Navigant Research Blog

Energy Efficiency Economics 101

— February 18, 2015

The frequently overlooked component for unlocking the great potential of energy efficiency in commercial buildings is the bottom line: cold hard cash. For commercial building owners and operators, especially those managing small and medium (under 50,000 square feet) facilities, the idea of installing energy-efficient equipment or energy management tools is a nice-to-have, not a need-to-have.

Tenant improvement and making a profit by keeping expenses low come before improving or replacing equipment with state-of-the-art efficient alternatives. A recent report from the National Institute of Building Sciences’ Council on Finance, Insurance and Real Estate contains a set of findings and recommendations on how small commercial buildings can implement energy-efficient retrofit projects.

Live Data

The report lays out the case for focusing on small and medium commercial buildings, a dormant $36 billion market opportunity that could provide huge employment opportunities (424,000 job-years) and carbon reductions (87 million metric tons a year). According to Navigant Research’s Energy Management for Small and Medium Buildings report, the energy management systems and services associated with this market are expected grow from $231.3 million in revenue in 2013 to $1.3 billion in 2022. The benefits are clear; what can be done?

The report recommends a few multi-tiered sets of actions that could help invigorate this market, at least in the United States. These include federal action, such as expanding research from the Commercial Buildings Energy Consumption Survey (CBECS), which is a critical tool for understanding the state of energy use in commercial buildings, but is only updated every 5 years. CBECS data could be used with benchmarking data to make the collective understanding of building energy data a living data set, providing a meaningful performance-based evaluation of how energy efficiency is actually deployed in existing buildings.

Increasing the Pace

Another recommendation is challenging in this political climate. The Section 179 (D) tax code, a part of the Energy Policy Act (EPAct) that incentivized commercial building energy efficiency, expired at the end of 2013. At $1.80 per square foot for the full achievement of 50% energy reduction, the incentive was helpful. The reliance on modeling was a challenge, and the improvement of benchmarking data drawn from a living version of CBECS could change that.

Finally, the report focuses on the variety of financing that can be made more available to this market. If energy efficiency financing can be presented as a secure investment with known outcomes and well-understood risks, the adjacent available pools of financing could, with some urging, be made available.  Increasing the deployment of utility-based on-bill financing is one possibility, but not all utilities in the United States would be open to that approach. Property Assessed Clean Energy (PACE) programs enable energy efficiency (or solar deployments) to be financed by local bonds, and repaid via local property taxes over time. The White House recently announced it would use the success of PACE in the multifamily residential market in California and apply it to federal Housing and Urban Development Department housing.


Going Ductless, AC Systems Gain Efficiency

— February 17, 2015

If the rest of the world used air conditioning like the United States, we’d be in trouble. Luckily, that is not the case. The presence of ductless split systems (which are ubiquitous almost everywhere else in the world) in U.S. homes is dwarfed by ducted central air conditioning units. Ducted units circulate air within a house to maintain an appropriate temperature, whereas ductless systems circulate refrigerant. Typical efficiencies of ducted central air conditioners run from 13 seasonal energy efficiency ratio (SEER), a measure of the energy consumed by an air conditioner based on its electricity consumption, to 21 SEER. Ductless split systems far more efficient; they’re available up to 33 SEER.

Many factors contribute to the slow adoption in the United States. U.S. houses are designed for and typically supplied with ducted systems. Running ducts through wood-framed American homes is far easier than in concrete, stone, or brick houses, which are more common abroad. But, general resistance to change among consumers, contractors, and distributors is the biggest factor that is holding back greater adoption. Ductless manufacturers have acknowledged this and are working to lower the barriers for switching that each stakeholder faces.

Changes to the Equipment

For contractors and distributors, ductless split system manufacturers reduce the burden of inventory management. Systems can come in a variety of configurations. One outdoor condensing unit can be connected to several indoor units (multi-zone) or just a single indoor unit (single-zone). Previously, these configurations required different units for multi-zone and single-zone configuration, and even units that have the same capacity aren’t interchangeable. But, earlier this year, Haier introduced its FlexFit ductless system, which can use the same indoor units in both single-zone and multi-zone configurations.

Similarly, several manufacturers of ductless split systems have eliminated cooling-only units and provide heat pump capability to all units.  Mechanically, the only difference between the two is a four-way valve. All heat pumps are capable of cooling, so providing a heat pump for a cooling application does not create any functional problems. Indeed, it appears that the logistics improvements associated with reducing the number of models offset the slightly higher cost of materials.

Is It Enough?

To win over reluctant consumers, LG Electronics has long focused on the aesthetics of the system. A traditional ducted system has a discreet register hidden on a wall, ceiling, or floor. Ductless systems entail indoor units in occupied spaces. To some, the units are unsightly. But, LG’s design-oriented Art Cool product line, featuring low profiles and designer color finishes, is an attempt at making indoor units pretty. Additionally, the company’s Art Cool Gallery hides the indoor unit in a picture frame that can be personalized with artwork or photography.

Navigant Research expects ductless systems to expand in North America in the future. But, even at aggressive growth rates, it will take years for ductless systems to reach parity with ducted ones. Cost remains a factor. Depending on the complexity of the system and whether ductwork already exists, installation of a ductless system can be much more expensive than the installation of a ducted system. Even if the United States never sees the same penetration rate as the rest of the world, though, ductless split systems will drive energy efficiency improvements in residential air conditioning.


Sunny Outlook for Multifamily Housing Energy Advances

— February 10, 2015

In January, the Obama administration announced a new partnership with the state of California to promote energy efficiency and renewable energy in the multifamily housing market. As part of this new agenda, President Obama established a target of 100 MW of renewable energy across federally subsidized housing by 2020. The program aims to deliver both climate change and economic benefits, estimating that improving energy efficiency in the country’s subsidized multifamily homes by 20% would deliver a $7 billion annual savings and a reduction of 350 million tons of carbon in 10 years.

Accelerating PACE

Property Assessed Clean Energy (PACE) financing will have a big role to play in achieving the goals of the White House and the state of California. PACE programs enable customers to finance up to 100% of an energy efficiency or renewable project and repay the debt as a property tax assessment over a period of up to 20 years. These programs are locally defined by city or state legislation.

The off-balance sheet financing model hit a major roadblock in 2010 when the Federal Housing Finance Agency (FHFA) put residential PACE programs on hold over a battle initiated by Freddie Mac and Fannie Mae over the first lien status of the energy efficiency debts of a PACE-funded project. The FHFA argued the PACE debts put a heightened risk of default on home mortgages and that Freddie Mac and Fannie Mae should not back mortgages on properties with PACE debt.

Four years later, FHFA has not formally changed its stance, but PACE programs are once again funding residential projects. The government of California was so certain the program did not add default risk that the state legislature passed SB 96 in 2013. SB 96 established the PACE Loss Reserve Program and ultimately rejuvenated programs throughout the state. California is not alone in the local drive for PACE financing. In fact, according to PACENow, the non-profit advocate for PACE financing, there are over 25,000 PACE projects underway across the United States, and 18% are supporting improvements in the multifamily housing segment.


(Source: PACENow)

Going West

The opportunity for energy management in the multifamily market is opening the door to growing business in the private sector, as well. For example, Bright Power, a company specializing in comprehensive energy management solutions for multifamily housing, including energy audits and benchmarking, energy efficiency upgrades, and solar, announced a $5 million round of financing that will help support the company’s entry into the California market. The overall buildings market is ripe for the adoption of renewable energy and investment in energy efficiency, and innovative financing models are helping customers overcome the upfront capital challenge. An upcoming Navigant Research report will examine the evolving market for energy efficiency financing as a part of Navigant Research’s Building Innovations syndicated research service.


Playing Under the (LED) Lights

— February 9, 2015

As my colleague Paige Leuschner has noted, the 2015 Super Bowl was arguably the most energy efficient major sporting event ever.  In particular, it was the first Super Bowl to be played under LED lights.  The fact that LEDs have penetrated all the way to this pinnacle of sporting events proves more than a U.S. Environmental Protection Agency (EPA) test or a third-party certification ever could that this type of lighting has overcome all of the initial concerns over quality and has firmly earned its position in the mainstream.  A stadium that hosts the Super Bowl cannot afford to experiment with a lighting technology that might not be bright enough, might provide an inconsistent color quality, or might flicker in even the slightest way that could be picked up by the high-speed cameras that record every moment of the big game.  Other lighting technologies have met those strict demands for decades, so the choice to switch to LEDs demonstrates a confidence that this comparatively new technology would not fail.


Indeed, the LEDs at the University of Phoenix stadium performed flawlessly.  Each new fixture is significantly brighter than the metal halide fixtures they replaced, allowing the stadium to reduce the total number of fixtures by more than half.  Color quality was also improved through the upgrade, according to Mike Watson, vice president of Product Strategy at Cree, the company that manufactured the LEDs.  As for the ability of high-speed cameras to capture critical moments without disruption by flicker, viewers who may have watched and rewatched every frame of Jermaine Kearse’s miraculous catch as the ball bounced off his left leg, right knee, and then his hands multiple times can attest that the lighting stayed consistent through every single frame.


So, without risk of jeopardizing the quality of lighting, the Super Bowl stadium was able reap the advantages of LED lighting.  The new system uses only 310 kW of electricity, compared to 1.24 MW from the previous system, almost 4 times as much.  Beyond the resulting energy and cost savings, the stadium management could also rest easier knowing that the new lighting would be able to recover almost instantly in the event of a brief power failure, rather than being forced to wait for the significant warm-up time of metal halide lighting (such as in the 2013 Super Bowl).

The clear success of LED lighting within sporting facilities also reduces the potential of a rival lighting technology, light-emitting plasma (LEP).  Although LEP cannot match the efficiency or cost of LED lighting, it was once expected to compete well in spaces that require very high intensity light and where high-speed photography demands the absolute absence of any flicker.  However, given that LEDs have demonstrated their ability to meet those demands in one of the world’s most watched sporting events, it is unlikely that LEP will ever be able to claim the sporting facility niche.  Since LEDs are taking up the lion’s share of R&D dollars spent by lighting companies, as discussed in the Navigant Research report Energy Efficient Lighting for Commercial Markets, it will be hard for LEP or any other lighting technology to catch up in the near term.  The bright lights at the Super Bowl reinforced the growing dominance of LED lighting across an increasing number of end uses for years to come.


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