by Birk Jones M.S, E.I.T

Existing commercial and residential buildings are responsible for almost half of all energy consumption and carbon dioxide (CO2) emissions in the US. But while fancy, big-windowed, eco-friendly new buildings get all the press, what people often forget about is the huge number of energy-inefficient buildings in existence that will not be torn down anytime soon. To make a significant dent in CO2 emissions nationwide, it will be necessary to make those buildings efficient by implementing energy retrofits. And, building owners can save money in the process.

Energy retrofits are also necessary because of changes in use and varying lifespans between the energy equipment and the structural members. Structural components are typically concrete, steel or wood, and these will have considerably longer lifespans than the energy consuming equipment within the buildings. For example, a concrete structure can be designed to be effective for up 60 years, whereas a heating system will become inefficient after 20 years. Therefore the heating system must be upgraded twice so that the energy is used efficiently. But planning and implementing these upgrades have been difficult tasks for many building owners and organizations.

Figure 1 shows a newly installed Heating, Ventilating and Air Conditioning System, which certainly lacks the trendy appeal that solar panels or wind turbines enjoy. But while this unit, duct work and series of pipes are not attractive, they are vastly more cost effective in reducing energy dependence.

Figure 1. Upgraded HVAC System for an Existing Commercial Building

So, why are energy efficient retrofits difficult to implement effectively? Answering this question will help us understand what key factors need to be considered. The major barriers encountered by organizations and individual building owners are:

  • Lack of Knowledge
  • Upfront cost
  • Low Returns on Investment
  • Split Incentives

Education is the most important element for a community to progress towards a sustainable future. Too often the prevailing attitude is that if something already gets the job done, why mess with it? Concepts such as energy sources, energy dependency, building impacts on climate change, and financing opportunities for implementing energy conservation retrofits are not well understood. These should be common knowledge for everyone, not just individuals in the decision-making roles. Building decisions should be made by understanding and listening to the occupants, maintenance staff, engineers, architects, contractors, building officials and people within the community. Together as a community we can share our knowledge and provide input to lead us in the right direction.

Existing building energy retrofits require the establishment of common energy reduction goals. Architecture 2030, a Santa Fe-based research group focused on combating global warming, has worked very hard to establish and promote a standard set of goals such as reducing fossil fuel use and ultimately becoming carbon-neutral by 2030. These goals have been adopted by organizations now trying to implement alternative methods within their current company structures. It is important the organizations use a defined decision process so that the largest amount of energy conservation is achieved while ensuring that the project can be appropriately financed. The process should involve collecting building energy data, identifying, analyzing, and assessing energy, and finally designing the appropriate energy retrofit option.

The assessment of the energy conservation retrofit is important because it reviews the predicted amount of energy reduction and also the estimated cost to implement the measures. Building improvements can have high upfront costs. Owners and organizations question the amount of debt they want to incur, the length of the investment, the effect on the cash flow and the return on investment. Owners do not want to invest in a project where the investment will outlast the ownership or life of the building, nor do they want to see a low return on investment that does not happen quickly.

The basic idea of an energy retrofit project is that an initial investment is made and energy conservation measures are implemented into the existing building. The building is then able to operate at a lower cost due to the efficiency of the new energy consuming components. The utility cost savings accumulates and eventually accounts for the initial cost of the project. The payback period calculation divides the initial cost for installation by the annual energy savings to find the number of years needed for the project to pay for itself. The better method, Life Cycle Cost Analysis, is able to calculate the value of money by incorporating interest rates over a certain period of time, and it also take into account the benefits of the energy conservation retrofit after the payback period concludes.

Building retrofits are not new concepts, but owners are not used to making these types of investments where the return comes in the form of energy cost savings. Luckily there are new mechanisms for financing, such as Energy Performance Contracts (EPC) and Special Assessment financing. EPCs provide no upfront cost to the organization. The funds are provided by a bank or investors. The contract includes all the services required to design, implement and finally monitor and verify the energy retrofit savings.

The Special Assessment financing mechanism is new and just being implemented. State governments have passed legislation giving local government the power to implement Property Assessed Clean Energy (PACE) Bonds. The state of NM recently passed House Bill 647, which enacted solar energy improvement special assessment, but it neglected to include energy efficient retrofits. There is currently a movement to include energy efficiency into the bill. Local governments such as Berkeley (CA), Palm Desert (CA), San Diego County (CA), Boulder County (CO) and Santa Fe County (NM) are actively incorporating the financing mechanisms. They have recognized the need to overcome the upfront cost barrier and are forming innovative energy financing districts. These are great but even with the elimination of the upfront cost there are still extra annual payments to incur.

Energy efficient retrofits rely on the owner’s ability to recoup the cost of the initial investment through the energy cost savings. Yet, current tenant and landlord lease agreements do not allow this to occur. This situation is known as a split incentive. The energy retrofit, in split incentive situations, relies on the organization’s ability to renegotiate lease agreements to incorporate the potential to realize cost savings associated with an energy retrofit. The agreements could be modified to include a clause that the owner reserves the right to supply their energy at or below the cost supplied by the normal provider. The new lease would require a definition of the base year annual energy cost. The owner can then perform an energy retrofit and realize energy savings. The owner would pay the utility company the reduced amount due to the implementation of the energy conservation measure and receive the full amount from the tenant.

Table 1 Updated Lease Agreement Cost Breakdown Example

Entity Energy Cost (annual) Operations Cost Savings (annual) ECM Construction Cost
Owner Cost $10,859 $11,008 $140,000
Tenant Cost $21,867 - -

Table 1 displays example data where the tenant pays $21,867 in annual utility costs. The owner decides that an energy retrofit is a good idea and modifies the lease. The energy retrofit is implemented for $140,000 and reduces the utility costs to $10,859. The tenant is still charged the original $21,867 by the owner so that $11,008 in savings can be used as payments for the initial investment. Once the investment has been paid off, the utility savings will become profit for the owner.

The implementation of this scheme could be conducted through the incorporation of lease update considerations into the decision process. This would require careful analysis to ensure its feasibility. The key consideration would be the building owner’s ability to update the tenant leases that eliminate the barrier and actually provide an incentive for all parties to conserve energy and implement energy conservation projects.

In some cases, financial feasibility studies and environmental considerations will determine that renovating a building is more practical than demolishing it and starting over. Decreasing our energy consumption will allow for incorporation of more renewable energy sources and lead us closer towards zero carbon emitting buildings.

Communities around the world must take on this challenge. It is not enough to wait for government programs to pop up and eliminate barriers, especially when the capacity to reduce energy consumption and increase savings is already available. Take on the attitude that we must give back and not continually take from the Earth.

Birk Jones recently completed his Engineering Masters Degree work where he studied the energy retrofit process. He is teaching a course in the subject at UNM in March (see page …) Email: