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How Energy Efficiency Assures Renewable Energy Policy Failure

The greatest confusion in the green energy arena is the use of Energy Efficiency as a primary objective, and it results directly in the failure to adopt renewable energy more pervasively.

If you look at any existing system, almost always can you find “cheap” investments to improve that system, but the problem is that thereby you make the problem larger not smaller: you are becoming more entrenched in the system you have. To be precise, “investments” in energy efficiency are subject to very pronounced diminishing returns, and thereby effectively the investor is painting themselves into a corner. For the most part, expenditures on energy efficiency are operational expenses, not investments. This is tinkering, not investing.

In the real estate market the problem is very evident in the methodologies which are typically used for evaluations of “energy efficiency” investments, and typically building owners try to maximize their participation in various incentive programs by meeting thresholds for certain subsidies, either directly or in the form of subsidized financing. Some of these methodologies are even supported by government, as here in NY, where NYSERDA has a program for multi-family buildings, which provides a set of targets that “help” buildings qualify for subsidies. The economically disastrous outcome is that building operators try to hit the targets at the lowest cost, and the “game” now becomes qualifying for the subsidy. By and large the industry is not doing serious long-term capital budgeting for energy. They retain the mindset o subscription energy.

One of the things that is being missed, is that with renewable energy the model changes, so we cannot treat renewable energy as merely a form of efficiency in an existing system. Instead, whenever we implement renewable energy at the demand side, we are making a make or buy decision and the models are two alternative sets of investment decisions. Once you develop such a plan for a building you will see that there are different engineering interdependencies that operate on the renewable side vs. the “energy efficient” fossil-fuel side. Therefore, the two investment paths are mutually exclusive.

The way the “energy efficiency” model usually wins out is because people evaluate their choices on the basis of payback of the equipment, when instead they should do a 30-year capital budget and evaluate the two alternative investment paths: energy efficiency investments of the existing systems, versus renewable energy, which will come with it’s own, very different, set of energy efficiency opportunities. Very soon it will become evident that the two paths are different, and mutually exclusive. The energy efficiency strategy increasingly hits diminishing returns, so that past 30% reduction in consumption it is usually a dead-end. The renewable energy strategy is more capital intensive at the outset, but enjoys more opportunites for synergies and compound returns as we progress. In short, the renewable energy strategy has a future, the energy efficiency strategy is a sinkhole, and it runs into a limit.

By evaluating “energy efficiency” on the basis of payback, the renewable energy options always drop to the bottom of the list, because they are more capital intensive, but once you look on a lifetime basis, the picture changes drastically. Thirty years of no energy bills beats 30% “energy savings” most of the time. In short, technology is progressing wonderfully, but we’re holding up the show with faulty financial planning methods, and often times incentive programs that almost push building owners to make stupid decisions for some cash incentive up front. 

In conclusion:

  1. A premature focus on energy efficiency as a primary objective, and incentives to encourage it, are counterproductive, and a de facto customer retention program for the fossil fuel industry. They preserve the status quo, and make it more attractive not to make changes. Subsidies and incentives should be directed at renewable energy directly, or perhaps at reducing emissions.
  2. Smart building owners should do a 30 year capital budget for their energy infrastructure, and not let subsidies and incentives fool them. First figure out what makes long-term sense for your building, and then figure out how you can leverage the subsidies.
  3. Payback analyis of energy efficiency marginalizes the role of renewable energy, and this is where we are today. You’ll be surprised to find out how often some of the incentives would prompt you to make the wrong decisions, if you follow industry practice of payback analysis of the equipment instead of a CAPM analysis of a building’s energy infrastructure.