NYC Energy Efficiency Paralysis - Open Letter to Mayor de Blasio

Energy Efficiency (aka EE) is the most confusing issue in the entire green dialog. It is about time that the FTC took action against anyone claiming that energy efficiency is green all by itself. It depends. If you make a fossil-fuel-based system more efficient, arguably you are reducing GHG-emissions somewhat, but that is seriously deceptive: you are simply extending the competitiveness of fossil-fuels, which is the opposite of what we want to achieve, if reducing GHG-emissions is the objective. If reducing GHG-emissions is what we want, that should be the focus, and Site Derived Renewable Energy (SDRE) is the only real answer.

Most programs nationwide are still stuck in the 1970's energy crisis. At that time, it was thought the issue was simply energy economics, which could be addressed by cleverly realizing that a dollar spent on reducing demand had more of an effect than a dollar spent on increasing supply. The environmental dimension, Green House Gas-emissions was not really on the radar yet. Also, there were not as many building-mounted renewable technologies available as there are today. But efficiency of fossil fuel systems has overstayed its welcome, and is not a major concern for a "green" future. Local Laws 84/87/88 need an overhaul for shifting the focus to SDRE, based on proper capital budgeting for energy infrastructure, not incremental spending on marginal efficiency of fossil fuel-based systems, which leads to capital destruction, not building appreciation--as explained in many ways on this blog.

PlaNYC was a Breakthrough of Sorts

PlaNYC was a breakthrough in beginning to take these issues seriously, but it was heavily compromised by the old efficiency paradigm, and ended up putting marginal energy savings front and center. At some point particulates emissions from #6 and #4 oil became another bad proxy for GHG-reductions. This was merely another diversion from the real issue, and the NYC Clean Heat program was the result, causing a rapid shift to natural gas, resulting in an ominous city-wide dependence on a single fuel. Moreover, by the time of this writing it is accepted wisdom that natural gas is about as polluting as coal, when you add in the losses of methane in production and transportation.

Renewable Energy in NYC under Mayor de Blasio?

We can only hope so. The time has come. I come from the school of hard knocks, having learned as a home owner that I unthinkingly spent myself silly on energy efficiency for two decades, without accomplishing anything. At long last, in recent years I finally began to think about the problem more seriously, and since then the issues have become clear to me. NYC has another chance with another administration. Will we move to the new paradigm? I decided that at the very least I should throw in a suggestion or two in the form of an Open Letter to Mayor Bill de Blasio.

Alternatives to PLaNYC: Pushing Renewable Energy

The open letter to Mayor de Blasio focuses primarily on the NYC Clean Heat program, and the very deleterious spate of natural gas conversions it has brought about. It touches upon the mistaken economics that have driven other elements of PlaNYC, such as Local Law 84 (actually, both LL84 and LL87). These regulations simply push efficiency, and thereby assure the opposite of what they would accomplish: they serve to extend the rule of fossil-fuels with marginal energy savings, and have building owners fritter away capital on incremental improvements, instead of investing it in SDRE.

Energy efficiency is mostly about guilt-free shopping, which is why manufacturers love the Energy Star label, but it does nothing to solve the GHG-emissions problem. Instead, it makes it more intractable by making fossil fuels economical longer. Below I am providing a series of explanatory notes to the Open Letter, some additional comments, and some references that may be helpful.

Notes and References for Open Letter

1. NYC Clean Heat is regressive: By now even the Sierra club is coming back from its advocacy for natural gas over coal (remember Bloomberg donated $50mln for that campaign in 2011?). The evidence is overwhelming that switching to natural gas is regressive for climate change. So converting buildings from #6 and #4 oil to natural gas was a subsidy to the gas industry, and capital destruction for the owners of buildings. SDRE retrofits could have given building values a serious boost, instead of just some small time energy savings at best.
2. The DaBX PlaNYC2020 report was an alternative plan to maximize Site Derived Renewable Energy, and make real reductions in GHG-emissions. We focused on NYC's old line C- and D-class apartment buildings, all in all some 15,000 buildings, a large percentage of which might be able to do such retrofits. We pointed out that these conversions should be done over 5-10 years to maximize the value of existing plant. We emphasized proper capital budgeting techniques to make the right long-term economic decisions.
3. The Urban Green Council later made a more general case with their 90 by 50 report describing generalized solutions across all major building types in the city. The report reinforced the important point that the optimal way of implementing retrofits is over time, by leveraging the economic life-cycle of building energy infrastructure components. Forcing everything to be done at once makes projects uneconomical. The report emphasizes generating renewable energy on site as well, but fails to understand the deleterious economics that result from the focus on marginal energy savings.
4. Geothermal energy is strategically important. It is in fact the single most powerful SDRE option for energy retrofits in NYC. New York's bedrock is an ideal substrate, and with 400% efficiency, nothing beats it: 1 joule of energy in (electrical) yields 4 joule output (heat). At a minimum, buildings can do a Domestic Hot Water solution, but the design needs to be optimized for harvesting of energy, either from time of use metering, or from wind turbines or solar PV. Whenever feasible, it should be part of energy retrofits because of the energy storage capability. In exceptional cases (if there are sufficient grounds), it may be able to provide the total BTU load for buildings. Remember insulation helps too!
5. Solar thermal is a hands down winner at 98% efficiency, and no PV should ever be considered (17% efficiency) if you can do solar thermal at all. The point of generating electricity is that it can be easily transported, but when generating renewable energy on site, you don't have a transportation problem, and retrofitting is becoming easier all the time, although on balance a thermal retrofit is harder than PV. There are many ways conversions can be done towards integrated HVAC even in older buildings, given today's hydronic air handlers, etc. With the forecasts of 3x more 90 degree days in summer by 2050, the time is now to start planning that transition, for buildings that don't offer centralized HVAC will be marked for demolition sooner or later. The old model based on window air conditioners is past its prime.
6. Hydronic heat is more energy efficient. Yet with the NYC Clean Heat program, in most cases, buildings have just switched from oil to gas, and continue to heat with steam. What is needed is a thorough understanding of the economics of conversion to hydronic systems, which in turn ties in with the potential for solar thermal and geothermal. Here is a report from NYSERDA, documenting up to 40% energy savings by switching from steam to hydronic systems.
7. Building mounted wind turbines are coming of age and typically offer more bang for the buck than solar PV, if the building has the right location to use wind energy. Then, there are hybrid solar PV/Thermal (PVT) systems which leverage the best of both solar technologies. In other words, SDRE, Site Derived Renewable Energy, is becoming increasingly realistic for retrofits, especially when considering that in a building you can harvest thermal energy in a variety of ways, as pre-heated hot water from geothermal or as high temperature process heat from solar thermal. All such designs solve the biggest problem of renewables, energy storage. Within a building, bridging the daily cycles does not need to be a problem.
8. Along the fourth dimension: timing is everything. One of the ways NYC Clean Heat is very regressive, is because it once more ignores the factor of time, and aims for a one time conversion for a short-term goal, which moreover now proves elusive, once we realized that the environmental benefit of natural gas is nil. The tie-in of this program with the NYSERDA MPP reinforces that short-term orientation. Long-term building economics dictate that you should generally not replace things before their time. What should be done is long-term planning for an SDRE retrofit, so that at every step of the way, you can pre-engineer the next steps. Both our DaBx PlaNYC2020 and the UGC 90 by 50 report advocate this longitudinal approach, but you need to make the plan first, otherwise you will be designing yourself into a corner.
9. Exemptions from NYC Clean Heat. Once it is understood that far greater advances in the reduction of GHG-emissions are possible with onsite renewable energy, the city should encourage exemptions on that basis, and give buildings 10 or 20 years to comply, provided they start out with a project that yields at least 30-50% reductions in GHG-emissions. Anything above 30% GHG-reductions can generally not be done with energy efficiency alone. The beauty is, that if it's planned right, SDRE will yield superior building economics, and thus increase building values, so that building preservation is ensured with SDRE conversions.
10. Building resiliency is a central point. In the new flood zones, building resilience is mandatory, and in a much more profound way than discussed here. Resilience is a value that ensures buildings can stay at least partially functional in an outage. The switch to natural gas has undermined building resilience in a disastrous way, and it should be reversed as soon as possible.
11. The disaster of becoming overly dependent on natural gas was amply demonstrated in the winter of 2014. Not only were heating bills going up, but more and more electricity is generated with natural gas also, and while january in the past was normally the low season for electrical rates, in 2014 rates were at an all-time high. For my own apartment the ConEdison (spot/variable) rates were ca 7 cents/kWh in 2012, 13 cents in 2013, and 22 cents in 2014.
12. NYC did not have any pipeline ruptures in 2014, as happened in the Midwest. But the city has a very constrained gas distribution system, depending on a few major pipelines, and there are no backup storage facilities (off-shore LNG anyone?). New York production of natural gas is also coming to a stand-still because of environmental concerns.
13. PACE financing is the obvious means that is in place already, and NYC will need it. It is politically a worthwhile project to support as long as it is tied to projects that accomplish at least 30-50% GHG-reductions initially. Once owners have the taste, and make proper long-term capital plans for energy, the potential for building appreciation is enormous. For at every level, if you can generate your own energy on site, that investment in SDRE is a permanent energy price hedge. 50% is really the optimal point to strive for in the initial project, since then the building is "over the hump" with dependence on fossil fuels.

Converting PlaNYC from communism to capitalism

PlaNYC as is, as well as other similar plans everywhere, operate in the central-planning style of the infamous 20 year plans of the former Soviet Union, which were designed to fail, as I've argued here. The mistake is to take the macro view of "energy efficiency" and then ram it down to the micro level with laws and incentives, instead of to engage the economic self-interest of property owners. Property owners should be in the business of maximizing property values, and government- the public interest- should incentivize reductions in GHG-emissions. Energy efficiency is not a proxy for GHG-reductions. Energy efficiency of fossil fuel systems makes GHG-emissions more intractable, so if we subsidize it, we indirectly subsidize the fossil fuel industry.

The energy benchmarking and audits of LL84/87 are a positive. The requirements to tinker with marginal efficiency improvements without totally rethinking the system is regressive, and bad policy. The market might take care of it - or at least need a lot less help than we're spending now on making building owners do things they don't want to do. Net zero construction has been healthier than any other area of construction for many decades, net zero or near zero buildings keep their values better than anything. Once we get building owners to perform serious renewable retrofits, the economics will force others to comply, or die. The simple fact is that with today's technology, 80-90% reductions are possible in many existing buildings, if the buildings follow a deliberate renewable retrofit strategy--the 90 by 50 report from Urban Green Council demonstrates the point. The first project should be in the 30-50% (GHG-reductions) range, and that is more than any energy efficiency project can do. Competitively, the pressure will be on.

Conclusion: Renewable Energy over "Energy Efficiency"

Once more, energy efficiency tends to mean making fossil fuel systems more efficient, and that is not a worthwhile goal for public support. PACE finance is an option that will enable the massive capital investments needed, to facilitate moving energy from liabilities to assets by means of SDRE. The focus needs to shift from energy efficiency of fossil fuel systems to site derived renewable energy and the city can exceed the parameters of PlaNYC completely if it does so.

The Energy Efficiency Trap and GHG-reductions

Energy efficiency as a single objective is a trap, because it prevents us from pursuing renewable energy and truly make inroads against GHG-emissions. Any user of energy, and that's all of us, would want his systems to be efficient. But if your energy systems are 80-90% based on fossil fuels, and you subsidize energy efficiency without further qualification, you are subsidizing the fossil fuel industry. Allegedly this is not what we're trying to do, but it is what we are doing, and the shareholders of ConEdison, Exxon/Mobil, Shell OIl, BP and others thank you very much for your support. I'm doing it for them here, because they seldom acknowledge all of these subsidies. But, energy efficiency grants and other financial subsidies should stop, if anybody, it's the carbon energy industry who should offer financial incentives to their customers to become more efficient, as a matter of customer retention.

There are in fact two columns to the energy decision for a property, which in an existing building amount to either the status quo, which usually means fossil fuel based, and the alternative being predominantly renewable energy based, with the ideal case being net zero. Regardless of which strategy you pursue you want to be efficient. The difference is that with energy from the grid your payback from efficiency comes from reduced energy bills in the future, whereas with renewable energy, the payback is a reduction in the installed capacity you need in the first place.

The Energy Efficiency Trap

In his recent book, The Efficiency Trap, Prof. Steve Hallett gives a vivid and in-depth analysis of the problem that the pursuit of efficiency achieves the opposite of what we want to achieve, namely making carbon energy cheaper, so we use more of it, and use it longer, when the point was finding an alternative. Hallett goes well beyond the Jevons paradox, which says that demand goes up as efficiency improves, and MORE THAN offsets the efficiency gains. Hallet's outlook is based on natural cycles - his background is botany and he thinks in biological cycles of development - and the picture he paints is none too encouraging, as the world is still stuck in the confusion that energy efficiency is green. It isn't. It is very, very brown, if not actually black, and certainly bleak.

Diminishing returns from energy efficiency

The behavioral analysis offered by Steve Hallett is important to understand first. Analytically, there is also the simple economical fact of diminishing returns from successive investments in energy efficiency, so it is an absolute dead-end from an investment point as well. This fact becomes really problematic very quickly because you tend to make different decisions about efficiency in the two columns, although some will be shared between the two. The end result is that you need to decide first things first, and that means a make or buy decision between carbon energy or renewable energy. Economically, this is a make or buy decision, since renewable energy moves energy from liability to asset, and it is capital-intensive up front. In more cases than people think however, 30 years of free energy beats "investments" in energy that offer a 10-25% reduction of your bills.

The compound returns of renewable energy retrofits

Not only does energy efficiency come with diminishing returns, renewable energy offers potential for valuable engineering synergies, and therefore compound returns. The example in a typical apartment building is the geothermal DHW system I discussed in my last post. A smart replacement strategy would be to provide the hot water in such a building with a geothermal system, probably with a natural gas second stage heat. You are giving the boiler another few years of useful life, but when it goes you can then switch to a solar thermal system, which can replace that gas backup heat for the hot water, and provide HVAC for the whole building as well. In the interim, when the time is right you could generate your electrical requirements in part or in whole from either a building mounted wind turbine or from solar PV (that could be via a hybrid thermal/PV system), and then your geothermal pre-heat could act as your own energy storage, giving you higher returns than selling back to the grid.

How the green movement was hi-jacked by energy efficiency

With the big oil price shocks going back to the 1970's, the logic was developed that said a dollar invested in reducing demand for energy had higher returns than increasing supply. Later, when global warming and GHG-reductions became an increasingly important issue, the carbon energy industry latched on to the idea that energy efficiency theoretically also would reduce GHG-emissions. Not only is this not true because of the effects of the efficiency trap and the financial fact of diminishing returns on investment, It also provides a very short-sighted strategy whereby carbon energy competes with renewable energy, so we continue to make the wrong decisions.

Energy efficiency and bad business planning

For the most part, building owners seem to evaluate their energy options based on payback of equipment based on marginal energy savings, and as a result the more capital-intensive projects never get done. As a business planning tool, payback may give me a good view of the potential of one technology or another, but unless I am doing a 30 year cash-flow model of my property, I will not catch the potential for engineering synergies, and the long term cash flow effects of free energy. And unless I consciously model the two alternatives, I will make the wrong decisions about energy efficiency. Another example: if our building can generate its own electricity, and switch to electric cooking, an enormous amount of indoor air pollution can be eliminated, and we can specify tighter windows, and use some heat-recovery ventilation. If you went down the energy efficiency road, the best you might have done is specify a tankless gas hot water heater,

Conclusion

Global climate change policies need to change. Serious progress with Greenhouse gas reduction will depend on prioritizing renewable energy, and dropping the confusion with energy efficiency as an "alternative energy strategy," when instead energy efficiency only preserves the status quo.

 

Geothermal Heat Pumps Strategic Renewable for NYC

It is time to revisit geothermal heat pumps, and the battle of renewable energy versus energy efficiency. It has been noted with some regularity on this blog that NYC Clean Heat, and its comrade in arms the NYSERDA MPP are destroying real estate values in NYC, and not contributing much to reducing GHG reductions. I was an early advocate for geothermal heat pumps as the single most strategic renewable technology for energy retrofits in NYC buildings, and in April of 2013, then Mayor Bloomberg finally commissioned a serious study of geothermal energy for New York.  We had been advocates (with my consulting firm DaBX) since 2011 at least in our PlaNYC2020 report, and then hurricane Sandy did its bit to promote geothermal heat pumps. It is time now to demonstrate why not only does geothermal have "certain advantages," but is actually the single most important strategic renewable energy technology in the city.

Multi-family Buildings and Geothermal Heat Pumps

In general, if you are looking at any building, energy that you can generate on-site with renewable energy technology (Site Derived Renewable Energy, or SDRE) has numerous advantages. Most importantly, financially, if you analyze long-term (say 30 years) cash flows, thirty years of no cost energy often beats out the "savings" of 15-25% that are achieved by most energy efficiency overhauls. This pays for the heavy capital commitment up front.

1. The first advantage is that you have no transportation losses.
2. A second efficiency factor is that because there are no transportation losses, you can often save the conversion to electricity and pure thermal technologies win the day, because heating and cooling are the larger part of the energy budget, often 75%.
3. On top of that, if you are operating with pure process heat, you have a pretty economical way of storing that either at high temperature (i.e. process heat from solar thermal), or as pre-heated hot water (from geothermal).

A geothermal heat pump is 400% efficient: for every joule of energy it uses (electricity), it returns 4. To take the simplest application in a building, for Domestic Hot Water (DHW), it was traditionally provided by a coil in the boiler, and the efficiency of such systems is typically in the range of 45-75%, in particular because those boilers were oversized relative to the need for hot water, and the need for hot water is year round.

Why the NYSERDA MPP marginalizes Renewable Energy (RE)

The NYSERDA MPP is built on a set of mistaken assumptions and foolish economics. It bundles a set of energy efficiency programs and incentivizes the building owner to deliver efficiency retrofits that score above (currently) 15% gain. It all but marginalizes renewable energy. It all results in owners trying to find the cheapest way to qualify for the incentives, and technologies are selected based on their marginal energy savings, just to get the incentives, in terms of advantaged financing etc. The program focuses on energy efficiency (EE), which always yields high returns at first,  but suffers diminishing returns later, and it is biased against renewable energy (RE) projects, which are capital-intensive at first, but come with a "long tail" of free energy.

The Math of Geothermal Heat Pumps

Here is the typical math for a geothermal heat pump in the DHW application - based on the assumption that the prices for the BTU inputs (oil, gas, electric) are all the same:

1. Old situation: DHW from a coil in the boiler - oil/steam, usually 60% efficient (between 45-75%)
2. New situation: DHW from geothermal heat pump (electric, 400% efficient), and natural gas secondary heat cum backup at 95% efficient, in about 70/30 proportions, so that the combined efficiency is 0.7*400+.3*.95 =280%+29%= 309% efficient.
3. Let's round it off: 60% efficient vs 300% efficient
4. Therefore, if the Btu pricing was all the same that would be the comparison, meaning in case OLD our marginal energy cost is 1.67x the Btu demand, and in case NEW it is 0.33x the Btu demand. In other words the marginal Btu input of the new system is ca 20% of what it would be under the old system.
5. In real life this picture is then complicated by the pricing differences between oil/gas/electric,  but the point is clear, the innate efficiency of the solution is staggering.
6. We should emphasize again, if we can generate any of our own electricity, with wind energy or solar PV, we can store it as pre-heated hot water, and get a higher return than selling it back to the utility.

Geothermal Heat Pumps: The Math of Effective Btus

Again, this beautiful equation will evidently have different outcomes depending on the actual pricing of the different energy sources.

1. We were buying oil to heat the hot water, and the Btu value of #6 fuel is approximately 153,000 Btu per gallon. In the winter of 2014, in NYC, a gallon of #6 goes for $4.00, therefore, the cost per 1000 Btu is 2.61 cents.
2. We are substituting this with electricity, which in the winter of 2014 in NYC, goes for about $0.25 per KwH, and the thermal value of a kWh is about  3,214 Btu. The cost per 1000 Btu therefore is ca. 7.78 cents; and with natural gas as a secondary fuel, which goes for about $1.25 per therm (100,000 Btu) and therefore costs ca 1.25 cents per 1000 Btu.
3. For argument's sake, we needed 1,000,000 Btus for a given quantity of DHW, and the comparison now becomes: Old style (oil/steam): 1.67 x $0.0261 x 1000 = $43.59, and New style (geothermal plus gas): (0.7 x 7,78 x .25 + 0.3 x 1.25/.95) = 1.36 + 0.39 = 1.75 cents per 1000 Btu, or $17.50 for 1,000,000 Btu.
4. Now, if we can generate some of that electricity ourselves with a wind turbine or with solar PV, we have the benefit of storage, which gives us a higher return than selling it back to the grid, and we are compounding our savings.
5. In short, most building owners got taken to the cleaners when they invested lots of money in converting to natural gas, and made some small savings and efficiency improvements, but long-term they are still at the whim of energy prices. Their buildings have become LESS resilient. With DHW being 30-50% of Btu requirements in the typical apartment building, the geothermal solution would be a hands down winner, and perhaps a first step towards a mostly renewable heating and cooling solution...
6. From the standpoint of clean energy and reducing GHG emissions, we are now servicing 70% of this Btu requirement (DHW) with electrically driven geothermal heat pumps, with 400% efficiency. In short, 75% of the 70% is GHG-free, representing over 50% of this requirement is now free of GHG-emissions.

What really happened...

The conversion to natural gas under the NYC Clean Heat program, combined with the NYSERDA MPP has been neutral event for GHG-emissions because, while gas burns cleaner, the production and transportation losses of methane make it about as bad as coal for overall air quality, although within city limits there would be some reduction of smog.

Only very few buildings made the conversion to geothermal hot water systems, and when they did, these systems were most often wrongly designed, as just water heaters, and not with a view to pre-engineering whole building energy solutions, in which boilers might eventually be replaced with a solar thermal plant, at most with only a simple boiler for backup.

In most cases, conversions were from oil to gas, which reduced building resiliency, for we are now in a city that is wholly dependent on a single fuel, and if you watched the news tonight, one pipeline explosion could cause a tremendous amount of havoc, as they are finding out in the Mid West.

Conclusion

Energy efficiency programs mean that building owners are paying for making energy from the grid more economical, instead of investing in their properties and generating their own energy with (mostly) thermal technologies. Though finally geothermal heat pumps seem to be getting some more recognition, it is clear again that energy efficiency gets prioritized by current programs at the expense of renewable energy, and ultimately to the financial detriment of building owners.

Baucus Energy Tax Reform Misses with GHG-emissions Reduction

The Baucus Energy Tax Reform Proposal, which has reduction of GHG-emissions as its focus, risks aggravating the very problem it is trying to cure. As drafted, for all its merit, and precedent-setting simplification, it would exclude an entire class of technology that offers more bang for the buck in GHG-reduction: all forms of thermal technology that can be deployed at the demand-side of the grid.

The proposal limits itself to addressing electricity generation, and production of transportation fuels. In other words, it limits itself to addressing the production of energy at the supply side of the grid, and thereby reinforces the grid model, at the very time that technologically we are capable of building microgrids, and net-zero or near-zero buildings (including retrofits), and because of the increasing demand for building resiliency, we should be stimulating more Site Derived Renewable Energy (SDRE), for that eliminates at least one energy conversion (from whatever to electricity), as well as the transport problem for either gas, or oil, or electricity.

Net-zero, Near-zero, Thermal Energy to the Rescue

The conversion to electricity goes with energy losses, as does its transportation, yet evidently it has redeeming value because of the ease of distribution, but the quiet revolution that is going on for the last decennia is the consistent growth and profitability of Net-Zero Energy Building (NZEB) construction. With natural gas it is already becoming an accepted fact that the production and transportation losses are so significant, that it is just as bad as coal on a system-wide basis.

The next frontier is Near-Zero Energy Retrofits, and in all cases the difference between mere energy efficiency (typically with a 20-30% reduction of energy bills), and any solution that maximizes the use of renewable energy technologies, both active and passive (Site Derived Renewable Energy - SDRE), is that projects can achieve 70/80/90% reductions in Green House Gas (GHG-emissions) with SDRE, and be absolutely economical. The extreme example is the Zenesis house, but in general Near-Zero Emissions is a tremendous achievement for existing construction, and any retrofit achieving over 50% GHG Emission Reduction should qualify.

The key technologies are thermal, both active and passive, including solar thermal and geothermal, and harvesting process heat from either the sun directly or from the ground with a ground source heat pump. The normal transportation losses with process heat do not apply if you are using the energy on-site, and you are saving energy conversions, plus you have an easy way of storing the energy in either high-temperature process heat storage or low temperature pre-heated Domestic Hot Water, as well as various other related, passive solutions. So the batteries are cheap, whereas with the centralized grid, and electricity in general, batteries are expensive, and very environmentally unfriendly.

Technological Non-neutrality and More GHG-emissions

The stated goal of technology neutrality would therefore not be achieved by this proposal, for the most efficient solutions, thermal technologies at the demand side, i.e. in buildings would be excluded from this tax treatment, whereas they would be big winners if the new technology neutral regime applied to them, since they produce far more bang for the buck than the grid-based alternatives. For example solar thermal is about 500% more efficient in converting the Sun's energy, and if you add the benefit of the ease of storage for off-peak use, that advantage becomes even greater. Plus, by nature it does not produce the fluctuations on the grid that come from solar PV.

In short, this proposal would exclude the very technologies that offer the most bang for the buck (the words used in the proposal staff discussion documents), and the greatest reductions in GHG-emissions, as well as reduce demand on the grid, and improve building resiliency, all of which are highly desirable outcomes today. Especially greater resiliency is of extreme relevance for the coastal communities and many other areas, where the reliability of the grid is questionable. The current proposal would reinforce the centralized generating model at the exact time when the nation needs more decentralization.

Building retrofits:
reducing GHG-emissions by excluding energy efficiency and including SDRE

Mere energy efficiency retrofits should probably be excluded from the tax incentives, for they are an indirect subsidy to the energy companies, not the building owners. Moreover, they are generally a solution with diminishing returns to property owners, not to energy companies. They typically achieve only 20-30% energy savings, and maybe the energy companies should sponsor them as customer retention programs. What should be included is Site Derived Renewable Energy (which may include energy efficiency upgrades). If these incentives are structured correctly, there will be a huge increase in building level renewable energy retrofits, with all the desirable outcomes noted above: greater resilience, reduced demand on the grid.

The Audit Problem: Verifying Results of GHG-reductions

The staff discussions of the energy tax proposal reflect concern about verification for retrofits on the demand side of the grid. Verification does not need to be hard, for long term lenders have a similar interests. Requiring audited GHG-reductions based on clear standards are the answer, and the EPA's Energy Star Portfolio Manager provides the framework.

Conclusion: net-zero and near zero buildings reduce GHG-emissions faster

There is a huge potential for GHG-reduction through on-site energy generation with renewable technology (SDRE), in the form of net-zero or near-zero construction and retrofits. Retrofits will obviously be the larger market. The more these solutions gain traction, the more demand will be removed from the grid and building resiliency will increase. As long as these proposed simplifications of the energy tax structure are limited to the supply-side of the grid, they will greatly impede the most promising technologies available, and they will aggravate the problem of technology neutrality which they are trying to solve. The most bang for the buck in GHG-reduction is on the demand side, with net-zero and near-zero construction and retrofits.

Energy Tax Reform is in the Air

Senator Max Baucus (D-Mont), Chairman of the Senate Finance Committee proposed far-reaching energy tax reform. The principles  are solid, to quote:

“It is time to bring our energy tax policy into the 21st century,” Senator Baucus said. “Our current set of energy tax incentives is overly complex and picks winners and losers with no clear policy rationale.  We need a system of energy incentives that is more predictable, rational, and technology-neutral to increase our energy security and ensure a clean and healthy environment for future generations.”

Regrettably, as drafted, it is limited to electrical generation, and thereby it aggravates the problem of confusing incentives that get in the way of maximizing reductions in GHG-emissions. It effectively accomplishes the opposite of its stated goal mainly by locking out the thermal technologies that are so powerful on the demand side of the grid, and can hugely reduce electrical demand, and therefore reduce GHG-emissions.

In its present form it would leave out the huge potential shift in energy production from the supply side to the demand side of the grid, where thermal technologies have the greatest potential. In general, renewable energy generation facilitates a move towards more on-site generation, and thus alleviates the demand on the grid. I addressed this issue earlier in an open letter to President Obama proposing simplifications in energy tax and incentives, including eliminating incentives at the technology/component level, such as is now done with the Energy Star rating system.

We can only hope that the proposal be amended to include ALL ENERGY GENERATING technologies, as well as energy storage, and certain passive energy technologies, insulation, energy efficiency, etc. Careful drafting is in order as to what is in and what is out. At the extreme, some homes and buildings should arguably be scrapped altogether, if they are hopeless energy sinks. However, even if they were replaced with a net zero building, that should probably not be permitted as a tax write off in its entirety as intended in the proposal... or should it? (Think e.g. Zenesis House.)

Utility-scale Projects

For utility-scale projects that continue the old model of the grid, with centralized generation and mass distribution, electrical generation is the way to go, because electricity is easier to transport than process heat. Various technologies can come into play, and we have recently even seen solar thermal win some interesting applications, such as the Ivanpah project. For remote energy generation, the Baucus proposal levels the playing field in the only way that makes sense. But centralized energy generation is of decreasing importance, and the greater reductions in GHG-emissions can be achieved on the demand side of the grid, not on the supply side.

Building Retrofits Include Energy Generation

Building retrofits are different. They are on the demand side of the grid. According to DOE, buildings account for 39% of total energy consumption, and 72% of all electricity. If the incentives are leveled in the spirit of the Baucus Energy Tax Reform proposal but include ALL forms of energy generation as suggested above, HUGE changes are possible. Not only can more electricity be generated in buildings (solar, wind, hydro), but more electrical demand can be replaced with thermal technologies, such as geothermal and solar thermal, thereby reducing the need for remote production in the first place.

This shift is necessary both because of direct environmental reasons, such as GHG-reductions, but also because greater building resilience is becoming mandatory, and in many areas with weather related risks (such as the coastal zones), greater energy independence and micro-grids are becoming very necessary, and laws are already starting to encourage them. Here is where thermal technologies will shine, and need to be on a level playing field with the alternatives.

The Potential Impact of Thermal Technology on GHG-reduction

The advantage of thermal technology when it is implemented at the demand side of the grid is extensive:

• Greater efficiency, in some cases this is very obvious. For example, solar thermal directly converts the heat of the sun and uses it for heating and cooling, and it can even be used for on-site electrical generation.
• Ease of storage, whether it is geothermal or solar thermal, storing process heat is much easier. With geothermal heat, preheated hot water used for heating or cooling can be easily stored, With solar thermal you can store process heat in high heat tanks, and downstream you can store preheated hot water.
• Because there are no transportation losses, and heat can be easily stored for intra-day use on-site. Also, geothermal can easily provide the ability to store energy from wind or solar PV for intra-day use also, which typically provides superior returns compared to selling back to the grid at wholesale levels, and again water storage is more environmentally benign than batteries.

Energy Star Portfolio Manager to the Rescue

Help is on the way from your friendly EPA. The Energy Star Portfolio Manager program is designed exactly to model building performance and plan energy retrofits with an eye to GHG-reduction, in short, the tools for a comprehensive revision of the incentives for ALL forms of energy generation are already in place. The proposed revisions of the energy tax could and should rely on this type of modeling, and it would seem proper if the EPA set the standards. With this type of support in place a simple incentive structure for GHG-reductions is all we would need.

Conclusion: Include All Energy Generation

As drafted. the Baucus proposal for energy tax reform is a step in the right direction, but it would accomplish the opposite of its stated goal by leaving out thermal technologies, and the sector that is capable of such dramatic GHG-reductions: building retrofits with on-site energy generation. We can only hope that the same simplification of incentives should be extended to all forms of energy generation, active, and passive, instead of applying to electricity generation alone.

Energy Efficiency, Handmaiden of the Koch Brothers

We are still in an alternate reality, as in: "down the rabbit hole" in Alice in Wonderland, where planning the green future is concerned. Basically, we are stuck repeating the mistakes from 40 years ago, based on assumptions that might have been more valid than now. Be that as it may, they are no longer valid today. A new plan is in order.

When the grid was still THE GRID and Energy Efficiency the solution

Back in the day of the first serious energy price shocks, economists pretty quickly surveyed the energy landscape at the macro level, and figured out that the marginal dollar is more effectively spent on reducing demand than increasing supply. From that time forward the energy industry (oil companies plus the utility sector), adopted energy efficiency as an objective and participated in attempts to achieve those demand reductions, in order to keep its products economically viable.

After environmental damage (Green House Gas (GHG-) emissions) became more known as a cost of carbon energy, the energy industry hi-jacked the renewable future, co-opting green energy with a substitution of energy efficiency for renewable energy. Thereby "green" was now good for the shareholders of the energy companies, for it extended the franchise, and the do-gooders in the environmental movement fell for the snow job, and became the best allies of the carbon cowboys under the auspices of energy conservation, energy efficiency, or whatever other moniker will serve, anything that made people feel like they were sacrificing for the good cause...

All of this had its roots in a time when we thought that economic use of energy was the problem, and before it was widely known that GHG-emissions were the problem, and renewable energy the answer, but we have never adjusted our policies. Most importantly, what has also changed in the last 40+ years is the rapid development of renewable energy solutions that can be installed in properties, on the demand side of the grid.

The Energy Star Program takes the cake

The Energy Star program is the epitome of the problem of dysfunctional energy policy, because it focuses on the component level, not on the systems level. This may be valid when it comes to selecting a new fridge or microwave, but anything that is even potentially part of the permanent energy infrastructure of a property needs to be looked at on a systems level. Unfortunately, only too often these days, there are tax-credits for specific items of Energy Star rated equipment, and all-too often these get specified by bookkeepers and accountants even when the engineers know they make no sense.

The Energy Efficiency Trap

Energy Efficiency is actually an economic trap, and it is also an environmental trap, as is very convincingly argued by Prof. Steve Hallett in the book The Efficiency Trap. Economically and financially, energy efficiency is a trap because of the phenomenon of diminishing returns, which creates the perfect trap with which to lure suckers into uneconomic and eventually self-destructive behavior. Here is how it works:

1. In year one we finally grab some subsidized program that will offer us energy efficiency. So we did a certain amount of weather-stripping and insulation, a set-back thermostat perhaps, and other low dollar, high impact fixes. It reduces our bills somewhat.
2. In year two or three the bills went back up, because of price increases, so our "investment" in weather-stripping has been wiped out,
3. However we now look at what inefficient equipment we have and with help from the Energy Star program we figure out how we can further reduce our energy use. In reality we get that new fridge we always wanted, and some other gadgets, but we save energy, so we can shop without guilt. Nobody is calculating what the return on investment is.
4. Another year later, it's time to get serious, we have cumulatively spent a lot of money on energy efficiency, with little to show for it. But we know our water heater is coming to the end of its life, and the boiler should be replaced in a few years. So let's do the water heater this year. In comes a happy salesman with a tankless hot water heater. Energy Star rated, good for a 30% tax credit, and with a ten-year guarantee, and 5 year financing so we are spending less than the energy we now buy to heat water. Miracle of all miracles: a self-liquidating proposition. The salesman loves saying that, and we like it too: "Sign here, press hard, three copies!"
5. Two years hence we finally have to replace that boiler, so we shop for new Energy Star rated boilers (what else!). Our old boiler was 60% efficient, and the new one is going to be 95% efficient. More tax incentives, and self-liquidating financing propositions. Finally we're spending less on energy, but we're still paying off this equipment. By this time we may have a 25-35% reduction in energy consumption compared to the year we started working on this issue. Our oil or gas bills are going down, but our electrical bill is still stubbornly high.
6. The next year there seems little left to do. Replacing the windows? A twenty-five year payback convinces us otherwise. But, wait a minute, here comes another sales person, now with a solar PPA, for less than our average monthly electric bill, we can now really go green and help the environment, not to mention impress the neighbors. And we're saving 10% compared to paying the electric bill, and we already know the rates will go up anyway...

By the time you add all this up, we have spent a fortune on energy savings, and our energy savings result in an energy bill that is only slightly less than when we started taking into account the various payments. Our utility company and our oil company love us. They even send us certificates to congratulate us on how "green" we are. But the problem is, every next investment was bigger than the last one, culminating in the solar panel that was an $35,000 investment, and 10% reduction of the electric bill was only a 4% reduction of the overall energy bills, and we're paying for it over 20 years, but the actual payback is very slow, and in the meantime, the remaining energy portion of our bills keeps going up.

Why Energy Efficiency is a trap

In the six steps to energy efficiency above, there were several thresholds that were crossed. Instead of upgrading the boiler, we could have chosen a solar thermal solution, except it seemed expensive, and we had just eliminated the water tank two years earlier, not realizing that it could provide "free" energy storage, so what were we to do? Write off our brand new tankless hot water heater and scrap it? Of course not! So we upgraded the boiler. In short, we walked a path of successively larger investments, with less and less energy savings, and we still have an energy bill that is well over 50% of what we started with.

If we had done a systematic analysis at the outset, taking into account when various equipment would run out, we might have ended up with a new energy plan in which we perhaps also did some insulation first, but saved up some money to install either geothermal or solar thermal for HVAC and Domestic Hot Water (DHW). And we got some tax credits on those as well, but we ended up reducing our energy bills by 70-90%. Moreover, we eliminated most major sources of indoor air pollution (boiler, DHW), leaving only the stove. We could now convert to electric cooking, and replace the windows with new triple glazing, and get some heat-exchange ventilation. And we could end up with our old house being near net zero, certainly if we could combine geothermal with solar PV. Site Derived Renewable Energy (SDRE) permanently replaces subscription energy from the grid. It is also permanent part of the plant and equipment of our property, and raises the value.

Ten years later Site Derived Renewable Energy wins

In these two alternate realities for our lives, the energy-saving alternative had us walking into the efficiency trap. We reduced our energy but at a staggering cost, and we still have a significant energy bill left, and it keeps going up. In the second alternative, we bit the bullet and invested significant money in the early years, but it looked better with every passing year, for the payments did not go up, unlike the energy bills of the neighbors. This is the effect of Site Derived Renewable Energy (SDRE). In short, the value of the property goes up, and we are helping the environment by eliminating 70, 80 or 90% of direct carbon emissions from the house. Not only that, but a new development of net zero homes was going up nearby, and we were approaching that level for our own home, so the value of our property should hold up.

Conclusion: SDRE wins

SDRE means permanently replacing the monthly energy bills with our very own generating capacity, which we only buy once. It could be solar thermal, geothermal, wind, solar PV, various passive energy solutions, or a combination etc. It adds to the value of the property. In fact, our property's value now goes up with energy prices, and we won't have to worry about the carbon tax when it comes. Site Derived Renewable Energy should be prioritized over energy efficiency, and ratings of components should not distract us from the total design concept.

The Voodoo Economics of Energy Efficiency

Recent reports continue to draw attention to the notion that energy efficiency predicts lower mortgage default rates. Indeed, it seems obvious that energy-efficient homes are worth more, and that mortgage default risk on such properties should be lower. This is the same kind of analysis that was previously used to promote PACE bonds. It may be superficially right, in the sense that the relationship is observable and provable, but it misses the point, simply because a more categorical understanding is possible. Or, while these relationships may exist and seem statistically significant, correlation does not imply causation. There is no consistent approach to underwriting risk for energy efficiency, nor is there an analytically sound approach to explaining why or to what extent the risk of defaulting on home loans is reduced under energy efficiency. The following attempts to fill that gap by means of a simple example.

Energy Efficiency is Secondary

First, energy efficiency is not a primary objective, but a secondary one. The first order of business is a make-or-buy decision about on site generation with renewables (Site Derived Renewable Energy) versus a carbon energy subscription. The easiest way to see this, is to realize that you cannot save yourself rich, something everybody knows and understands. Let's look at four people, property owners all, and their different approaches, Mr. Tinkerer, Ms. Efficiency, and Mr. Analyst, and Ms. Intuition.

Mr. Tinkerer - Energy Efficiency Flying by the Seat of your Pants

• Mr. Tinkerer begins by "saving" energy without thinking, and thereby accepts the status quo. In his single family home he has an $300 electrical bill and an $700 oil bill, for $1,000/month combined.
• He then buys some gadgetry that reduces energy consumption and some insulation, and his bills goes down to $900.
• A year or two later, after some energy price increases, and more wear and tear, he is back to paying $1,000 a month.
• He keeps tinkering and spending money on Energy Star appliances and other energy-efficient products, but never realizes why he's not achieving serious energy efficiency.

This is a case of casually pursuing energy efficiency, and it is probably the most common. Mr. Tinkerer operates from the unexamined belief that he can save himself rich, but all he does is overpay for "energy saving" devices, without ever realizing that energy savings are not additive. Most of us dabble in energy efficiency in similar ways, it's a way to shop without guilt. It probably is a wash in the beginning, we spend as much as we save, but in the long-run we spend way more than we "save." Sometimes it's a lot more, for the savings do not add up, EVER.

Ms. Efficiency - Energy Efficiency by the Book

• Ms. Efficiency really goes hog-wild, and does everything she can to reduce energy consumption, year after year. The first year she spends $3,000 and creates a 20% reduction, i.e. she enjoys a 15 month payback on her investment.
• The second year (she still have 3 months to go to earn back that first investment), she spends $6,000 for a further 10% reduction. Simplistically, 10% of the remaining $800/month energy bill is $80, and therefore she now enjoys a 75 month payback, or 6.25 years.
• The third year she can't find anything else to do, she wants to do something major, and now she talks to SolarCity (or any other similar provider of solar pv on a PPA- or lease-basis), and they can provide her with a solar panel (nothing down!!!) and reduce her electrical bill by 10% (she's already very efficient), for a further 3% of her overall energy bills. It's a 20 year Solar PPA. So now her monthly energy bills are down to $698.40 in constant dollars, but there were a few price increases, so she's at $750/month for the year. However, now her roof is covered with a beautiful shiny solar panel! She sends a Christmas card to her mother, to show off the solar panel, and mom is duly impressed with how green her daughter has become.
• However, once she analyzes the figures correctly, that solar panel is a 20 year investment of $40,000 for a 3% reduction in her energy bills (10% on electricity alone), which means a payback of 154 years.
• She's still paying $750/month in energy bills (including the $200/month solar lease), and the prospects remain that prices will go up for the remaining $550 "energy" portion of her monthly payments. What has she won? To a financier it seemed things have improved, for $750 now is less than $1000 a few years ago, but that PPA commits $40,000 of her borrowing capacity, and the panel locks out most of her roof, for any alternative uses that might prove to offer better results.
• The residual energy portion of her monthly obligations continues to be above 50% of her starting figure.

In short, a categorical make or buy decision has to be made first before anyone starts on efficiency: do we continue to buy energy, or can we economically make our own. On site renewable energy generation is the alternative to buying energy in perpetuity. Energy efficiency only comes into consideration AFTER we make that make or buy decision, or else we falsify that decision, which is now commonly the case.

Energy Efficiency and Diminishing Returns

The example above shows the effects of diminishing returns, the successive investments show less and less savings, because the base is growing smaller. Ms Efficiency started out investing $3,000 with a return of $200/mo then $6,000 with a return of $80/mo, and finally $40,000 with a return of $21.60/mo (clearly she is paying more for every successive improvement, while here additional savings decrease). This is a losing battle, and it is the battle home owners are losing all around the country, as long as they believe in the "savings" paradigm.

Short-term, yes cash flows are improving, but a few energy price hikes can wipe that out, and the result is that eventually the improvements prove minimal or non-existent within a few years.

PACE Bonds and Mortgage Default Risk

The rationale for the creation of PACE bonds was to provide building owners with a means of financing major capital investments up front to do material retrofits in the energy infrastructure of properties. Unfortunately, the PACE bond camp has been hi-jacked by the energy savers also, and thus they have become yet another customer retention program for the energy companies, and the vendors of energy saving widgets, which was not the original idea. PACE bonds were designed to overcome the capital intensity of the switch to renewable energy, not to squander money on energy efficiency enhancements. Investment in renewable energy moves energy from liabilities to assets, and therefore would structurally reduce underwriting risk, if the economics are solid.

Enter Mr. Analyst - Investing in Site Derived Renewable Energy first

Here is how it should work: Mr. Analyst, with the same $1,000/month energy bill, invests significant money (maybe $140,000), and gets 20-year PACE financing that costs him $900/month, but he wipes out 85% of his energy bills. He gets a geothermal heat pump that provides his HVAC, and a solar panel that offsets most of the electrical load. The first year he gets a 30% tax credit on some of that investment, etc., which helps, but he ends up in a similar situation to his neighbor Ms. Efficiency. She went the energy savings route for the first 3-5 years, but then gradually Ms. Efficiency observes her bills nudging above $1,000 again. Mr. Analyst stays steady at $900/mo in payments, and his residual energy bill of $150 grows a little bit, but not a lot. And Mr. Analyst looks better with every passing year. Let's assume that equipment lasts 30 years. By that time the energy profiles of the two homes will be vastly different.

Ms. Intuition - Thinking Long-Term

Ms. Intuition in the meantime may be even smarter, she gets the same geothermal heat pump, and puts it on a time of use meter, running it mostly at night. She reads the papers, and she sees that solar panels today are 15-20% efficient, but there's some new invention every few months that promises a great breakthrough. She waits a few years, until solar panels have gone from 15-20% efficiency to 35% efficiency, and she now installs a solar panel that completely offsets her electrical use, and she ends up with zero energy bills. In short, she "ate" the electricity cost for a few years, but she gained a technology advantage compared to Mr. Analyst. Geothermal heat pumps are already 400% efficient -- returning 4 joules for every 1 joule you supply -- and are not likely to get any better. With solar PV there is another patent announced every week to increase the conversion efficiency, so it was a reasonable guess to expect that the efficiency of that technology would increase in coming years, and that waiting could be prudent. Notice also that the solar panel here enhances the investment in the geothermal heat pump and improves the value of that energy price hedge even further.

These are just examples. The numbers are rough, to show orders of magnitude, but the principles are clear. They show that the passive stance of "energy efficiency" and "energy savings" is often bested by a focus on generating your own energy wherever it is economical.

• We can't save ourselves rich, and energy efficiency might reduce underwriting risk somewhat, but there are better alternatives, such as investing in Site Derived Renewable Energy (SDRE) instead of energy efficiency.
• Energy efficiency is an operational expense, not an investment, it is short term in nature and mostly not part of permanent plant, but subject to wear and tear.
• Energy generation with renewable sources is an investment that adds to property values, by moving energy from liabilities to assets.
• Logically, in the short-term "energy efficiency" might be a self-liquidating proposition, which by definition would reduce the underwriting risk and the chance of mortgage default by the amount cash outflows are reduced, however these effects don't last, for easily provable reasons.
• Site Derived Renewable Energy (SDRE) is a clear and lasting energy price hedge, certainly if more than 50% of the energy requirement can be economically generated on site. In this case the performance of the property improves with every energy price hike, and thus there is a long-term reduction in underwriting risk, and we can expect a commensurate, but lasting reduction in mortgage defaults.
• SDRE also offers protection against a carbon tax, if it ever were to come. Again, energy efficiency cannot do that, even if it may temporarily reduce mortgage default risk. 

Current research into the issues of mortgage default rates fail to distinguish these structurally and financially very different alternative scenarios, while it is analytically clear that the one has a short-term effect, and the other adds lasting value to a property.

Conclusion - Investment in SDRE wins out over Energy Efficiency

Energy efficiency can be shown to produce improved cash flows in the short-run, and therefore should reduce underwriting risk and mortgage defaults. However, for good analytical reasons the longer term value of energy efficiency alone is uncertain, and a better option is renewable energy generated on site (SDRE), that is justified not only by the marginal savings of the equipment, but also by the lasting improvement of property values.