Deep Energy Change at Steinway & Sons in Long Island City

The other day it was my pleasure to get a tour of the Steinway facility in Long Island City, and see their Energy Plant, in particular their solar thermal installation including a 100 ton absorption chiller, and which is smoothly integrated into their overall system with natural gas as a backup, and with an underlying development track of process improvement and rationalization of the energy infrastructure of the plant, which goes directly into improvements in their temperature (68F) and humidity control (50%RH), and increased systems reliability, and a payoff that includes measurable improvement in their operations. The tour was led by Mr. Bill Rigos, who was the project lead for Steinway, and who clearly took hands on responsibility for the project, including overseeing the development of a very customized system of controls that integrates essentially all of the relevant data from various sources, and makes easy control of their system a reality.

Revision/Update: Here is a report on the same installation from Greentech Media from 2013: https://www.greenbiz.com/news/2013/02/22/black-and-gold-go-green-steinway-sons-journey-sustainability

To me, what I saw was a demonstration of the kind of "deep energy change"  the City needs more of. The financial people might tend to see a project with a ca 7.5 year payback, which in investment terms is not overly exciting, but, were the total scope to be modeled, including the greater measure of energy independence, and systems redundancy/reliability, as well as the various aspects of process improvements in the factory, the actual capital improvement to the business is staggering, since it not only saves energy but is directly responsible for process improvements, and reduced production loss ratios which are a direct consequence of a more controllable climate system. In other words, the secret is always in seeing the integral effects on overall operations and these types of intra-marginal investments add tremendous value to the economy.

These types of projects stand in shrill contrast to much of what is going on under the name of energy efficiency, which is often times actually a massive government subsidized form of capital destruction, that can be summed up as: make'm more efficient and switch 'em to gas, or, as a friendly engineer who is in the energy efficiency racket referred to their projects in upgrading multi-family buildings: "screwing in new lightbulbs." Central to the argument which we advance on this site the first generation of energy efficiency projects are always easy, have short paybacks, except they ignore the fact that there is NO follow-on, because they are an investment track with diminishing returns over time.

I could only say that it was a special privilege to see such a shining example of profound systems thinking, and an enduring deep commitment in the person of Bill Rigos himself, in such a venerable New York institution. Literally a shining example for the City, showing an alternative to the natural gas mono-culture that is engulfing us all, which is simply the next energy crisis in the making. At least here and there we are seeing example of looking at energy as we properly should, as a make or buy decision, in which renewable energy becomes the driver and subscription energy the backup. These are the breakthroughs we need to evolve to a sustainable economy and a measure of energy independence which can grow over time. Renewable energy plant is becoming a capital asset of buildings and companies, and valuations of businesses and buildings will undergo radical change in the years to come. Many who are dancing to the pied piper of energy efficiency will come to realize they foolishly invested in becoming more entrenched in fossil fuels and subscription energy, and are likely to find themselves cornere in a dead end street at the next energy crisis, which is presently being created by the current vogue of superficial energy change, which wrongly prioritizes energy efficiency before a proper assessment of the fundamental make or buy decisions about energy plant and the life-cycle consequences of those decisions.

The superficial story of the energy savings at Steinway will be validated over and over again by the immeasurable process improvements to their unique and incredibly valuable industrial process. The evaluation of these kinds of intra-marginal improvements remains notoriously difficult, but it is the difference between business-like investments in energy plant as a strategic asset of a business, compared to the herd-like and thoughtless pursuit of energy efficiency of existing plant, which is more a customer retention program for the utilities and energy companies, and at best an operational savings, that does not deserve the name of an investment.

As an example of the value of Solar Thermal technology in general this application is also valuable, for too often people are charmed by Solar PV because of the incentives, and because electricity is more sexy than heat. What is forgotten is that a lot of the energy you need in buildings is heat anyway, so as long as Solar Thermal produces about five times the amount of energy for the same square area compared to PV, there is little reason to look into PV if you could be using Solar Thermal instead in our densely populated area with high real estate prices.

DaBx PlaNYC2020 Draft

Finally I have brought together the whole integrated vision for a renewable infrastructure, as an alternative, but also complimentary approach to the city's PlaNYC2030.

It is the city's old line apartment buildings, those grand old buildings of 5-6 stories that made the glory days of the Grand Concourse etc, which are the richest target of opportunity for what the city apparently calls Deep Energy Change - a radical shift to a renewable base of energy production. It is these grand old buildings which are there in their hundreds and thousands, that potentially are the proverbial low hanging fruit for an energy revolution that will accomplish deep energy change.

These buildings offer the right scale, large enough but not too large (as skyscrapers would be), to be able to make them substantially energy independent with today's technology. Simply put with the combination of a modicum of grounds around the building, usually plenty of available space in the basement, a flat roof, and few shading problems, usually all or most of the available conditions are in place to accomplish a substantially feasible program of conversion to renewable technologies today.

The prevailing framework of policies and incentives focuses on energy efficiency before energy independence perversely  provides the indefinite postponement of energy independence with government subsidies. It promotes shallow energy change and in the process effectively prevents deep energy change from ever happening. For a building owner, if they are not planning for energy independence now, and develop long term plans to get there, they will never get there. Failing to plan definitely is planning to fail. To the extent that owners are following the current framework of energy efficiency oriented upgrades, they are digging their own graves, in the form of a collective next energy cirisis, moreover, this is often financed with long term money, ensuring that buildings will be under water again in the next energy crisis when it comes. Thus the present model is building the slums of tomorrow, and practicing capital destruction.

Any owners who have done nothing, and are still operating with the old steam boiler and hot water from a coil in the boiler, are actually potentially in better shape than the ones who have followed the prevailing energy efficiency regime, because every dollar they invested in making a fossil fuel infrastructure more efficient, becomes an obstacle for the economic justification of a switch to the energy independence program.

Very evidently, the administration is talking about "deep energy change,"  without much clarity that the current policy framework is an effective deterrent for its accomplishments. We can only hope that the administration can find ways to encourage a shift. There are a number of ways in which law makers and regulators can effectively make these changes possible, and even speed up adoption.

We are publishing the report in two forms, for $99 as an open-ended subscription to the report and all major revisions, and $25 for one time copies.
The subscription version can be found here: http://www.dabxdemandsidesolutions.com/Services.html
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Of Fannie, Freddy and PACE Bonds

If you are not familiar with the story of PACE Bonds, you can follow it here www.pacenow.org

Fanny Mae and Freddie Mac objected to the priority of PACE bonds over mortgages, and thereby scuttled one of the biggest hopes for a recovery in the real estate market.

What should have been done instead is to develop a set of clear engineering and financial test criteria to ensure that the types of investments that are made are never in mere energy efficiency, which face diminishing returns in the long term, but always in multiple renewable infrastructure producing compounding returns over time.

In the urban setting in particular what should be understood is that the investment decision is not primarily about energy costs, it is about grid costs. With transport and delivery costs at 50-70% of the energy bill already, the much ballyhooed volatility of energy prices has little to do with the price of beans, or energy for that matter. As far as the eye can see transport and distribution costs will go up ahead of inflation due to aging infrastructure and utility regulation and politics, so the fluctuating energy costs are a diminishing portion of the problem.

Conversely, if you know today that 50-70% portion of your bill will rise faster than inflation for the reasonable future, and that can be forecast with certainty, then the uncertainty of the price forecasts of the remaining 30-50% are less relevant. Meanwhile no reasonable person expects energy costs to be going down anytime soon, though we may have plenty of volatility.

Thus again to become more efficient at consuming a resource which will cost steadily more forever with substantial certainty, is a death trap, and a stay of execution, yet the financial sector wants to encourage that, and make sure that like lemmings the entire city will throw themselves off the same cliff at the sight of the next energy crisis.

The fork in the road is simple. It is not available to all properties, but by and large it applies to older multi-family buildings in NY of 50 units or more, and for those integrated renewable energy strategies are feasible today, and the priority of PACE bonds over mortgages should be conducive to long term appreciation of the underlying real estate assets. So Fanny and Freddy should become more selective, and resist any energy loans that focus only on energy efficiency, while supporting PACE bond financing WITH priority over mortgages if a well engineered compound strategy of integrated renewable technology is applied, which demonstrably faces continuous asset appreciation.

The current stalemate means the financial sector is creating the next energy crisis, not avoiding it.

Local generation of energy from renewable sources on the demand side of the grid reduces dependence on the grid, and can help improve economics for the grid operators as well, and so once the grid operators understand the new model they should also financially support it.

PlaNYC2020 and the NYC Energy Conservation Code

OK. So Version 2.0 of PlaNYC2030 came out, and it is full of helpful research as well as wonderful initiatives and plans, and the question will be if this is going to be just like the yesterdays's infamous Soviet 5-year plans and 10-and 20-year plans - top down planning that does not work, or is it going to become a practical reality? Better yet, are some going to see the opportunities to get ahead of the crowd and cash in on the inevitable?

NYC seems to be ahead of much of the world, and most cities, in terms of planning and good intentions, and occasionally in some far-sighted action as well, but nevertheless there remains widespread room for improvement, and some of that comes in the form of opportunity. One of the most important insights of recent years is how disproportionate is the contribution of buildings to energy waste and the associated environmental problems in the city, and with all the brave plans we now have, some of which have already become reality, such as the new energy efficiency codes which the City adopted last year, this is starting to be addressed.

This new code is already a very important step, but the question remains how many owners will see money in exceeding it... that's where the music is. The logic of the code is to deal with new buildings and alterations of existing buildings, but we all know that if the problem with cars was that they live 10 years, building have even more obnoxious longevity habits, and can be around for many decades or even centuries. Meanwhile it is only buildings over 50,000 square feet, who must complete their benchmarking by August of this year. So the question is: what war was ever won by attacking the enemy where he is strongest? Or in this case by attacking the problem where it is the biggest? Granted, there is some underlying logic to this approach, but it is important to ask why we are not attacking the enemy where he is weakest. Namely: are there any targets of opportunity, which are being missed?

The answer is yes, and if these targets of opportunity could be addressed properly, the City's energy future, air pollution problems etc., could be improved both more and faster than in PlaNYC2030 as it stands now, which is why I'd like to suggest an alternative PlaNYC2020. Stronger yet, much of the current policy framework incentivizes short term, shallow, and incremental improvements in efficiency, which implicitly causes the indefinite postponement of deep energy change.

The City is full of older apartment buildings (I live in a reasonably decent old D-Class building). What it will take is owners who look at the long term future and realize that a building substantially without energy bills is going to be worth more than the identical building next door with very high energy bills. For comparison, I mention the fact that in my native Holland neighborhoods are already being planned from the standpoint that if they did not do anything, energy costs would eventually outstrip rents. That kind of view point is a big motivator for creative thinking. The current class of property owners very well may not have the mindset, and the NYC Dept of Housing Preservation and Development is no help in the matter either. They talk about putting the emphasis on Building Preservation (many of these old buildings could be quite viable), but their de-facto policies fly in the face of their pronouncements about building preservation. The emphasis on Energy Conservation over Renewable Energy and Energy Independence is by nature a path of diminishing returns, and bound to breed slums in the future, for when buildings are committed to the path of energy efficiency they eventually will be just as much at the whim of energy costs as they always were.

Older apartment buildings offer a scale which facilitates renewable energy even with today's technology, but it is not done, and the most important reason that it is not done may well be in the fact that existing incentive programs to encourage energy conservation, actually incrementally prevent the serious development of energy independence for the future. Many of the existing subsidies, and incentives, including things like NYSERDA's MPP (Multi-Family Performance Program), are geared to maximizing energy efficiency at a point in time. The worst problem from that viewpoint is the Energy Star program - for all its evident merits, from the standpoint of a building system it is anathema, for it suboptimally allocates resources (capital) at the component level, and thereby prevents other decisions which could have been more effective. The NYSERDA MPP program is an improvement to a degree, but it still misses the point because it only looks at thermal efficiency at the building level at one point in time, and ignores long term integration potential.

The critical observation here is that in an existing building, the two options, energy efficiency and energy independence are divergent investment paths. The former is really a customer retention program for your local utility and your oil dealer, whereas the latter is truly an investment in increasing building values in the future, as it produces compounding returns. Equally important, energy efficiency is by definition an investment with diminishing returns: every successive percentage point of improvement becomes rapidly more expensive as you approach the limit of what can be done, and so you might have reduced energy spending by 30 or 40%, or even 50% but then you hit the limit, and you are still buying subscription energy, and only waiting for prices to increase enough to do... what else? Then you may finally have to look at renewable energy seriously. Typically the first efficiency measures show paybacks under 18 months, but pretty soon you start running out, as paybacks for incremental improvements become explosively more expensive.

The alternative path, towards Energy Independence Now! is the plan towards PlaNYC2020... and it starts in a less attractive way, probably with 5-7 year paybacks, but it gets better after that, as you get the benefit of compounding returns. To choose the energy independence strategy now requires careful planning and a long term view. Speculative owners need not apply. Owners looking for a long term income property should explore this path, and in fact are stealing from themselves if they don't, for the more money you spend on energy conservation or energy efficiency without examining the alternatives thoroughly, that is capital down the drain that will make switching to the other track increasingly difficult. It is not that energy efficiency is not a factor in the energy independence path, but inevitably different efficiency measures would be prioritized under an energy independence plan.

In this context failing to plan is definitely planning to fail, for if you invest in the more efficient burning of gas, as in my all time favorite oxymoron of Energy Star rated gas hot water heaters, then you will never think of looking at other sources for heating water, and their economies, such as geothermal or solar. Nor will you think about the radically different energy infrastructure you will need to develop for your building to exploit these opportunities in the future. Because of engineering interdependencies, the critical choice is which of these technologies to deploy first, which will vary building by building. If that implementation sequence is done right, with at least a 10 year horizon, then the result will be a building that has eliminated 85% of their fossil fuel based energy bills, versus the same building next door which went the efficiency route, marching politely at the hands of NYSERDA and other authorities, and will be down to 60% of of their erstwhile energy bills. So again ask yourself, which building will be worth more in 2020, the one with 60% of the 2011 bills, or the identical one next door with 15% of 2011 bills, if the oil prices are $250/bbl, and NatGas is at $2/therm plus the ever rising delivery costs? For the grid costs are bound to rise ahead of inflation as far as the eye can see, for both gas and electric.

This is the real question. It is the difference between PlaNYC2030 and PlaNYC2020, and the crucial point is, that if you do not plan to get to the 2020 plan today, but you follow the rules for the 2030 plan, you will make absolutely sure that you will not get there in 2030 either, and a fortune of money will have been lost in the process. This amounts to pure capital destruction on a societal level, and the premature and exclusive focus on energy conservation over energy independence is to blame. Energy efficiency does NOT cumulatively add up to energy independence, and if it is prioritized without examining the alternative, the pursuit of it will postpone an energy independent future indefinitely, and PlaNYC2030 will not live up to its promise, though the potential is there today to exceed its targets by a landslide. Yet the majority of the market place is either doing nothing at all, or at best following some of the elements of the 2030, and thus collectively ensuring the postponement of energy independence, and the continuation of the maximum allowable levels of pollution in our urban environment.

What Was The Question?

A paradigm shift starts by flushing out the assumptions that are unconsciously taken for granted. The classic business school example was the great crash of the railroad company, which followed... you get it: the railroad rush and boom... if only, the theory goes, they thought of themselves as transportation companies instead of as railroads. But, naturally it is only typical that when we are successful at what we do, we do not have eyes and ears for the next thing, for almost everyone falls for the temptation of believing themselves and their business invincible - after all their accountants tell them they are making record profits, so they must be doing it right. There seems to be no need to question the "accepted" model and the long forgotten assumptions that underlie it.

Energy policy is such an area. Technology is shifting very fast, but the use of it for the most part is unimaginative, and plagued with those unconscious assumptions. So we end up plugging renewable energy into a business model that is based on the subscription model of energy, and the capital expense for renewables does not seem to be warranted. We are oblivious to the fact that we asked the wrong question.

The question seems to be I'm now spending, let's say $100,000 a year for energy in my building, what can I do to reduce my cost? The first round of answers came from the utility industry and was based on the insight that sometimes you get more bang for the buck by reducing demand than by increasing supply, so incentives were created to achieve that. But on the basis of an individual building manager, answer is not enough, for it does not address the true economics of building ownership - it simply perpetuates the franchise of the utilities, which defeats the purpose in the long run, which must be energy independence. This approach is akin to a heroin addict who goes on methadone for a while because he can't afford his daily fix any longer, but then after awhile goes back to heroin when he thinks he can manage it. Making the addiction "manageable" does not solve the problem. Or, to use another metaphor, our real estate industry is like a little baby who refuses to be weaned from the breast of the utilities and the oil companies and start eating solid food.

To put it in financial terms, if the question is how do I reduce my $100,000 energy expenditures, then I tend to get focused on energy conservation as an investment, which always produces the predictable diminishing returns. Simply put, when I started I had the choice of 5 technology options, and since I'm conservative and prudent (or so I think), I take the one with the shortest payback first. It saves me 10%, so now my base is 90% of what it was before. The next one also saves 10% but only 9% on the original scale, so the second 10% reduction brings my expenditure to $81,000 annually, and the third 10% to $72,900. Note, in actual life the results will likely be worse, because some of these options tend to partially cancel each other out, so in reality I may get to $75,000 in constant dollars.

Next I contemplate a much more expensive option, which promises a 30% savings, however since my base is now only $75,000 and my payback period now is 4 years, when it would have been only 3 years, if I had done this investment first. Not to worry, just wait until the energy prices go up again, and your payback will meet your criteria. Or did you think energy prices were going down? The bottom line is, that of the five options we had we should have contemplated the biggest one first, and the other second, for otherwise we talk ourselves out of the deal. The longest payback should have won out on that basis, if it was within the criteria at the outset.

However, we are still investing with diminishing returns, so incrementally every dollar yields less, and we run up against a hard limit beyond which we cannot go with this approach. The alternative is to learn to wean ourselves from the breast milk of the local utilities and the oil companies. When is the time? Perhaps we should first max out our investment in energy conservation, before we wake up? Or should we wake up now and start properly investing in the profitability of our business, instead of just incrementally spending ourselves into the corner of diminishing returns, and be totally stuck when the next energy crisis hits?

The point is very simple, that solar hot water heater, may have a 6 year payback, even after incentives, and it has a 30 year lifespan, but that high efficiency gas hot water heater with its 3 year payback only has a 10 year life expectancy, so over the 30 years you will still have gas bills, and 3 replacements, while the solar plant has negligeable O&M costs. In six years, which building will produce a higher asset value mine with an energy cost of $20,000 a year, or yours - an identical twin otherwise - with a proud certificate of achievement from ConEdison and NYSERDA on the wall that you are one of their most efficient consumers because you reduced your energy consumption by 30%? By the way, you're now only 4 years away from having to replace that high efficiency gas hot water heater, and I don't think that a new one that's 99.6% efficient in the lab is going to make much difference over the old one which was 99.5% efficient, and looked like such a bargain. And meanwhile my building may still be buying energy in one form, but quietly it is generating an offsetting amount of energy in another form, and monetizing it, so that it is effectively hedged against the cost of energy going up.

So, financial common sense would argue that you quit listening to the vendors who are pushing their devices based on payback - let the shortest payback win - and treat these investments as intra-marginal investments in your building, and focus on long term asset value of your portfolio. In short a discounted cash flow model, and NPV should be your criteria, as well as the long term engineering path towards energy independence. I know, the banks will gladly lend you 20 year money for a 5 year problem fix. Sure, you can save a lot of energy, and you can afford to service the loan, but after all, whose interests do you serve - the utilities, the oil dealers, the banks, or perhaps creating value in your own business should be considered?

In short the next question that should be questioned is: "How do I reduce my energy bills?" The proper question should be: "How do I create the highest asset values in my buildings?" and energy should be looked at as a profit center, not a cost center. Even an economically minimally viable path towards energy independence will create higher asset values, than current practices that are focused on energy conservation, energy efficiency. You may have to give up on those certificates of achievement from your local utility.

Of Hamster Cages, the Grand Canyon, and the Climbing of Mount Olympus

Energy Efficiency is a commendable thing, but I like to question its sometimes guileless application, which can product less than desirable results. As I point out repeatedly on this blog, energy efficiency, when applied in a fossil fuel framework, runs into the law of diminishing returns, and at some point it leads to capital destruction, because you spend yourself into a corner you cannot get out of, and in fact you are making the switch to renewables harder, not easier. Thus Energy Efficiency is not additive to Energy Independence. Everyone knows we can't save ourselves rich, but the same people blithely assume energy is the exception to the rule. It is not.

The following then is a thought experiment, for an imaginary old building of 100 apartments in an old city, like New York, with a steam heating plant burning oil, a coil in the boiler for hot water, etc. On day one, today its total fossil fuel consumption is 100, then some technology is implemented with a 10% efficiency improvement is implemented and it drops by 10 to 90. But the next improvement of 10% is now applied to the 90, and thus the improvement is only a further 9 points to 81, based on the original scale. The next improvement of 10% only moves the market 8.1 points to 72.9 on the original scale. And so on.

If we assume that we prioritized these investments based on their relative paybacks, selecting the first one first, etc. we will say that the paybacks are deteriorating for every next decision, and this function runs into a limit, because of diminishing returns. The end point of a fossil fuel based system, however efficient, is always a system burning fossil fuels. That limit might be an impressive improvement over past practice, but nevertheless the bills keep coming. Depending on what technologies are being implemented, there may also be an engineering interaction, because e.g. the function of certain controls might overlap, and you find that a 20% reduction, and a 10 % reduction result in about a 23% real reduction, or even less than expected based on the numerical analysis above. In short there are both arithemetic reasons and engineering reasons why 2+2=3 in this scenario, again we have diminishing returns for every subsequent investment, and we are painting ourselves into a corner.

The remaining fuel consumption (be it gas, oil, or electric), is subject to various price pressures, which in all likelihood will outrun inflation for the foreseeable future. In other words, let's say an overall 35% improvement in efficiency was achieved, this will inevitably eaten up by price creep for the irreducable remainder. For oil there are immediate price pressures, because of increased refining requirements in NYC. There might be some form of carbon taxation, and other pollution taxes. Gas is now the darling of fossil fuel, but even there, there are storm clouds on the horizon, and it has the same cost pressures on the delivery cost as does electricity. In the case of electricity, the cost of delivery is now 65% of the bill. Because of aging infrastructure, and the horrendous cost of upgrades, it is set to outrun inflation as far as the eye can see, and the other 35% of the bill is hostage to fossil fuel energy prices in general, as long as fossil fuels dominate. In short, every reasonable case would show a tendency for these prices to continuously outrun inflation. In short this scenario is the hamster cage of energy efficiency, if it is applied within a fossil fuel based framework.

Some of the improvements to the building envelope, to water consumption, are likely to be of equal value if we had developed the building with renewable energy, however in some respects technology selections and decisions might have been different in that case, for if it becomes a capital trade off against installed generating capacity, the evaluation for upgrades to the building envelope is far more straightforward than if it were against a forward string of "energy savings" which are discounted to the present. Depending on the energy systems in a design, different approaches to the building envelope might be selected than in the fossil fuel dominated case.

More importantly, the above defensive strategy ends up in capital destruction in the long run, exactly because of diminishing returns, and the fact that a fossil fuel based system somehow continues to burn fossil fuels, and be the victim of price increases. There is no way out of the trap of "efficient consumer" of energy, it merely cements the dependence upon subscription energy costs in all forms, as it stretches them as far as possible. This strategy does paint the investor into a corner, and the best you can expect is that your local utility sends you a certificate of honor for what an efficient customer you are. The point is, they get to keep you as a customer. But wait, it gets better.

The alternative to the above "energy efficiency" scenario is to choose a path towards energy independence. Energy efficiency plays a role here too, but it is more secondary, for the first order of business is selecting the generating technology or technologies. The generally accepted view is that renewable energy is not yet economical. Fortunately, there are some incentives, etc., and simply put, some buildings are more suited than others. So if you own the Empire State Building the focus is on energy efficiency, and renewable energy plays second fiddle. However, if you own an old line 5-8 story apartment building, like in the example we are discussing here, there might be a path towards a successful renewable strategy.

A renewable energy strategy takes a different mind set, and it takes more capital up front. Or, as an investment banker friend put it: You cannot cross the Grand Canyon in three easy steps -- I had to think about that image a while, but then I saw it: on the second step you fall to your death, so you must have a bridging strategy which takes the first three steps at once. The "Grand Canyon" of this situation is the shift - a paradigm shift - from consumption to production. It means starting to think about energy as a capital asset and therefore a profit center in building management, no longer as a business expense. The technologies are rapidly evolving to enable this type of thinking. Energy is becoming a technology business, and building-level generation is going to become the norm, be it that retrofitting old buildings, which were designed in the era of fossil fuels, is often a challenge, so the thing to do is to pick the right type of building to do these things. For most building portfolios, this will initially be a matter of pearl diving.

Also, along the lines of the things we said above about energy efficiency, if the building was recently overhauled based on the current common practice of emphasizing energy efficiency, then we've actually widened the Grand Canyon, because we've doubled down on our bet on the fossil fuels, which may not be the winning bet... There's no logic to this, other than, it seems to be what everybody does, and everybody assumes that renewable energy is not yet economical, and most folks are overlooking the possibility on that assumption, or if it is being attempted, renewable technologies are plugged in as a partial replacement within a design that is driven by the fossil fuel model, and most of the time that does not produce the desired results. However, by integrating technologies, in the right buildings hybrid solutions are possible which definitely allow a gradual development towards a renewable energy model, with energy as a profitable activity of the building.

The energy independence strategy will hinge on a comprehensive rethinking of energy use in a building, a very deliberate and extensive use of energy efficiency, as well as a long term plan which respects the interdependence of different generating technologies, so that and initial investment will lay the foundation for shifting into an energy production posture, and will be improved by subsequent enhancements. Conversely, if renewable energy is implemented without a long term energy plan, very likely the wrong sequence will be chosen, and the risk will be spending the same dollar two to three times over over the long run. In short, to get an initial bridgehead to the other side, it would behoove us to search out the narrowest point across, with more or less friendly features. By properly pre-planning for the interdependence of technologies in the context of a long term energy plan we will be making sure that we eventually do reach the top of Mount Olympus in the way of the classic Greek notion of making sure that our every step goes in that direction. The result will be a progressive accomplishment of energy independence. Independence from the grid, and 80-90% reduction in direct fossil fuel consumption is within reach in some cases in perfectly ordinary buildings, though the economic case is not yet easy, however once the foundational investment is made it gets easier, for different from the above "energy efficiency"scenario, the value of our investment now goes up with every price hike for fossil fuels, for here 2 + 2 =5, if you have got the engineering right. In five to ten years this approach should therefore yield improved property values by maybe 10 or 20% or more compared to the energy efficiency retrofit, who will be facing the same old problems in five to ten years, as energy pricing and "grid creep" catch up to them. The renewable energy choice will then be the only option, but the gulf is likely to be wider, because to some degree the same dollars will have to be spent twice.

To put it a different way, as is familiar to seasoned investors, all else being equal, investing for growth beats investing for efficiency and "savings," which is by definition a dead-ended strategy, something that becomes intuitively obvious by a reductio ad absurdum - anyone can see that 100% efficiency is impossible, just like you cannot save yourself rich. The strategy is clear enough and on a tactical level it boils down to finding the narrowest place to bridge the Grand Canyon, and to be like General George S. Patton who went back to square one, by selecting his route through Brittany and ultimately to Berlin based on Caesar's routes, where he could naturally ford rivers, so that the Germans could not stop him by demolishing bridges.

The Upshot of the PACE Bond/FHA Flap

If you carefully read the position of the FHA Statement on Certain Energy Retrofit Loan Programs, it should be clear that the right solution could only be positive, but that does not guarantee we will get there.

Simply put, everyone who has done any work in the renewable energy area understands that as of yet there is very little understanding in the market place that energy is becoming a technology business and therefore a capital asset of buildings. It will completely alter the mortgage business, but it cannot do so unless and until it has a rational foundation. If this issue is solved constructively it could be the single biggest progress in improving real estate values in the nation, because in effect permanent renewable energy plant in any building is a hedge against rising energy prices, and there are very few people who would believe that energy prices will go down, or that America could ever hope to be competitive if it continues to spend more on energy per inhabitant than the rest of the industrialized world.

Buildings are the biggest single frontier in that battle with energy intensity, and handling this transition correctly could do more for real estate values than anything else. Meanwhile the current confusion is entirely due to the parlous state of energy programs and incentives, which generally confuses energy efficiency and energy independence, making in effect the unstated assumption that energy efficiency will add up to energy independence, which is simply not so. In fact, making energy efficiency a priority and treating it as a subsidized capital expenditure guarantees that we will prolong dependence on fossil fuels indefinitely, and completely back ourselves into a corner economically.

Only energy independence should be stimulated, subsidized, promoted, and energy efficiency should only be subsidized under the auspices of proper renewable energy projects, where it does become a capital decision, because it is a direct trade off against installed capacity. Energy efficiency in the context of fossil fuel use is an operational savings, and should not be treated as a capital investment, unless it is the only option, and preferably in the context of a strong renewable component. Giving buildings a measure of energy independence, by focusing on energy production at the building level, will always enhance building value, assuming it is done correctly. This is true for a residence as well as for commercial properties, and lenders will have to learn to make energy independence the true focus of building valuations, not mere energy efficiency.

Having said that, there are of course efficiency measures which are rightly part of the building structure, such as insulation, windows, etc. and they will therefore take on a permanent nature, but by making the distinction suggested here, we would solve the total quagmire we are in with respect to these types of investments. Namely, if we prioritize energy efficiency based on fossil fuel based systems, we are in effect postponing the decision to produce energy at the building level, and financially making it harder to ever make that decision in the first place. This type of a shift should properly be the domain of public policy, to see to it that the shift happens. The corollary to this is that once the focus is on building level energy production, investments in energy efficiency have a much quicker payoff, because they are then a proper capital decision, namely they directly reduce the need for installed capacity. In other words it is the order in which we do these things which is important.

Given that the confusion between energy efficiency and renewable energy is so pervasive, and programs therefore routinely subsidize investments which destroy capital by prolonging fossil fuel dependence, it will take some time before these mechanisms are adjusted to the new realities. Meanwhile it is up to owners to analyze their investment decisions correctly, and the ones who do will definitely win by seeing their returns not only operationally, but in terms of building valuation. Many old buildings can be made 80% energy independent with todays technology, by pursuing renewable energy production first, and efficiency second.