Since the dawn of time (well, OK, since 1979 when Michigan and Princeton Professors Ross and Williams developed the idea of a “house doctor”), energy efficiency enthusiasts have been convinced that retrofitting a residential building to save energy could pay for itself in fuel savings. It’s been a rocky road since those days, when the prime concern was our dependence on unreliable Mideast oil rather than climate change, and in the energy price valley of 1985 – 2000, it was a lot harder to make the case.
But over the last ten years, subsidized programs all over the country have carried out hundreds, perhaps thousands, of retrofits. Many were aimed at affordable housing, including the federally funded Weatherization programs, and state efforts like NYSERDA’s Assisted Multifamily Program (AMP, in which I was active) and the current Multifamily Performance Program (MPP). Others focused on coaxing the owners of unsubsidized multifamily buildings, including coops, condos, and market-rate rentals, to upgrade their building systems in the interest of greater efficiency, but always with the carrot of long-term savings. Similar efforts went on in many of the more progressive states.
All these programs were successful in installing efficiency upgrades: insulate the roofs, add caulking and weather-stripping, switch to fluorescent lights, replace that failing boiler, and add better heating controls. And because we had used careful analysis and detailed computer models, we were confident the savings were there. But the fact is, we couldn’t present fuel and electric usage data from any of the early projects to prove that our analysis was accurate. As late as 2008, we had a grand total of 20 buildings from AMP for which we had verified savings, largely of satisfactory magnitude.
Of course this is a problem from a technical perspective – we would like to know we are telling the truth when we claim that savings will be forthcoming. But there is another, much larger problem: all the retrofits done under Weatherization or NYSERDA programs are subsidized, one way or another, so the owner could expect a much more substantial return on their own partial investment than they would receive in pure market circumstances. And still it was hard to get them to undertake the projects. Further, what we need now is a truly massive campaign of energy retrofits, far larger than can ever be subsidized by either NYSERDA or the federal government. And owners rarely have the cash reserves to undertake energy retrofits on their own. The only way to bring retrofit activities “to scale” is to make them an investment opportunity for lenders, by which I mean banks.
But you know bankers – dour, untrusting, “show me your cash flow” types who want proof that you will have the money to meet your monthly obligations. (We will omit discussion of the unfortunate events of the last few years except to note that now no one will lend any money without ironclad guarantees of credit-worthiness.) If we want bankers to lend money for retrofits based on the use of energy savings to repay the loan, we need tools to convince them that the savings will be forthcoming. Until now, those tools were not in evidence.
Today, we stand a chance. Deutsche Bank Americas Foundation and Living Cities commissioned Steven Winter Associates and HR&A Advisors to undertake a massive study of energy retrofit activities in New York City, and to formulate an underwriting approach based on their findings. The just-released report provides both a powerful case that the savings will be realized in enough instances to justify significant investment activity, and an analytic framework that will make investments even more secure.
On the technical side, they examined 231 buildings for which pre- and post-construction data was available, and developed a strong set of useful conclusions. Just a few examples: expect more substantial and reliable savings from fuel use reduction than from measures aimed at electric usage; the more fuel your building uses, the greater the potential for savings. (Before you say “duh”, this was quantified in way that that will be very useful for underwriting, as we will see.) And because buildings are complex systems, they found that while observed savings tracked projected savings in a statistical sense, there would still be cases where the savings fell short. How can this risk be minimized, making energy efficiency retrofits an attractive investment for our dour banker?
Here is where the team developed an exceedingly clever analytic approach. The engineers designing the retrofit will use their models to predict savings. But from an analysis of the 231 buildings, the team already knew that on average, they could expect savings roughly equal to half of the pre-retrofit fuel use minus a substantial constant. (See the paper for the math!) The clever approach then is to trust the engineer’s model unless it predicts savings greater than the average found for their data set, adjusted for energy use in the building being modeled. If the model predicts savings greater than the data set average, use the data set average. If the model predicts savings less than the data set average, use the model results. Then go talk to your banker. When this approach was applied to the buildings in the data set, they found that the actual energy savings substantially exceeded these adjusted predictions, a situation that should leave underwriters satisfied.
Can this work? Will we see a dramatic increase in capital available for energy efficiency retrofits? Only time will tell, but we have made a substantial step forward. All the buildings in New York City over 50,000 square feet will undergo energy audits, as required by Local Law 87 of 2009, and the proposed measures and their estimated savings will be there for all to see. Now, a robust way to justify financing the measures is also available.