Supply is not unlimited

A recent editorial in the Boston Globe (Oct. 24, 2011) by former US senator, John Sununu, claims that natural gas is the energy of the future. He cites the Kinder-Morgan acquisition of El Paso Energy as a bell-weather—a firm vote of confidence from sophisticated investors that natural gas is the long-term answer.

He notes that advances in technology, including underground mapping and modeling, combined with hydraulic fracturing (“fracking”) have “unlocked” previously unavailable supplies of natural gas.

All in all, he implies, investor confidence and new access to (still finite) supplies of traditional fuels render alternative, efficient energies unnecessary. 

I don’t see it that way.

People often lump supply together with energy efficiency, confusing it with energy conservation.  But here’s what: supply or not, building owners and investors want energy efficiency. They’re the ones that pay the cost of not having it. Plus, the more efficient a building, the more appealing it is to tenants, big and small.

What’s more, focusing attention on technological advances that enable us to tap into hidden supplies of fossil fuels is short sighted. The supply is not unlimited. Just because there seems to be more doesn’t mean we should use it. Long-term, we’re better off continuing to focus our attention on technology that enables buildings—houses included—to use energy efficiently.

Why do people do things that don’t make sense?

At sea, at the helm in the middle of the night. Our speed was 0.00—by my calculation, it’s infinity until we get to our destination. Then, the slightest breeze kicks in and I revise the ETA—we’ll get there in 12 hrs. The slightest bit of wind can turn infinity into 12 hours, 8 hours, 4 hours.

Possibly my late night maritime reflections have less merit on land, but I kept thinking about a parallel argument. Even the slightest bit of investment in energy efficiency can make a big difference.

So why then can someone who appreciates the vagaries of technology—especially nascent technologies--eagerly embark on a full-scale energy efficient overhaul of his home? Yes, the rebates and incentives are compelling, but they matter less to the generally affluent people paying for these wholesale enhancements.

And the truth: most energy efficient solutions pay back in no sooner than seven years. Seven years. Photovoltaic doesn’t payback for 15 to 25 years in most cases. That technology is still very inefficient and expensive. (Of course, it’ll get better in time.) But why is the payback so long for energy efficient technology? Simply, much of the business is still a cottage industry—there’s no scale, no cost efficiencies.

In spite of this fact, people are happily replacing their windows and heating systems at great expense. It’s their home--they’re thinking about protecting their  investment, the resale value and reducing their energy bill while feeling good about doing something “responsible” beyond recycling. But what’s even more surprising is this: when that same person goes to work, he or she wouldn’t dream of spending company money for such a poor return. That would be irresponsible.

I’m not naïve. I know there’s a necessary difference between what you do with your own money and your company’s money. That delta won’t narrow without a dramatic shift in either the social consciousness of business practice and/or the patience of shareholders (which is non-existent today). What’s more likely—and long overdue—is the transformation of today’s energy efficient cottage industry into a formidable and scalable one.

It’s about the money. Again.

In July, the U.S. Department of Energy (DOE) and the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) announced an agreement “to improve building energy standards that reduce energy costs and carbon pollution nationwide.”  

I applaud this step. There are many groups advocating for better energy policy, but the DOE and ASHRAE are big guns and leadership and support from influencers like them are important. That said, an agreement alone isn’t enough.What’s missing is that energy efficiency isn’t yet a part of the fabric of business. For example, even energy-efficient construction and retrofits in the commercial real estate arena aren’t yet “mainstream”.

For sure, there are plenty of reasons why this hasn’t happened yet: the economy, overt and covert politics, and the costs associated with what is largely considered a cottage industry. But to me, the number one reason that energy efficiency in commercial real estate hasn’t gotten over the mainstream hump? Financing.

Lenders are hesitant to finance low-energy building projects because of the uncertainty of their return on investment. The rightly want to know the financial (or carbon) impact that energy efficient measures will have on their building projects.

Today, aside from owners, the most significant source of funds for energy efficient building projects is likely private foundations. Their commitment is long-standing and meaningful. But as long as these are the major sources of financing, energy efficiency can’t be mainstream. Our industry needs banks, investment banks, and other institutional funding sources. And to invest, these institutions expect the precise data that enables them to compare an energy efficient investment with competing investments using traditional measures. That’s a fundamental component of their business--it’s their language. If they can’t have the data, they won’t provide the dollars. (Of course, a little help from the political and economic environment would be appreciated...)

Providing critical investment data is essential. And if an energy efficient building could optimize its financial energy and environmental impact, all the better. Data, and a near-optimal strategy, versus random one. That’s the way I see it.

"Energy Efficiency:" Do You Really Mean It?

The debate over global warming continues. But while scientists and pundits go back and forth about proposals like cap-and-trade, fundamental issues on energy conservation and sustainability get less attention--even though they may have more real, near-term impact. 

According to IBM’s Smarter Buildings Survey, 70% of all electricity in the U.S. is consumed by buildings. Fifty percent of that is wasted--the same goes for water. Current estimates suggest that by 2025, buildings will be the single largest consumers of energy on the planet. Not to mention greenhouse gas emissions. 

You don’t have to look far to find real examples of this. Take the regional headquarters of a large tech company with several hundred thousand square feet of rental space. Almost nothing about this project was designed to conserve energy except for a few “bolt-on’s” that have little real effect on overall efficiency. The building has walls of unglazed glass, little or no passive solar, and uncoordinated HVAC. Ironically, it’s a cutting-edge tech company with an obsolete building.

In truth, “bolt-on’s,” and similar approaches, are more cosmetic than impactful and they typically can’t meet the higher standards some tenants now demand. As more companies try to reduce their carbon footprint--for cost and in the hope of being seen as “green”--those taking a “cosmetic” approach may find it hard to get tenants. The result is a loss of market value. Looking ahead, it’s likely that tenants will either refuse to consider a property that doesn’t meet certain standards, or they’ll feel empowered to demand energy efficient adjustments.  

Bob Lemons, Managing Partner of KeyPoint Partners, a company that manages and leases commercial real estate, has driven this point home by saying, “There is social and market pressure to be a good citizen, but any move must also make economic sense.”

So how do you measure real energy efficiency? We know the alternatives—the best-known being the Leadership in Energy and Environmental Design (LEED) program. LEED ratings are awarded based on how “green” a building is;  “responsible” owners and developers of real estate aggressively pursue these ratings. But in my view, LEED doesn’t go far enough in terms of energy efficiency.  A lot of LEED criteria, like adding bike racks, locating buildings near public transportation, or adding parking spots, don’t get to the heart of efficiency issues.

Still, buildings that get high LEED scores are perceived by the public as being “green” although being perceived that way is sometimes all some companies seek.  (For me, the meaning of “green” has become so nebulous I won’t use it. Often, it’s not even an indicator of energy efficiency.)

Part of the problem is that technology changes so quickly. Few architects or engineers can keep up with the tools available for energy-efficient new construction or retrofitting projects, never mind being equipped to project the financial impact of low energy strategies. Government agencies such as the EPA offer some guidance, but there are no standards, aside from quick and obvious fixes like sensors that turn lights out in office buildings. “Deep retrofits,” such as re-insulating the envelope of the building, aren’t practical unless buildings can be taken apart for other reasons.

E|CON offers one solution. We’ve developed an “energy investment system” for existing buildings or those in design. By crunching an incredibly large amount of data we can produce a set of optimized energy performance and financial results, taking into account every feasible low-energy mix of technologies—for everything from insulation to HVAC to windows—and how they can best be implemented as part of a building energy strategy.

As the industry gears up for more change, and the possibility of stronger and more coherent government regulation, this solution could become the foundation of a meaningful energy efficient future for commercial buildings. 

Too Pie-in-the-Sky?

A recent article from the Rocky Mountain Institute made a compelling and earnest case for energy modeling. It’s a powerful tool that everyone should use, argues the RMI. It’s the future.

It’s hard to disagree. A tool that can model the energy performance of an entire building or building system is invaluable. With increasing national and global attention on energy efficiency, our industry should rely more and more on energy modeling to guide building decisions. Energy model results help optimize building design and help define the strategies that have the greatest impact on a building’s energy efficiency. And energy modeling helps manage operating costs. Why shouldn’t everyone be using this tool?

Well, the RMI extends the argument further, suggesting that a standardized energy-modeling tool would make universal adoption possible. What’s more, with a standardized energy model, the industry—design, engineering and construction professionals—could take responsibility for teaching how to use these models. Major associations, such as the AIA, could provide courses on energy modeling.

A thoughtful proposal, but too pie-in-the-sky for me. The suggestion that we adopt a standard model and then embark on a long journey to educate multiple industries on its use is naïve. “Capitalistic” and competitive tendencies aside, energy models are complex, highly technical and not recognized for ease-of-use. More important, RMI’s suggestion only works if one assumes that energy modeling is static. It’s not. It changes as the demands of energy technology, construction, and design evolve.

So let’s look at it another way. Why bend to the energy model when it could bend to us? What if an energy model was easy to run and user-friendly—with even more capabilities? What if it was so dynamic and easy to use that architects, engineers, building owners and investors could use it?

I understand that there are limitations we’re all forced to accept—like the Registry of Motor Vehicles and taxes. But the time has come for us to think differently on this one. It can be done.

Wrestling with Green

Green. It’s not just a color anymore. It’s a movement. It’s a “cause.” And it’s a marketable concept for consumer-product promotion. The vibrant light being shone on “green”--and the positive reaction from the general public--smells a lot like money to businesses. 

The commercial real estate industry is no exception. Building owners see “green” as a competitive differentiator. They’re working in earnest with prospective tenants to highlight the merits of their “green” buildings. Prospective tenants, in turn, are eager to tout their “green” space to employees and clients alike. In fact, a recent survey conducted by CoreNet Global and Jones Lang LaSalle found that half of corporate real estate executives say they’re willing to pay extra for space in green buildings. 

That should be a boon for the commercial real estate industry. But is it?  I won’t argue that “green” initiatives are good for the planet and reflect our collective commitment to social responsibility.  Light bulbs, recycling stations and bike racks make sense. But we do a disservice to the commercial real estate industry if we end there. I believe that the powerful force in our industry is “energy conservation.”  While “green” initiatives benefit the health of our planet, they don’t deliver a significant financial return. As an industry, we don’t have to apologize for the fact that this matters. Business is business and energy conservation can help our bottom line.

But for now, light bulbs may be the farthest building owners are willing to go. Energy conservation poses a couple of challenges that building owners can’t yet wrestle to the ground. The first is product complexity. The energy industry has introduced literally thousands of products to the market and there is a seemingly infinite number in development. The challenge of staying abreast of the latest, and best, technology is not a small one.  How do you know which are the right products and, as important, the best combinations for optimal energy efficiency?

The second challenge speaks to measurement and that brings us back to the fundamental point that business is business. Building owners, and their CFOs, need the data that can validate the financial merits of an energy efficient strategy whether in a new building or a retrofit. How does that strategy affect the bottom line? That kind of dynamic measurement is not yet possible. And it’s asking a lot of sophisticated business owners to make a leap of faith and invest in energy efficiency at their peril.  Let’s face it: in any business, where would an owner be willing to spend an indeterminate amount of money, for an unclear outcome that can’t be measured?

The simply reality is this: significant investment in energy efficient buildings won’t expand until building owners and investors can achieve optimal energy and financial performance by measuring two factors:  the effectiveness of the energy efficiency investment and the return on that investment.  Few chief financial officers are able to measure the return-on-investment of the efficiency initiatives they are asked to invest in. Until key stakeholders—corporations, landlords, financial institutions, and investors--have the tools they need to take a solid business approach to energy efficiency, real energy conservation is an idea whose time has not yet come.