologies that you would not otherwise figure out, but most importantly it is the time value of money that allows you to see that 30 years of no energy bills beats 30% reduction in energy consumption most of the time, and a bigger capital outlay is warranted, and feasible if you can access subsidized financing. Such compound returns through synergy are worth gold.

Conclusion:

Renewable Energy done right produces compound returns through integrating several Clean Energy technologies at once. Energy Efficiency of a fossil fuel system produces strongly diminishing returns after you hit about 30% 'savings,' which is literally fool's gold. Only energy-efficient renewable energy gives you financial sustainability.

From Liability to Asset with Renewable Energy

To move something from the liability column to the asset column is a dream opportunity and an art form that occurs only once in a great while in business. It is the operational way to asset appreciation. The renewable energy revolution will facilitate a complete metamorphosis of some buildings, and leave others behind in the dust. Because we remain stuck in the old model, people are slow to discover it, and moreover there are many brakes on the system, rules and regulations, and tax incentives, and other programs which falsify the decisions. It is easy to see in newer, net-zero (or close to that) buildings, it is harder to see the opportunities in existing construction. Changing the paradigm is never trivial, because the resistance of the old system is so tremendous. We have been used to it for so long.

In NYC there are numerous initiatives to try to push us in the right direction, but many of them tend to backfire in terms of the transition to renewable energy. By creating massive incentives that focus on "energy efficiency," or even on clean air, renewable energy is swept under the rug. It will take savvy investors to realize the opportunities that do exist, and to not squander money on marginal efficiency improvements, but instead to focus on the long-term prospects of switching to a renewable energy infrastructure.

Marginal operational improvements versus investing in renewable energy

The existing focus on energy efficiency and clean air works out to be a customer retention program and an inadvertent subsidy for the fossil fuel industry, and along with the common practice of evaluating technologies piecemeal on the basis of payback of the equipment, rather than value-add to the NPV of the building as a whole, it raises the hurdle for renewable energy.

Whole Building Plans for Renewable Energy!

If a renewable energy solution has a payback of seven years, it loses out against a raft of quick fix energy efficiency solutions, because as long as payback of the equipment is substituted for proper financial modeling, the quick fixes will win out. But once you do a proper 30 year capital budget and a financial model, it will quickly turn out that 30 years of near zero energy bills will often beat a mere 30% reduction of energy bills. The only challenge then is how to get there economically.

In short, any renewable energy plant we can integrate into a building is directly constructive to long-term asset value, for it replaces a liability with a permanent part of the asset, which is the building, and in some cases it may even move energy into the revenue column. Programs like the NYSERDA MPP have virtually institutionalized bad financial planning among building operators, for they reinforce the bad habit of focusing on marginal improvements based on payment of equipment, compensated by subsidies including subsidized financing to incentivize building operators to do the things that are good for the utility and not for the building, and by limiting the conversation to some small improvements at one point in time the whole long-term financial planning for the building is ignored, including the fact that there's no follow-on strategy once you have started investing in energy efficiency alone.

NYC Clean Heat favors fossil fuel

Never mind the short-term argument that the switch from #6 and #4 oil to natural gas reduces emissions, the point is that if this prevents buildings from switching to renewable energy, it is prolonging the fossil fuel era, and prolonging the period of CO2 emissions. It is my estimate that 50-75% of buildings affected by NYC Clean Heat could make the transition to renewables economically and gradually within 10 years, but instead, subsidized finance is wasted on an interim fix of transitioning to natural gas. This is capital destruction, at least in the case of those buildings that could have realistically switched to renewable energy instead. Obviously, a switch to renewable energy would also help NYC meet clean air standards much more permanently in the long run.

In short, the NYC Clean Heat program in as much as it will do these things, will in the long-term undermine NYC's objectives of meeting Clean Air standards and ensure failure. The renewable alternative is being overlooked, but would lead to strong asset appreciation of the buildings. The reasons are partly wrong financial modeling by owners, and partly incentives that make it more attractive to make the wrong choices.

Asset appreciation should drive renewable energy adoption

Taking buildings even partially off the grid with renewable technology, replaces a liability (energy bills) with a fixed asset (generating capacity), and once an existing building starts a process of renewable energy conversion, the follow-on investments show potential for compound returns. Example: your new wind turbine could drive your geothermal hot water plant, and have enough power left over to supply the common areas as well as some of your tenants. Another example is that if you can convert to hydronics and/or heat pumps, you could eliminate all window A/C's and supply cooling to tenants cheaper than it would be with window ac's, and make money doing it (BTU metering).

Most old line apartment buildings could be cash positive in energy with renewable technology over ten years. Underwriters should take note. Also, false proxies such as specifying energy star equipment should be eliminated from underwriting. Instead a proper long-term energy plan should be the focus.

The majority of old line apartment buildings are suited for most forms of Clean Energy, from Geothermal to Wind Energy, to Solar. The magic is in integration. For more information, see www.dabxdemandsidesolutions.com

Conclusion:

Only renewable energy is directly constructive to asset appreciation, if it can be done economically. Energy efficiency of a fossil fuel system merely attenuate the correlation of energy pricing with building values, and is a mild support in the short-term and useless in the long-term, because there is no follow-on investment strategy after the first few rounds of energy efficiency improvements, and particularly if the focus on energy efficiency prevents renewable energy alternatives.

Leveraging NYC Clean Heat for Renewable Energy Retrofits

The NYC Clean Heat program is one of the many examples of good intentions gone wrong, for by and large it misses the opportunity to push the city towards renewable energy. Instead, it is diverting capital to a temporary fix, leading to NYC boiler conversions to natural gas, when far better options might be available, better for the city, for the tenants and for building owners. Large numbers of C- and D-class apartment buildings, particularly in the outer boroughs, such as the Bronx, which typically are burning #6 or #4 oil would have an easy time shifting towards renewable energy instead of to natural gas (or even biodiesel).

It is true enough that natural gas is less polluting than #6 residual oil, or even #4, but from the standpoint of building preservation. However, these buildings would be generally more viable economically in the long-term by switching to renewable solutions.because renewables offer a permanent energy price hedge, and lower maintenance costs. The only way to get buildings out of the economic trap of energy price hikes is renewable energy. Probably 50-75% of buildings in this particular class are capable of making the switch.

The right use of The NYSERDA MPP

To make the transition to gas attractive the NYSERDA MPP program offers a wraparound for overall efficiency upgrades to buildings, and which is in many cases not the best option if it leads to merely making a fossil fuel system more efficient, instead of switching to a renewable alternative. The financial methodology of that program is geared to making the existing infrastructure more efficient, not to evaluating alternative solutions.

The idea should be to make the transition to economic sustainability and increased competitiveness with renewables. Only if a renewable solution is not in the cards, is the marginal reduction of CO2 and particulates emissions helpful, but again, not if it distracts us from the major goal of switching to clean energy and becoming energy independent. If the NYSERDA MPP is used to finance a conversion to natural gas, it misses its potential, as long as an alternative is possible for a particular building. Very simply, 30 years of no energy bills will beat 30% savings any time. Owners sacrifice future value of their buildings if they make the wrong choice.

Obviously, if we can make it to a renewable energy infrastructure, we are going to outperform the mere switch from oil to natural gas. Thirty years of no energy bills will always beat out a 30% energy savings, if you can do it economically. The thing to do would be to pursue an exemption from the Clean Heat conversion, and do a 30 year energy plan for the building, such that the first phase qualifies you for the NYSERDA MPP program.

MAJORING IN A MINOR

Both NYC Clean Heat and the NYSERDA MPP focus on a secondary objective first and thereby falsify capital decisions, and cause capital destruction. Naturally, in some buildings there is no renewable option, so that's bad luck. Anyone who has done any financial modeling or operations research work can tell of how bad it can be if you major in a minor, if you optimize a system for a secondary objective, not the primary one. For a building, the primary function should be the long-term Capital Asset Value of the building. The renewable energy building will be worth some 10-20% more, hands down, in 5 or 10 years, than its fossil fuel (or even biodiesel) burning twin. The exact spread will depend on energy prices, of course.

Energy Efficiency is the secondary variable that can either make a fossil fuel system more efficient (not green!) or make a renewable energy system more economical (very green). The confusion in the public dialog is that energy efficiency is misrepresented as green, which is merely a way of greenwashing fossil fuels. Energy efficiency is only green if it helps you make a renewable system economical, and in that case there is a direct compound return, because e.g. better insulation will reduce the installed capacity needed.

An alternative conversion program

Here is the outline of the renewable energy strategy:

• Make sure that phase one of your plan meets or exceeds the criteria for NYSERDA's MPP.
• Get an exemption from the Clean Heat conversion program because you are going renewable.
• Typically, the first step is to take Domestic Hot Water (DHW) off the boiler, and implement either a geothermal or a solar thermal solution, which will typically achieve a 25-50% reduction of your BTUs for heat and hot water. (Because heat is seasonal, but hot water is year-round).
• With your exemption you should get a clear agreement that for economic reasons your are doing the next step (heat) when you need a boiler replacement.
• By doing this, you have bought another 5 or 10 years of economic life for your boiler, because it'll be off-line in summer.
• At the end of the economic life of the boiler, you then can go to either a renewable or use the best fossil fuel solution available then.
• For details, see www.dabxdemandsidesolutions.com

It should be noted that the City has recently begun studying geothermal energy, which is important for this program and has already provided a powerful solution to many buildings. Also wind energy should move to the top of the agenda as more suitable designs are appearing on the market which are geared for installation on buildings.

 A long term renewable energy plan

The trap of all programs that focus on marginal efficiency improvements, such as the NYSERDA MPP, is that they focus on only ONE point in time, and ignore the long term plan for a building. The truth is that the path of energy efficiency, which is prioritized in the NYSERDA MPP, in most cases shows the quickest returns from some effiiciency gains, but if you did a 30 year CAPM analysis of your building, you would see that subsequent investments in energy efficiency face strongly diminishing returns. By comparison the renewable energy plan is more capital intensive up-front, but usually superior, because you get 30 years of (nearly) no energy bills, not merely a 30% reduction in consumption.

We should also note that if subsidized finance is used to switch buildings to natural gas, that would have otherwise been capable of switching to renewable energy, that is really an indirect subsidy of some energy company, and of the fossil fuel industry in particular.

Conclusion

The need to switch away from #6 and #4 heating oil, should be leveraged for converting to renwable energy, not natural gas, whenever it is feasible. Owners who do will see at least a 10-20% increase in building values over the next 10 years, if they follow through.

If you do a proper 30-year energy plan for your building, with a good understanding of the engineering interdependencies, two things will become clear:

• if your building is suitable, a good renewable energy solution will beat out mere "efficiency" of a fossil fuel solution.
• And, number two, you can use some of the programs that now exist to help secure financing for your conversion.

NYC Clean Heat provides the motivation, and the NYSERDA MPP can be used on behalf of a conversion to renewable energy.