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Dec 3, 2015

Building Efficiency Crucial to COP21 Commitments

The market needs solutions that can enable capital to be deployed at scale


This month more than 190 countries have come together for COP21 in Paris with the aim of achieving a legally binding and universal agreement on climate that can keep global warming below the critical 2°C level. There is a rising tide of confidence that such an agreement can be reached, which brings into focus the greatest areas of opportunity to drive change. The world will be seeking solutions that can rapidly scale and deliver impact without compromising pathways to economic prosperity.

Of these , the role of buildings is pivotal. Today over 30 percent of global greenhouse emissions are buildings related. Those emissions are predicted to double by 2050 if we follow a business-as-usual path. If we just look at consumption of electricity, more than 60 percent (and as much as 74 percent here in the U.S.) is buildings related. Buildings’ enormous appetite for electricity—much of which is produced by fossil fuels—threatens our climate, our economy, and our health. 

Yet at the same time the buildings sector offers some of the greatest potential for rapid and economically beneficial change, and the technology to achieve this already exists. According to a 2009 McKinsey & Company analysis, the deployment of all NPV-positive efficiency improvements, relative to status quo, would reduce U.S. commercial building sector energy use by 29 percent by 2020. 

For the First Time at COP, a Day Dedicated to Buildings 

This year's COP marks the first time there will be a dedicated Buildings Day at the international event. The World Green Building Council will host it with the help of UNEP and other partners, with a focus on buildings' contribution to a 2°C path. At buildings day the focus on taking action will be discussed through three panels: 1) public policies, 2) value chain transformation, and 3) bridging the investment gap. 

The critical question facing every policymaker though is: “If investing in efficient buildings is so economical, why aren’t building owners doing it already?” The core issue is not the basic economics but rather the misalignment of incentives and market signals that today do not serve the system as a whole. Addressing the causes of these market failures will allow the market to pivot and bring market-based solutions. We do not need new technology or costly programs to address the efficiency opportunity.

Only Modest Successes to Date Pursuing Building Efficiency

Over the past three decades, the biggest driver of improved energy performance in buildings has been policy, standards, and codes that progressively raise the bar of efficiency, allowing for industrialization of technology and economics of scale to come together. There has also been success with voluntary building rating systems such as USGBC’s LEED that drives beyond code performance for those organizations that are focused on achieving sustainability goals—typically government, institutional and large corporate enterprises.

As the world looks for solutions, learning and replicating best practices around policies, codes, standards, and voluntary building rating systems (or stretch codes) is a must. However, we must also recognize that these levers primarily address buildings yet to be built. Existing buildings largely remain an unaddressed piece of the puzzle.

A New Paradigm for Efficiency is Needed

Beyond these successes, the market has been obsessed with segmenting markets to find solutions to specific barriers to adoption. This is especially prevalent in existing buildings where in most cases the barriers are unique to each "owner" segment. This segmented approach to solving the problem of efficiency in existing buildings—which are still projected to represent over 50 percent of the buildings that will be in use in 2050—has resulted in thousands of niche approaches that are unable to deliver economies of (or outcomes at) scale.

For existing buildings we have to start looking at the problem differently: segmentation is not the path. We are thus reminded of a statement from over 500 years ago from the great mind of Leonardo da Vinci: “Learn how to see, realize that everything connects to everything else.” Buildings represent over 60 percent of global electricity consumption. It's time we start viewing those buildings as an integral part of the electricity system, and not just as the load that the grid serves. Even more, we need capital invested and deployed at scale to seize the efficiency opportunity. The critical question remains: How to unlock the massive amounts of capital necessary to capture the opportunity?

Efficiency as an Investible Asset Class

The electricity system has been designed and optimized around the supply side of electricity. Mechanisms are in place that fuel investment in grid infrastructure, largely from utilities. Such mechanisms ensure healthy returns for investments in long-term assets at low, or at least assessable, risk. These mechanisms have enabled investment of "patient" money, capital that has no expectation of full repayment for at least 20 years. On the other side of the meter we find building owners with little motivation to invest in measures that improve building energy efficiency—effectively delivering energy capacity back to the grid—unless they see a simple return of less than two years. 

This gross mismatch between supply-side watts with long-term acceptable paybacks and demand-side "negawatts" of efficiency with very short acceptable paybacks drives capital flows and results in significant over-investment in generating capacity and significant under-investment in available demand capacity…the majority of which is related to buildings.

If we are to truly capture the clean electricity capacity (a negawatt is, by definition, zero carbon) available through eliminating electricity waste in buildings, we have to level the playing field so that patient capital is available to demand-side resources consistent with the terms available to supply-side resources today. In short, it's time for energy efficiency and negawatts to be truly leveraged as the demand-side electricity grid resource that it is. The key to making this happen is to have an electricity system that pays for measured performance delivered to the grid regardless of source. We have seen the system move in this direction with grid- connected renewables and the creation of demand response markets, but efficiency has to date been largely ignored. 

The Timing is Right to Pursue Negawatts of Efficiency

In the past the barrier has been how to measure a negawatt. However, advanced analytic techniques for quantifying efficiency savings are being applied in “negawatt” meters that compare normalized baseline performance to actual performance, enabling real-time measurement of investment-driven energy savings normalized for such things as weather and occupancy schedule and in compliance with the International Performance Measurement & Verification Protocol. If we look to California, they are starting down this path through SB-350, the clean energy and pollution reduction act of 2015, which seeks to incorporate meter-based performance into utility energy efficiency programs. 

This is not a call for energy efficiency incentives or rebates (they have their place in stimulating demand but do not represent long-term solutions). This is a proposal for energy efficiency measures deployed in buildings (both existing and new above code) to be measured and paid for in the same way and for the same price as generated electricity is paid for under the condition of measured performance. 

Leveraging Existing Capital Markets

This income stream can be easily financed in the same way utility generating capacity projects are financed. The investment is not to an indebted building but into a long-term income stream payable by the grid meeting the criteria necessary to attract "patient" money. Negawatts—like watts—can and should have quantifiable value that, once aggregated and structured into an investable asset class, could unblock capital at scale into this powerful demand-side resource that to date has been largely untapped.

On the other side of the structure, a building owner would pay the building's measured electricity consumption plus the measured savings (i.e., what was being paid before the efficiency measures, funded by an investor, were deployed), hold all the other attributes of an efficient building, and receive performance incentives as necessary to ensure alignment of goals. Meanwhile, the contractor or energy services company (ESCO) implementing the measures provides an underwritten guarantee of the measured performance to ensure integrity of negawatt supply to the investor.  

Clearly, many further questions need to be answered and issues resolved, which can only happen through collaboration across key market players. Some of these questions would likely include: 

  • From a utility perspective, how would demand charges and other rate structure elements interface with a building's actual energy consumed vs. baseline consumption.
  • From a building perspective, how would incentives or charges flow between landlords and tenants? 
  • From a contractor perspective, how do responsibilities of guarantees on measured performance that are dependent on action or inaction of a building owner transfer on failure to meet obligations?

These are just the tip of the iceberg. We'll be asking—and seeking to bring answers to—these questions and more in the future. 

Implementation of such an approach, leveraged across all building types, has the potential to reduce the demand on the electricity system by over 20 percent here in the U.S., giving us a much shorter and lower-cost path for transitioning to a clean energy future.

So while I applaud the focus on buildings at COP with the first-ever Buildings Day, let's not forget that the truly scalable solutions are more likely to be found when we look across the system that buildings are an intrinsic part of…solutions that we will not find if we just look within the buildings themselves. 

Image courtesy of Shutterstock.

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