Navigant Research Blog

Green Buildings Get Capital Vote

— July 2, 2014

While Congress drags its heels on climate change legislation, the District of Columbia has become a leader in green building requirements.  The D.C. Green Building Act of 2006 requires that all new private development projects 50,000 SF or larger qualify for the LEED-certified designation.  As a result, Washington not only has more LEED-certified buildings than many states, but also has the second-largest number of ENERGY STAR-certified buildings of any city in the United States (Los Angeles is first).  As the number of green buildings in the nation’s capital increases, attention is being focused on the actual energy efficiency performance of these buildings.

The Washington Examiner, a local tabloid, provided a shockingly poor analysis of the impact that LEED certification has on buildings in D.C.  The report looks at data provided by the district government on energy intensity based on actual utility bills to determine if buildings constructed to LEED standards are more efficient than buildings that are not.   The analysis examines the performance of buildings over a set period of time and compares a group of LEED buildings to non-LEED buildings.  But buildings are considered to be LEED buildings if construction to meet LEED standards has been completed, is ongoing, or is even just planned as future work.  Examining projects such as Ballou High School (estimated completion date: June 2015), Stuart-Hobson Middle School (December 2015), and Lafayette Elementary School (August 2016), the report overlooks the fact that the performance benefits of building to LEED standards are not realized until after construction.  Rather than conclude that the buildings with the poor energy performance were chosen to be renovated to meet LEED standards, it concludes, bizarrely, that LEED standards are meaningless.

Commissioning Key

Though it may be easy to dismiss this analysis outright, it raises an important question about how to ensure that a building’s performance is aligned with its design.  During operation, buildings drift toward inefficiency.  Periodic commissioning of mechanical, electrical, and plumbing systems can optimize the building’s performance.  (This process is described in Navigant Research’s report, Building Optimization and Commissioning Services, from 2012).  Indeed, the LEED standard for new construction requires fundamental commissioning of buildings and provides an additional credit for enhanced commissioning.  However, commissioning is rarely repeated more than once every 3 to 5 years.  The drift in building performance is an opportunity for new approaches to energy savings.

The U.S. Green Building Council (USGBC) is attempting to capitalize on this opportunity through the launch of its dynamic plaque, which provides an ongoing LEED rating to measure and display a building’s rating in close to real time.  But a dynamic plaque still needs an operator to diagnose and address changes in performance.  The future of well-tuned buildings lies in ongoing commissioning, which automates the process.  Solutions available from several building energy management system vendors not only monitor performance, but also detect anomalies and recalibrate the control system to meet ideal parameters.  By applying fault detection and diagnostics-based algorithms that track individual control and equipment performance on an ongoing basis, continuous commissioning provides the best opportunity to guarantee that green buildings are energy efficient buildings.

 

Business Community Wakes to Climate Change Risks

— June 27, 2014

Attempting to reframe the climate change debate in terms of profit and loss, instead of politics, a bipartisan group of business and political leaders has released a report that says the United States faces billions of dollars in economic losses due to global warming.  Titled Risky Business: The Economic Risks of Climate Change in the United States, the study was produced by the Rhodium Group, an economic research firm, in association with a committee headed by former Treasury Secretary Hank Paulson, former New York City Mayor Michael Bloomberg, and Tom Steyer, the billionaire former hedge fund manager who has devoted his fortune to the effort to limit climate change.

Essentially, Risky Business makes the point, through an exhaustive database of the probable economic downsides of rising seas, drought, higher temperatures, and crop failures, that regardless of politics, it is irresponsible to ignore the risks of climate change – especially if you’re a businessperson, investor, or money manager.  With its high-powered lineup of Republican and Democratic financial heavyweights, Risky Business is the latest signal that the business community is awakening to the grave consequences of ignoring anthropogenic climate change, even as political leaders fail to act.

Ignored Rule

“Viewing climate change in terms of risk assessment and risk management makes clear to me that taking a cautiously conservative stance — that is, waiting for more information before acting — is actually taking a very radical risk,” wrote Paulson in a New York Times essay earlier this week.

In 2010, the U.S. Securities and Exchange Commission (SEC) established a rule requiring publicly traded companies to divulge their exposure to climate change risks in their reporting.  That rule has mostly been observed in the breach.  A February study by the Ceres Group, a Boston non-profit that looks at the financial implications of climate change, reported that, “A large number of companies fail to say anything about climate change in their 10-K filings. Forty-one percent of S&P 500 companies failed to address climate change in their 2013 filing.”

That is changing, as business leaders, driven by regulators and shareholders, have started to factor in likely climate-related effects on their businesses.  Large investors, meanwhile, have started to punish companies that produce or continue to rely on fossil fuels.  The announcement by Stanford University in May that it would eliminate fossil fuel investments from its $18.7 billion endowment portfolio is the most significant victory to date of the divestment movement.

Popping Sound

In an update to its 2011 report, Unburnable Carbon, the Carbon Tracker Initiative calculated that only 20% to 40% of the total listed reserves of the world’s fossil fuel companies can be burned if the world is to avoid catastrophic climate change.  Current fossil fuel company valuations represent a carbon bubble.  Eventually, the initiative stated, some form of price will be put on the carbon represented by those reserves, dramatically reducing their value.

“The scale of this carbon budget deficit poses a major risk for investors,” wrote the report’s authors, Jeremy Leggett and Mark Campanale.  “They need to understand that 60-80 percent of coal, oil and gas reserves of listed firms are unburnable … Capital spent on finding and developing more reserves is largely wasted. To minimize the risks for investors and savers, capital needs to be redirected away from high-carbon options.”

Politicians have utterly failed to come to grips with the environmental crisis of climate change.  Now, by framing it as an economic crisis, the business community is having a go.

 

German Utilities Struggle in Renewables World

— June 24, 2014

Germany’s energy policies have promoted strong growth for the country’s renewables industry and have served as guidelines for countries like the United States, Australia, and Canada in adopting similar laws.  They have not, however, benefited German utilities.

Power generators in Germany are struggling as the combination of renewables and other Energiewende policies continue to shift the economics of the country’s power market.  The result has been frightening drops in per-unit wholesale electricity prices, the proliferation of low-cost/high CO2-emitting generation resources, and desperate calls from utilities for policy reform to preserve capacity markets that will provide revenue stability.

Germany allows renewables to take priority on the grid.  Because its energy market is deregulated, compensation for energy resources is set by supply and demand dynamics and marginal costs per unit.   As a result, renewables flood the grid when they are available, which is mostly during daytime peak periods (when prices used to be the highest).  But because the marginal cost per unit of renewable electricity is essentially zero, even when fossil fuel-powered resources are utilized, they are compensated at a much lower price than they have been in the past.  That’s bad news for German utilities (which are surprisingly underinvested in renewables), as they have traditionally made most of their income by generating electricity.  E.ON reported revenue losses of 14% compared to 2012, while RWE reported a loss for the first time in 50 years.

The Brown Stuff

One of the most noticeable consequences of this is the growth in coal consumption.  Due to the intermittency of renewables, utilities are required to ensure sufficient backup power at all times.  Since they are not guaranteed the ability to actually sell these reserves – and face low marginal profits when they do – they choose the most inexpensive generating option – usually coal.  Currently, lignite (brown coal) provides about 25% of Germany’s energy supply, a figure that, according to the U.S. Energy Information Administration, is growing steadily year-over-year.  This is unfortunate because it is the dirtiest fuel source in terms of CO2 emissions.  Furthermore, plants take upwards of 6 to 8 hours to ramp up, which means that it is more cost-effective to keep them running at all times.  But utilities claim that they must increase their use of lignite in order to maintain financial stability.

So what’s the answer? After so much push for renewables and dedication to reforming the energy industry in Germany, it doesn’t make sense for Chancellor Angela Merkel and German regulators to return to the status quo ante.  Grasping the futility of seeking to reverse the Energiewende, utilities have proposed a number of market reforms.  In particular, following France, there has been an increase in lobbying for the establishment of capacity markets that would guarantee utilities a source of income regardless of whether they actually sold their resources.

High Anxiety

Proponents argue that capacity markets would enable utilities to not only use cleaner fossil fuel sources, but also increase their investments in efficiency-related grid projects.  And this makes sense; the Energiewende has proposed grid investments to decrease overall transmission and distribution losses and extend the reach of renewable resources (also promoting energy efficiency).  In addition, the extension of demand response technologies (something that could also proliferate if curtailment is allowed to be sold as capacity) could ease some of the problems surrounding intermittency and high CO2 emissions from spinning reserves.

With anxiety rising among both utilities and regulators as the energy business in Germany becomes more and more disparate, it seems important to take a close look at establishing market mechanisms that simultaneously promote renewables and allow utilities and grid operators to maintain financial and operating stability while developing new revenue streams based on energy efficiency.

 

Ohio’s Freeze on Renewable Mandates Encourages Clean Energy Foes

— June 20, 2014

In an ominous first for renewable energy policy, Ohio Governor John Kasich signed a bill that freezes Ohio’s Alternative Energy Portfolio Standard (AEPS) and energy efficiency measures for 2 years.  The AEPS has been in place since 2008 and called for all investor-owned utilities to source 25% of their electricity from alternative sources, including 12.5% from renewables, by 2025.  These policies, which are more generally called renewable portfolio standards (RPSs), have been enacted in 29 states and Washington, D.C. and play a key role in driving demand for renewable energy.

Any policy that detracts from the status quo-entrenched fossil fuel interests is an attractive target.  RPS laws have been under sustained attack over the past few years, with no fewer than 15 attempts to scrap them at the state level.  The popularity and dropping cost of renewables have helped fend off these attacks, but this result in Ohio reflects the first time that opponents of renewables have succeeded in rolling back an RPS.  Enactment of the 2-year freeze is likely to be followed by a readjustment of the requirement downward, or the scrapping of it altogether.

There were some localized issues that propelled the attack.  A new generation of wind turbines optimized for lower wind speeds has allowed the expansion of wind energy from its traditional home in the more sparsely populated heartland to the more densely populated eastern Midwest markets like Ohio.  This led to increasing NIMBY (not in my backyard) and BANANA (build absolutely nothing anywhere near anyone) opposition.

Domino Effect?

Entrenched fossil fuel interests worried about competition fanned these flames.  And to be sure, the accompanying energy efficiency measures appeared to be a legitimate problem for large industrial users who were not given credit for improvements in process efficiency.  The energy efficiency issues, in fact, may have provided the most momentum behind the RPS attack.

But beyond the state-specific critiques, opposition to renewables comes from fossil fuel interests and conservatives who oppose any government support for alternative energy.  The Energy & Policy Institute has illuminated an increasingly orchestrated nationwide effort that includes the American Legislative Exchange Council (ALEC), with financial backing from the Koch brothers.  ALEC was reportedly active in helping gain support among state lawmakers in Ohio for pushing back against the renewable energy mandates.

Emboldened by victory in Ohio, attacks on state RPSs are likely to increase.   It will be hard to slow the clean energy momentum, though.  Renewables deployments have grown so fast in the United States (and globally) that analysis by Navigant Consulting director Bruce Hamilton shows that around 15 states with RPS mandates, or RPS goals, have already achieved 100% compliance in recent years and another 8 are at 75% to 99%.

Government support remains essential for the future of renewable energy in the United States – but the thousands of wind turbines and solar panels installed in recent years provide a strong foundation of fuel-free energy resources, and today’s increasingly popular and cost-competitive renewables will drive continued deployment whether politicians demand it or not.

 

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