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Emma Stewart, Ph.D. Headshot

Why U.S. Buildings Are Leaking a Mixture of Money and Carbon (& What Congress Can Do About It)

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By 2020, U.S. buildings will have wasted the equivalent of the entire U.S. defense budget and nearly the equivalent of the stimulus bill passed in February. Drawing from a recent study by McKinsey & Co. the estimate of this leakage will be more than $640 billion this decade -- and another $73 billion per year in the next decade.

The good news is that policy makers have recently passed legislation addressing building efficiency and our overall energy future, including the American Clean Energy and Security Act (ACES), and the 2007 Energy Independence and Security Act (EISA), which set national goals for zero-net-energy buildings for new construction after 2025, and the retrofit of pre-existing structures to zero-net-energy use by 2050.

Where legislation has fallen short is that the U.S. has typically invested only a fraction of the capital necessary to reap any benefits. Energy efficiency investments typically have returns over 20 percent with risks comparable to U.S. treasury bills. Our investments neglect the opportunities with greatest return and lowest risk.

Improving energy efficiency in buildings generally runs into three barriers:

  1. Difficulties in measuring and verifying the financial and carbon benefits of avoided energy use
  2. The split incentives for efficiency investments between builders, owners, and tenants
  3. Significant upfront cost to receive longer term payback

To overcome these persistent barriers public policy should address the three R's. Not Reduce, Reuse, Recycle, but instead Reveal, Realign and Reward.

Reveal

Measuring and verifying the financial and carbon benefits of avoided energy use in buildings is tricky and time-consuming, but is also a critical step to creating the transparency needed by developers, architects, owners, and prospective tenants to invest in energy efficiency.

Both ACES and the American Clean Energy Leadership Act of 2009 reported by the Senate Energy and Natural Resources Committee grasp the importance of this by providing for building energy performance labeling programs. In setting federal standards, these bills refer to existing building labeling programs such as LEED, HERS, and ENERGY STAR, which have seen mostly voluntary adoption in the new and existing building market. Recent ACES language passed by the House limits the prototype building labeling program to new construction only, but the Senate should stand firm to establish a comprehensive, consistent, and required building labeling program, including existing commercial and residential markets.

There also has been a recent push to install sub-meters and smart meters in numerous homes and commercial buildings. This is a relatively expensive way to go about understanding your building, is only relevant after a building is constructed (i.e. when improvements are harder to make), requires expertise to interpret and diagnosis issues, and may not reap the intended rewards for the building owner until the systems are smarter. The U.S. needs to consider faster, cheaper options, like rapid building energy analysis through Building Information Modeling, which can be completed in a few hours and undertaken at all points throughout the life cycle of a building.

Realign

Split incentives (or "principal-agent problems") among builders, owners and tenants are some of the most powerful obstacles to building efficiency investments. The International Energy Agency estimates this issue alone can account for 30 percent of wasted energy in the built environment. Coupled with the access to transparent information described above, the most powerful policy mechanisms for realigning incentives among builders, owners and tenants are building standards and new contractual arrangements that ensure that the costs of energy - and the benefits of its avoided use -- are spread across all parties.

In regards to building standards, the American Recovery and Reinvestment Act of 2009 made good headway by amending the Energy Policy & Conservation Act to promote lighting and appliance efficiency standards. However, this neglects the biggest opportunity for financial and energy savings: the building structure itself.

As for new contractual arrangements, more support is needed for those experimenting with the concept of 'green leases', whereby tenants revise contract terms with their building owner to ensure that both invest in, and both benefit from, efficiency upgrades.

Reward

While energy efficiency investments tend to have attractive returns, the upfront capital costs have proven to be one of the main reasons why such returns are so frequently passed up. The $3.2 billion and $5 billion allocated by the ARRA to DOE to disburse efficiency grants to states and fund weatherization programs, respectively, are two steps towards rewarding building owners for smart investments. The General Services Administration's $4.5 billion to transform public buildings into high-performance green buildings is an opportunity to develop models of the next generation of buildings from which we all can learn.

Far more is possible and state experiments can point the way. FERC and state legislators must revise utility regulations to reward efficiency over volume of energy delivered. On-bill financing programs by utilities have proven that when tenants know they are able to pay for efficiency investments in small increments added to their utility bill, they are far more likely to make such investments in the first place. Pay-As-You-Save programs take this one step further by ensuring that the entire loan is repaid using money from rebates and saved from reduced utility bills, often times with a zero sum cash flow over the life of the loan, then positive cash savings through the remainder of the measures' life.

Additionally, more programs are needed that tie tax credits to green building standards or publicly financed low-cost loans should be offered for efficiency improvements. Legislators and agencies such as Housing & Urban Development should be careful to ensure that such financial rewards give preference to applicants proposing holistic retrofits. These are more cost-effective and avoid the possibility of decreasing overall building performance through knock-on effects.

Congress is on the right track in setting higher standards for building performance. As it completes energy legislation this fall, it should keep its focus on policy mechanisms that help reveal the financial and carbon benefits of efficiency upgrades, realign the incentives of different parties throughout the life cycle of buildings, and reward those parties who chose to invest in efficiency by assisting them over the upfront cost hurdle, Americans will find ourselves with a lot fewer leaks in our buildings and a lot more money in our pockets.

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