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Dec 19, 2013

A Multi-Pronged Approach to Building Efficiency

Part 3: RMI Scales Deep Retrofits Through Deep Retrofit Value

 

Since 2009, RMI’s work to advance deep energy retrofits has focused on a multi-pronged approach to scaling: 1) collaborate with project teammates, owners, and other fast movers who learn from and copy pioneering deep retrofit projects, 2) engage entire portfolios and campuses of buildings to impact more than scattered singular building retrofits, and 3) develop new, better, and more comprehensive ways of assessing risk and value associated with deep green buildings, to drive greater investment by financial decision makers.

Engaging portfolios and campuses and better assessing risk and value are both new and challenging topics, and our donor-funded work to advance them is by no means complete. But we believe we must aggressively accelerate the nature and quality of retrofits of all sorts in most commercial buildings—and it is imperative that we do so in order to rapidly drive down energy use and CO2 impact.

In today’s part three of a three-part series, we take a look at RMI’s work on risk, value, and decision making. (Read parts one and two.)

Risk, Value, and Decision Making

In our earliest work on the Empire State Building and car dealerships, much of the key analysis and decision-making about whether and how to execute was financial. In those efforts, we used relatively simple life-cycle costing models, and since few good ones were available, we built better ones and made them available for all on our website.

But we also realized that life-cycle costing was the tip of the iceberg. If the goal was to dramatically improve the economics of retrofitting existing buildings and driving far more capital into the attractive opportunities that resulted, we had to do a lot more. Reviewing all the levers for improving retrofit economics, it became clear that RMI could add the most significant value in reducing the risk and cost of executing the complex design and build process of a retrofit. With that we set to work.

The Role of Building Energy Modeling

The first step was to develop and host the first-ever workshop for all the leaders of the U.S. building energy modeling (BEM) community. Called the BEM Innovation Summit, this two-day workshop sought ways to capitalize on the biggest opportunities for building energy modeling to support widespread solutions for achieving low-energy buildings. RMI has been involved in advancing how energy modelers can help improve confidence in efficiency investments. Most recently, RMI teamed with two research facilities to demonstrate methods for quantifying uncertainties, and thus risks, of modeled performance estimates.

RMI is also addressing owners’ needs to understand risk, which allows them to manage it. For instance, through DOE-funded work, RMI authored Building Energy Modeling for Owners and Managers, a guide to specifying and securing services. Equally important, these efforts have made RMI a go-to source for key thinking about risk reduction and access to less-expensive capital. In the end, our work on finance is about risk reduction and value increase to enable far more money to flow into making buildings better and more efficient; to “making older buildings even better than new ones.”

With 80 billion square feet of existing commercial buildings, and an ongoing new-build market equaling the best one to two percent of that, this is essential and must happen on a massive scale. We are determined to overcome the nontechnical barriers with the same drive as the technical ones.

Overcoming Split Incentives

Encouraged by a donor who had his own real estate portfolio, RMI teamed up with the influential Building Owners and Managers Association International (BOMA) to develop a practical new report, Working Together for Sustainability: The RMI-BOMA Guide for Landlords and Tenants. The report detailed the conclusions of a workshop on how to overcome the classic split incentive issue, which inhibits owners from making efficiency improvements that a tenant benefits from but will not pay for, and vice versa. Owners, landlords, tenants, and brokers all contributed and detailed ways to work together to overcome this hurdle. The free report has been aggressively and broadly distributed by BOMA and other channels (BOMA is a 100-year-old organization with 114 active branches in the U.S. and Canada) and RMI continues to work with BOMA to get new messages and ideas out today.

Small But Important: Retrofits in Smaller Commercial Buildings

Encouraged by BOMA, and cohosted with the Northwest Energy Efficiency Alliance (NEEA), RMI in 2011 also took a first look into the challenges of planning and financing retrofits in smaller commercial buildings, those under 50,000 square feet. This represents the vast majority (90 percent) of all commercial buildings and more than 50 percent of the space in the country. These buildings are considered too small to study extensively, with owners or managers too busy to navigate the complexity of any but the most urgent retrofit projects, much less the challenges of utility rebate and government tax credit paperwork.

The workshop found that 75 percent of these buildings are zombies whose owners cannot afford or have no interest in investing in their upkeep, even though rents, comfort, and longevity would all go up if they did. This is a massive opportunity for cities and local utilities to encourage, and local entrepreneurs to serve, ideally with turnkey solutions. The results have been leveraged in RMI’s community and electricity work and Reinventing Fire projects ever since.

Identifying Comprehensive Deep Retrofit Value

The small buildings Retrofit finance work also provided the final stimulus to look not just at risk and its links to financing, but more broadly at value. Good, deep green buildings such as those resulting from a deep retrofit are more comfortable, productive, marketable, attractive to recruits, supportive of corporate sustainability-linked brands, and many other great things. Many such values are hard to quantify. But since the real estate industry has very well established techniques for handling other hard to quantify but still vital factors—such as location, or marble lobbies, or fast elevators—why not get these value drivers into the decisions? Everyone would be better served if we did: owners, brokers, tenants, and the planet.

Scott Muldavin, who literally wrote the book on this topic, joined RMI in 2011 to help us and now serves as an advisor and collaborator. Our RetroFit Value Model, in a first version aimed at owner-occupants (half of the market), is due out in January 2014. Thoroughly reviewed and very well received by those in the field of sustainability and real estate finance, it lays out the logic, research, insight, and clear methodologies for capturing all the value components of a highly efficient building, to enable better and wiser deals to be made. RMI is of course using the framework in its own real estate planning. And we plan to share the work broadly with the help of friends like Urban Land Institute, BOMA, CoreNet Global, and many others. We also hope to find support to expand this approach to investors and brokers and specialty markets like universities and the GSA, where the tools will need some adjustment.

We are by no means done with the process of driving more capital, more portfolio strategy, and more aggressive campus goals and progress into the U.S. energy system. The stakes are huge and the timing is critical. Without strong savings in buildings, U.S. electricity and gas use will continue to grow, and new, long-lasting but regrettable investments in fossil-fueled electricity and natural gas distribution systems will be made. Those would be investments we do not need, because less money can bring permanent savings via efficiency, with no inflation or risk. Such fossil-fuel investments would likewise be ones the planet cannot afford, because the unnecessary electric plant WOULD of course be used, to the detriment of all who could have been richer, more comfortable, and more productive without it.

(Read parts one and two.)

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