Building Owners May Be Losing Money by Not Investing in Energy Efficiency

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If you were the Chief Financial Officer of a business with $120,000 in profits to invest, where would you park this cash? In a money market fund yielding 0.39% annually — or in deep energy efficiency retrofits for your building that provide an 18% annual return?

When building owners consider upgrades for their commercial properties, energy efficiency may seem like a bottom-line expense that could be postponed. But when you take a deeper look at the costs and benefits, it becomes clear that energy efficiency yields a better return than most alternatives.

The surprising economic benefits of energy efficiency

New reports from the Peninsula Advanced Energy Community (PAEC) show the economics of eight energy efficiency measures for five building types: office, municipal (fire station), school, multifamily residential, and retail. Using a consistent approach to calculate payback, each report analyzes these same eight technologies:

  1. LED lighting conversion
  2. Building Management Systems (BMS) and advanced controls
  3. Reduction in phantom loads
  4. Higher-efficiency windows
  5. Improved insulation quality
  6. Replacement of obsolete air conditioning with higher-efficiency systems
  7. Heat pumps as replacements for natural gas space heating
  8. Alternative water heating systems

Not surprisingly, the PAEC reports found that certain measures tend to have a faster payback, such as installing LEDs and reducing phantom loads. Other measures have longer payback times, such as replacing windows, implementing BMS, and switching to alternative water heating systems.

Building owners usually cherry-pick the energy efficiency measures with the fastest payback. But they’re missing a significant opportunity, according to the PAEC analyses. Bundling the eight energy efficiency measures, even those with longer paybacks, still offers an attractive rate of return — and ensures that deeper retrofits will happen.

For example, in the report on office buildings, the payback for each energy efficiency measure is shown in the following chart:

Payback Analysis (years) Source: PAEC report, Final Economic Benefit-Cost Analysis of Energy Efficiency and Fuel Switching Measures

Payback Analysis (years)
Source: PAEC report, Final Economic Benefit-Cost Analysis of Energy Efficiency and Fuel Switching Measures

When considered on its own, just replacing single-pane windows with dual-pane energy-efficient windows in an office would provide a 12-year payback. But when this measure is bundled with six others, the payback for office building retrofits is just 5.4 years. The PAEC report calculates that the internal rate of return for these eight measures together is 18%, a higher return than you could get with most other investments.

What accounts for the economic benefits?

The five PAEC analyses standardized their approach to include incremental capital costs, available incentives, incremental operations and maintenance costs, and annual energy cost savings — and the incentives are significant.

Pacific Gas & Electric (PG&E) offers businesses and government agencies in southern San Mateo County 0% on-bill financing. This means that when the property managers of commercial and government buildings agree to energy efficiency upgrades identified in a PG&E energy audit, the utility will pay for energy efficient equipment and installation work by contractors up to $100,000. Then PG&E will roll the costs and savings into the customer’s bill over the next five years. This program makes it much easier for commercial property owners to opt in to energy efficiency projects.

Further benefits from energy savings

In addition to attractive paybacks, bundled energy retrofits offer dramatic energy savings. To compare energy use between five different building types before and after retrofits, the Energy Use Intensity (EUI) provides a standard measurement of a building’s annual energy use per unit area. The following table allows us to compare the  EUI and average payback for each modeled building type.

Energy efficiency before and after: Five modeled types of buildings Source: PAEC report, Final Economic Benefit-Cost Analysis of Energy Efficiency and Fuel Switching Measures

Energy efficiency before and after: Five modeled types of buildings
Source: PAEC report, Final Economic Benefit-Cost Analysis of Energy Efficiency and Fuel Switching Measures

Energy efficiency’s role in building advanced energy communities

Energy efficiency is a critical first step in building advanced energy communities (AEC). Once that important first step is taken, the stage is set for these key elements of an AEC:

  • Low or zero net energy buildings
  • Abundant solar electricity
  • Energy storage and other distributed energy resources
  • Solar emergency microgrids for power management and islanding of critical loads during outages
  • Charging infrastructure to support the rapid growth of electric vehicles

These elements together scale up clean local energy, support grid reliability, and minimize the need for new energy infrastructure costs such as transmission and distribution upgrades.

The goal of the PAEC initiative is to advance the expansion of AECs in California. Millions of buildings in the state need to be retrofitted. The graphic below shows the types and numbers of buildings that the California Energy Commission would like to see upgraded to the latest building and energy efficiency standards.

As policymakers, utility executives, municipalities, and other government agencies attempt to overcome the barriers to AECs, the PAEC economic analyses shine a light on how to frame energy efficiency upgrades. By showing how financially attractive it can be to bundle energy efficiency measures, the PAEC initiative inspires property owners in the public and private sectors to take the first key step toward implementing AECs and advancing our clean energy future.