The case for deep energy retrofits as a COVID-19 economic recovery vehicle.
For commercial building owners, financial investors, and government officials alike, making commercial buildings more energy efficient should be a focal point of their pandemic economic recovery plan. This article explores four key benefits of energy efficiency investment and lays a foundation for the road ahead.
As many businesses struggle to make rent or make their work-from-home policies permanent, more and more tenants will vacate their building space. And as post-COVID vacancy rates climb, commercial real estate will undoubtedly suffer. Commercial building owners, who previously enjoyed fully occupied buildings and climbing rents, will instead face declining net operating income (NOI). To weather the storm, they must quickly figure out how to slow or prevent this revenue backslide, either by reducing operation and maintenance (O&M) expenses or by generating income from new sources.
Investing in energy efficiency can do both.
Energy efficiency retrofits are where public and private capital investment, as well as any forthcoming federal stimulus spending, will have the biggest impact. Now is the time to double down.
Energy efficiency investment creates jobs
Energy efficiency retrofits not only promise long-term returns due to the value of energy efficiency, they also can serve as an immediate job creation engine. In a 2016 study from the Political Economy Research Institute, political economist Dr. Heidi Garrett-Peltier showed that, on average, every USD $1M spent on fossil fuels creates 2.65 full-time jobs. By contrast, every USD $1M invested in energy retrofits for commercial buildings created 14.3 jobs, Garrett-Peltier explained in a 2011 study later cited by PNNL.
Energy efficiency investment builds a healthier world
According to the U.S. Energy Information Administration, commercial buildings account for 18% of energy consumed in the United States. The energy savings brought about by deep energy retrofits — often 50% or more — are not just financial, they also have the potential to make meaningful progress towards climate goals. Beyond GHG reductions, from air quality to temperature to background noise, study after study — such as this one from NCBI — point to one conclusion: healthier buildings make for healthier, happier people.
Energy efficiency investment reduces O&M expenses
Deep energy efficiency retrofits of existing buildings can reduce energy use by 25% or more.
In a 2012 case study by Rocky Mountain Institute, a retail chain conducted a pilot across three of their stores. Retrofit measures included everything from redesigning or replacing lighting and lighting controls to replacing HVAC systems with high efficiency units, installing programmable thermostats, and replacing the heating system. For one building, marginal capital cost came to $230,000. Energy cost savings totaled $50,000 per year.
“Return on investment is fairly quick,” said Seattle Building & Construction Trades Council Executive Secretary Monty Anderson. “You don’t need to re-engineer a building to reinsulate pipes or replace heating systems.”
Energy efficiency investment can be profitable
Reduced expenses are great, but these cost-saving benefits only scratch the surface of energy efficiency’s economic potential. With the right structures in place, deep energy retrofits are sound investments that can actually generate profit.
The problem is that energy efficiency investment is hampered by an old, flawed paradigm of misaligned economic interests.
Because most tenants pay their own utility bills, building owners don’t often invest in energy efficiency — after all, the tenants would be the ones reaping all the financial benefit. And because tenants don’t own the building, they also aren’t motivated to pay for energy efficiency upgrades or retrofits themselves. As a result, commercial building energy retrofits rarely happen without utility or government intervention, or incentives.
Fortunately, this flawed paradigm can not only be bypassed, it can be leveraged to create wealth and benefit for all parties involved.
What’s needed are tools to help building owners, energy service companies (ESCOs), and utilities monetize the value of energy efficiency by creating a measurable and transactable resource.
Advanced analytics are now available to remotely evaluate buildings and identify energy efficiency opportunities. Once a building retrofit project is complete, investment-grade software can continuously meter energy efficiency and transact its value. Finally, you need an investment structure—a set of agreements that owners or third-party capital can use to fund and perform deep energy efficiency retrofits and monetize those outcomes over long periods of time.
The net result works for everyone.
Tenants pay the same energy expenses as if no retrofit had taken place (actual utility costs + the value of the metered energy efficiency), but enjoy healthier, more comfortable living or work spaces, all without risking their own capital.
Investors pay for energy retrofits, pay rent to building owners, and reap the financial rewards of their investment (the value of realized energy efficiency production).
Building owners not only receive rent from investors for “use” of their buildings to produce energy efficiency, their properties have also been made more efficient and more valuable, all at no cost to them and without incurring debt. Building owners themselves can also function as the energy efficiency investor—a particularly attractive option for real estate investment trusts (REITs) and private equity owners.
Altogether, software plus an investment structure allows commercial building owners and investors to harness energy efficiency’s previously untapped potential as a wealth creation engine. Energy efficiency is a leading contender in preventing revenue backslide for commercial building owners and generating revenue for investors. Public and private capital can work in tandem to capture this opportunity.
The time is now
Deep energy efficiency retrofits for commercial buildings act as a force multiplier — reducing expenses, creating jobs, generating income, and helping create a healthier world. Energy efficiency projects are “shovel-ready,” with the potential to quickly create hundreds of thousands of jobs. We have a skilled workforce that needs work and is ready for action.
The case for investing in energy efficiency is clear, the problem has always been who pays for it. Owners and investors want to monetize energy efficiency investment, but misaligned incentive structures have made doing so difficult.
Deep energy efficiency has traditionally been viewed as hard to justify economically, rather than a sound financial investment with favorable returns. We need to empower investors and building owners not only to overcome these barriers, but to profit from them. Investing in energy efficiency is key to post-pandemic recovery, not simply because it helps create a healthier world, but because it can be a fundamentally sound, smart, and profitable investment.