This could make or break commercial net zero energy

Inside the ABCs of NZEs.

I recently joined the very small minority of people who find leasing language interesting. Leases tend to be dry and confusing with their lawyer jargon of "henceforths" and "herebys," but if you can look past the legalese, leases can be used as a critical lever to scale net-zero energy (NZE) in commercial buildings.

Increasing market penetration of NZE-leased buildings is crucial in mitigating the carbon footprint of our built environment, because commercial buildings consume 36 percent of the electricity in the U.S., and 52 percent of commercial buildings are leased (PDF). But only a handful of NZE-leased buildings are in the U.S. today.

This is due in large part to the split incentive issue in leased buildings — the misalignment of the capital costs for efficiency (often borne by the owner) and the cost benefits from energy savings (accrued by the tenants). While NZE may make lease language more complex, having a goal to meet (renewable supply must be sufficient to meet energy use) has the ability to align tenant and landlord interests. And, with a well designed NZE lease, the terms can be developed to give both parties confidence that there are legal teeth to getting this done fairly and successfully.

Vaulting the split incentives barrier with the NZE lease

Until recently, knowing what components to include in an NZE lease was difficult because only a handful of NZE leases were written, and those leases weren’t publicly available. To meet this need, Rocky Mountain Institute just released its NZE Leasing Best Practice Guide, which walks developers through how to write and negotiate key components in an NZE lease.

A well-designed NZE lease will include the following components:

  1. An energy budget: Setting an energy budget for tenants in the lease helps control their energy consumption, making NZE goals more achievable. An energy budget should include the tenants’ lighting and plug loads as those easily can be metered by tenants and are entirely within tenants’ control. While landlords can work with their tenants to determine whether HVAC and hot water heating loads should be included in their energy budget, these loads are a lot more difficult to submeter by tenant as they tend to have central units and are mainly in the landlord’s control, so submetering them could add additional cost and complication.

    Landlords should work with their tenants to make sure the tenants have the tools and information they need to achieve their energy budget without affecting their productivity. The energy budget should be tracked closely, and there can be rewards and/or penalties in place if the budget is or is not met. Individual tenants that exceed their energy budget can be required to purchase renewable energy certificates (RECs) to meet the NZE lease terms. This way, even if one tenant exceeds an energy budget, the building as a whole still can achieve NZE. This level of granularity does require each tenant to be metered independently.
  2. Disclosure of energy: It is important for tenants and developers to be held accountable to their NZE goals, so tenants should receive data on how their energy consumption is tracking compared to their energy budget as well as how the building is performing as a whole. It is recommended that at a minimum, an annual report disclosing total energy consumption and on-site renewable production as well as a monthly report disclosing tenant-specific energy consumption be written into the lease. If the building is not performing as intended, tenants and developers should work together to develop an energy management plan (PDF) to align energy usage with goals.
  3. Regular recommissioning: Similar to personal vehicles, buildings require frequent tune-ups to ensure they are performing as intended. Putting a regular recommissioning (PDF) requirement into the lease as an operating expense ensures that recommissioning occurs as needed and that tenants anticipate the costs.
  4. Cost recovery language: For landlords to invest in energy efficiency projects or solar photovoltaics (PV), they need to recover the cost of these investments. One of the best examples of cost recovery language is the "energy aligned clause (PDF)" created by a working group in New York, which recommends passing through a cost equal to 80 percent of the modeled energy savings for an efficiency improvement measure, so tenants have a safety factor built in if the energy saving measure does not perform as expected.

Be a part of the NZE revolution

Now that you understand how exciting and crucial an NZE lease is, you can start conversations with your internal teams and tenants on how to integrate green lease language into your existing portfolio and consider NZE for your next new construction project. Here are resources you can use to get started:

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