In April,
former President Bill Clinton,
Rocky Mountain Institute (RMI) Chief Scientist Amory Lovins, New York City Mayor Michael Bloomberg, and
Empire State Building owner Tony Malkin, along with project partners
Jones Lang LaSalle and
Johnson Controls Inc. announced an audacious plan to reduce the energy use of the Empire State Building by 38 percent, and save $4.4 million annually in the process.
The plan was the result of a 12-month study, which included intensive building measurements, energy and financial modeling, and tenant engagement.
The Empire State Building project proved that a high level of energy savings can be captured cost effectively. Many other analyses, including work from
McKinsey & Company, RMI, and
Lawrence Berkeley National Laboratory, also find the existing stock of commercial buildings ripe with cost-effective energy-saving opportunities.
Recently, a flurry of public and private initiatives, like the
American Recovery and Reinvestment Act, for instance, have been launched to capture cost-effective energy reductions via building retrofits. The opportunities are not new, but, in the past, a number of challenges have impeded progress, and most have yet to be overcome.
The Challenges Associated with Energy Efficient Retrofits
Industry, government, and NGOs commonly cite challenges to commercial building energy efficiency retrofits such as split incentives between owners and tenants (who pays the bills versus who pays for more efficient equipment, for example), poor information on the costs and benefits of energy saving measures, lack of knowledge on available service providers, too little capital and high discount rates.
As members of the Empire State Building Team, we identified several additional challenges to achieving the energy savings we knew were both possible and cost-effective. We believe these will also need addressing if our country wants to ramp up its building energy retrofit activity with the necessary speed and to the necessary scale.
• Taking a Comprehensive Approach: Most energy service companies (ESCOs) do not capture all available energy gains. This is because they rarely take a comprehensive building approach and building owners do not specifically ask for a "whole-building" analysis. Hence, most projects focus exclusively on meeting loads efficiently instead of reducing or eliminating them all together. This often leads to retrofit projects that generate about 10 percent to 15 percent savings from easy and quick payback measures, such as lighting and HVAC controls. By considering energy efficiency measures that reduce energy loads like building envelope changes and daylighting, in addition to more efficient systems to meet existing loads (e.g., lighting and HVAC), a whole-building retrofit can achieve much greater energy savings while improving the project economics.
• Aligning energy retrofits with equipment replacements: For an energy efficiency retrofit to be cost effective, the retrofit needs to align with planned replacement or upgrades of multiple building systems and components. For instance, the Empire State Building had plans under way to replace its chillers, fix and reseal some of its windows, change corridor lighting and install new tenant lighting as leases expired. Since these upgrades were already on the books, the team redesigned, eliminated and created projects that cost more than the initial budget but would generate significant energy savings over a 15-year period. When these energy savings were accounted for along with the added upfront project costs, the net present value of the energy efficient retrofit projects was better than that of the initial retrofit projects.
The key takeaway here is that you actually have to align retrofits with the scheduled replacement of equipment because the energy savings are typically not substantial enough to offset the full non-incremental capital cost and can only justify the incremental capital cost (e.g., the difference in cost between resealing windows and remanufacturing windows).
• Capturing tenant energy savings: In existing commercial buildings, capturing the full energy efficiency opportunity requires engaging with tenants. In the Empire State Building retrofit, over 50 percent of the energy savings required some level of tenant engagement. Often energy efficiency opportunities are not implemented because of numerous real or perceived barriers, including a hesitation to engage with tenants, split incentives, business interruption concerns, etc.
• Finding a financing model that works: Financing building retrofits through private capital alone will be difficult in today's lending environment. Given tight lending conditions, it is unlikely that private capital will be widely available for retrofits of privately owned commercial buildings. In addition, since most first mortgage liens cover existing equipment that will be replaced or upgraded in a retrofit, an inability to collateralize loans may further complicate the financing situation. A number of possible solutions that combine private capital with publicly funded loan guarantees and other public financing mechanisms have been proposed, but no single financing mechanism has gained national traction.
• Retrofitting small and medium-sized buildings: The ESCO business model, employed mostly for the retrofit of municipal, state, federal, university, school and hospital buildings and some large commercial office buildings, is not suited to small and medium-sized commercial buildings, where transaction costs are often disproportionately high relative to the profit opportunity for ESCOs. Small buildings with less than 50,000 square feet of floor space account for approximately 50 percent of the total commercial building stock in the United States. This presents a major opportunity for business model innovation to deliver retrofits to a large and underserved commercial building market segment.
Addressing these barriers will be key to driving significant, cost-effective energy reductions across the commercial building stock, and for the entrepreneur who concocts a way to solve a barrier or two, financial, environmental and social benefits will prove ample.
For more on the Empire State Building retrofit, visit
www.esbsustainability.com
Eric Maurer is a consultant with Rocky Mountain Institute's Built Environment Team, and Caroline Fluhrer is an analyst and Aalok Deshmukh is a senior consultant with the Built Environment Team.
Image courtesy of RMI, Johnson Controls and Jones Lang LaSalle.
