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10 Reasons Why Sustainable/Energy Retrofits of Commercial Buildings Will Be the Next Big Thing

According to the US Department of Energy, commercial buildings account for 35 percent of US (and 40 percent of global) electricity consumption. Existing commercial buildings on average spend 30 percent of their operating budgets on operating costs and account for close to 20 percent of all global carbon emissions.

Today, the majority of all commercial building owners and managers recognize that energy efficiency retrofits have the potential to yield substantial savings on operating costs, while reducing a building’s environmental footprint. However, considerable time and effort continues to be spent by industry specialists in the identification of the numerous barriers (rather than solutions) to accomplish retrofits on a large scale.  Such barriers include, without limitation, lack of available capital, unproven returns on investment (or payback), split incentives between landlords and tenants, lack of technical expertise and continued trepidation from senior lenders.

None of these arguments are insurmountable, and substantial market forces are positioning sustainable/energy retrofits of commercial buildings to be the next big thing.  While not intended to be an exclusive list, the drivers of this industry movement include the following:

1. New financial tools created by lenders, academics and entrepreneurs to facilitate underwriting the economic benefits of such retrofits will become mainstream, proving the value of retrofits and thus unleashing untapped capital to finance the requisite reconstruction projects.  The University of California at Berkeley, the World Bank, Wells Fargo Bank, former President Clinton and New York Mayor Michael Bloomberg’s C40 planning group, Richard Branson’s Carbon War Room, green financier Ygrene, Lockheed Martin, IBM and Barclays Capital are just a few of the multi-national players leading the charge for viable solutions to the existing funding gap.

2. Existing financing structures will become more acceptable, each serving certain segments of the marketplace: (i) traditional debt (loans and bonds), (ii) shared savings with Energy Performance Contracts (EPC), (iii) Tax-Exempt Lease-Purchase Agreements, (iv) Capital Leases, (v) New Market Tax Credits, (vi) Lease or Bond Pools, (vii) On-Bill Financing, (viii) Tax Lien Financing/Property Assessed Clean Energy (PACE) bonds, (ix) Power Purchase Agreements and (x) Energy Efficient Mortgages.

3. Performance contracting will continue to be used as turn-key solutions for sustainable energy retrofit projects and assist in securing existing third-party financing.  Under a typical performance contract, an energy service company (ESCO) assumes some portion of the risk over a retrofit project’s useful life by offering a guaranty of energy and operational cost savings and in certain instances bringing a lender to finance the work.  Such a guaranty affords third-party lenders a financeable stream of positive cash flow (regardless of the actual performance of the retrofit) and reduces the overall risk of a borrower default.

4. Green leases and green tenant demands are on the rise, causing landlords to support these market demands through increased energy efficiency.  The green lease structure, when drafted and negotiated properly, combined with the ability to measure energy consumption on an outlet-by-outlet basis, motivates tenants to reduce consumption of energy, to produce less waste, to reduce water usage, and to utilize environmentally friendly office furnishings and equipment.  On the flip side, the landlords are incentivized to provide the capital outlay, on a pass-through basis, necessary for the requisite energy retrofits.  Tenants ultimately incur the cost of the retrofits, but they also see the direct benefits in the lower operating expenditures.

5. According to the Rocky Mountain Institute and Johnson Controls, the ESCO industry was sized in 2011 at $4.1 billion and is currently growing at a rate of 26 percent per year.  By 2020, Pike Research projects that the market for retrofits in commercial buildings will reach $152 billion worldwide.

6.  In order to meet legislative greenhouse gas (carbon reduction) mandates at the federal, state and local levels, large-scale retrofit projects, in which combined technologies are utilized to optimize buildings as a whole system, will have to be utilized on a national basis.  The Deep Energy Efficiency Pays (DEEP) program is one example of a proposed utility-based incentive that is applied on top of other existing rebates to push for whole building retrofits through reduced payback timelines for owners and investors.

7. Advancements in building automation technologies and the convergence of information technology and building data are forcing the commercial marketplace towards DEEP retrofits on a global basis.  This collection of information and analysis of data in central databases affords building owners and operators the ability to not only track and identify where a building’s energy inefficiencies lie but also allows for the creation of specialized solutions when effectuating each applicable retrofit.  Post-retrofit, these technologies monitor, adjust and synchronize a comprehensive infrastructure that reduces energy consumption on a real-time basis and interfaces with smart meters and smart grids.

8. In the United States, various federal agencies responding to President Obama’s commitment (i) to green the executive branch (requiring LEED Gold certification on all federal building projects) and (ii) in his Better Building Initiative (seeking, through tax incentives, to reduce energy consumption in commercial buildings by 20 percent, which equates to savings of over $40 billion per year), are creating and rolling out programs to incentivize building owners to engage in sustainable/energy retrofits.

9. One of the fastest-growing LEED rating systems over the past two years has been LEED for Existing Buildings Operating and Maintenance (LEED-EB: O&M).  This quantifiable measurement and certification standard, and others, will continue to assist the marketplace in monetizing the value applied to sustainable/energy retrofits.

10.  Performance disclosures, highlighted by new legislation in California that mandates the disclosure of building performance to all new tenants and buyers, will drive building owners to increase overall efficiency metrics of existing commercial buildings through retrofits.

In our view, while progress towards the goal of catalyzing large-scale energy retrofits in commercial buildings has been frustratingly slow for a variety of reasons, we believe that change is in the wind.  New technologies facilitate assessment of energy usage at both macro and micro levels.  A new take on traditional legal relationships will allow for the identification and alignment of interests between owners, tenants and their lenders to incentivize the commitment of capital to achieve energy efficiency.  Moreover, tenants themselves will continue to take into account energy efficiency when deciding where to lease.  While we are of the opinion that no one financing structure will predominate, we do believe that new underwriting technologies, taking into account energy consumption data captured and shared, will permit the rationalization of investment of capital to fund energy-efficient improvements.  Combined with continuing government subsidies, these factors will together provide a powerful tailwind to push energy-efficient retrofits to the next level.

Michael C. Polentz is Co-Chair of the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips, LLP, located in the Palo Alto office. Clayton B. Gantz is a partner in the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips, LLP, located in the San Francisco office. They can be reached at mpolentz@manatt.com and cgantz@manatt.com, respectively. This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. Earlier columns have discussed Demand-Response and Energy Efficiency Programs, California’s Cap and Trade Program, Demise of Redevelopment in California, What’s Next for the Renewable Power Industry and Renewable Energy Projects On Tribal Lands.

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11 thoughts on “10 Reasons Why Sustainable/Energy Retrofits of Commercial Buildings Will Be the Next Big Thing

  1. Cost shouldn’t be a deterring factor when it comes to implementing an energy efficient building plan. Many options are avaible to lower energy costs starting on a smaller scale. However the incentives can be quite rewarding, making it easier for those looking to add a sustainable energy plan on a larger scale.

  2. Great article! I believe the authors Polentz and Gantz referenced in #6 the “DEEP program” proposal which Johnson Controls Institute for Building Efficiency and Rocky Mountain Institute developed in a Fall 2011 paper – but there was no mention of the resource/paper which explains the approach. It would be great to post the full paper via hypderlink in the article to the paper “Going Deeper: A New Approach for Retrofits” which can be found at: http://www.institutebe.com/InstituteBE/media/Library/Resources/Existing%20Building%20Retrofits/Issue_Brief_DEEP_Programs_for_Retrofits.pdf

    Jennifer Lake
    Executive Director, Institute for Building Efficiency

  3. Cost shouldn’t be a deterring factor when it comes to implementing an energy efficient building plan but a lot of short sighted people only look at cost and not the over-all picture

  4. Whilst I would agree building management controls if correct programmed and commissioned can improve energy efficiency there is a skills gap in terms of knowlege of HVAC systems and associated programming. There is also the o going cost of operating building management systems, reprogramming and other hardware and software upgrades. Simple solutions such as improved insulation in buildings certainly in the UK is the most cost effective solution with no ongoing maintenance cost. Complex M&E solutions sound good in the short term but lack of maintenance and technical expertise over the years following installation can have a negative effect. I would like to see evidence over a 10 year period where it can be shown BAS systems have delivered such savings

  5. Love the discussion.
    Here in Australia the Federal Government has instigated programs such as “Commercial Building Disclosure” for Commercial Buildings (Criteria applies) where energy assessments must be made of buildings and disclosed at the point of Sale of the building.
    There are also Clean Energy Grants available for manufacturing companies and associated commercial buildings to improve Energy Efficiencies.
    A whole range of Energy reducing actions are implemented including Daylighting (Solatube) which we have assisted companies in reducing their dependance upon Electrical lighting during daylight hours. Lighting within a commercial office building can consume approximately 40% of the cost of utilities within the building and much higher percentages in more Industrial style buildings.
    Earlier discussion referred to ROI/Payback periods – this is naturally dependent upon type of building, artificial lighting systems in existing buildings etc but customers are finding ROIs acceptable. In some cases in order to reduce initial up front costs to implement daylighting systems clients decide to investigate Blended lighting solutions to reduce initial financial exposure.

  6. This article is bang on. We are a Canadian company started a few years ago with the main goal of developing cost effective and practical LED options to replace all fluorescent fixtures in new and existing commercial buildings. We now have patent pending products that are proven both in terms of cost effectiveness and quality in operation in some of the very top grade fincancial buildings: a pay back period of less than 3 years over a useful life of 27 years at a 14 hours a day, 5 days a week operation. The economics should be compelling along with the sustained quality. However, we are still facing resistance, particularly from the specifying engineering community in “risk for new products” and “resistance to change” in maintenance practices. I do believe that some kind of shared savings scheme would be a motivation to try out these new applications, but the difficulties in establishing agreed upon savings that are legally binding on both sides over a period of time, especialy when the savings may include more than just the readily measurable Kilowatt hours use in lighting such as the savings in not having to change fluorescent fixtures over time would be difficult. Perhaps the author(s) of this article or some reader can assist in clarifying how this can be accomplished.

  7. Yes this is a great article, we are a Raleigh N/C based company who specialize in supplying environmentally friendly solutions to everyday problems, but more importantly these solutions are also very cost effective and save money. This is also the point of this article, retro fitting things like insulation saves money on energy to either cool or heat a building. We supply sustems to deal with organic waste on site which saves money on haul off fees, and is environmentally frirndly. The old idea that been Green costs more, should really NOT be the casen

  8. Good article, the low hanging fruit of PRIMARY energy consumption is building HVAC, commercial and residential, it is the largest energy consumer in ALL buildings, GHP systems can cut HVAC energy consumption in half, any solutions that don’t adress the heating and cooling infrastuctucture in a building are like whitewashing a mud fence… ITIOFD…I have a dog in the fight.

  9. Agreed, there are barriers to reducing energy and reducing costs associated with energy bills, but they are only barriers if you let them be. The largest barrier usually is the decision maker/business not taken any steps or any real consideration toward energy saving retrofit projects. There are all these drivers to utilize that hedge any foreseen and unforeseen barriers a business might have. I owe and operate a business in the southwest that helps other large and small businesses reduce their utility bills. We have seen positive results not only fiscally but also on the employee and customer end. Targeting the right areas to reduce costs are key. Knowing and measuring the data will guide a business to their target areas. What works for one building may not work for the rest. We have seen the rise and fall of incentives, which has produced other barrier-breaking options. Take advantage while incentives are programs are high. The technology and solutions are here and ready. The support is here and ready. Businesses need to explore what is already available and really consider taking a step forward while these drivers (discussed above) are strong. The sooner a smart investment in an energy saving area is made and acted upon, the faster the payback, and the quicker the money can be reinvested or added to the bottom line….

  10. I have to disagree with multiple comments made above by Graeme Wardrope. I believe he is only looking at older technology complicated systems.
    Some new wireless energy management solutions are so simple and intuitive to operate that the average blue collar facility or property manager can operate them after just an hour of two of training. Skills gaps in understanding HVAC systems and how to program them become irrelevant. You just have to read the email alert that we send you notifying you that something is wrong. They you call your HVAC service provider and tell them which unit needs attention, as pointed out in the email.
    There are no reprogramming costs associated with our system. The software is cloud based. We automatically update the software and then email you to inform you of new features that are available.
    Simple solutions such as adding insulation do work, but we have had clients that didn’t even know that they needed more insulation or where they did and did not need it until they installed our system and then gained visibility on their building’s energy use and needs.
    Rather than take a lot of time to operate and manage, our system has consistently saved our clients significantly on labor time. With a quick glance at their computer, IPad, or smartphone they know which devices are down, not maintaining temperature setpoint, maintaining temperature setpoint but not operating efficiently, have had their setting overridden by a local user, etc. Our average client spends 5 minutes a day checking on alerts rather than wasting hours going room to room checking on devices or spending all day driving to multiple building sites.
    Wardrope isn’t alone in his assumptions. We have encountered many building owners and managers that, based on outdated information, had no interest in energy management systems. I’d invite such people to take another look. When I made my first long distance call, it cost 10 cents a minute (within the same country) and had to be made from a land line. Now I can make free worldwide long distance calls via the internet on my smartphone from anywhere I am. Technology and price change rapidly these days.

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