California’s Next Step in Energy Efficiency Legislation: Building Retrofits

Momentum is building around the nation for deep energy retrofits of buildings—which have a critical role in transforming our energy system and ending the use of fossil fuels.

For example, President Obama has ordered $2 billion worth of federal building retrofits and has partners for another $2 billion of work in the private sector. U.S. Senator Al Franken of Minnesota has kicked off a “Back to Work Minnesota” retrofit initiative. New York City, to spur retrofits, requires owners of buildings larger than 50,000 square feet to audit their property’s energy use every 10 years and report their annual gas, oil, and electricity consumption by May 1.

Now, in California, state Controller John Chiang is pushing for legislation to jump-start retrofits.

California has been at the forefront of the building efficiency movement, setting a goal of net zero energy for all new residential construction by 2020 and new commercial construction by 2030. But, as important as that step is, it does not address energy waste in the bulk of California’s existing buildings. In addition, the state has an aggressive goal to generate 30 percent to 70 percent of energy savings through retrofits of its existing buildings—commercial and residential—by 2020.

Our existing building stock must be addressed in order to significantly impact overall energy consumption. Buildings are energy hogs, consuming 42 percent of the nation’s primary energy, 72 percent of its electricity, and 34 percent of its directly used natural gas. The U.S. building stock uses more energy than any country except China and the United States as a whole.

The California legislation will provide a financing method for private owners to pay for energy efficiency investments in existing buildings.

“It is a market-driven policy that will spark our economy by bringing investment capital into our state—and help California dig out of this recession with little risk to California taxpayers,” Chiang said in a recent statement.

RMI’s work was referenced in the framing of the bill. “While teaching at UC Davis I closely followed the work of Amory Lovins and continue using his materials with my students. When the controller tasked me with identifying opportunities for investments that might put Californians back to work on projects with long-term sustainability, the work done by RMI on economic benefits to energy efficiency became the foundation of our efforts,” said Alan Gordon, deputy state controller for environmental policy.

Financial barriers have typically made it difficult to fund energy retrofits even though they often pay for themselves over the life of the improvement. Current loan mechanisms, when available, often do not offer a low-enough cost of capital to make the investment attractive. In addition, the amount of time required to pay back the loan may be longer than the owner plans to hold the building. Chiang’s proposed state-controlled mechanism would funnel the debt into revenue bonds issued by the state, which are secured by a lien on the deed of the building. This structure offers increased security for financiers to lend, and the burden of repayment transfers to whoever holds the building deed. The financing is designed to cost the state nothing.

The legislation, introduced in both the California Senate and Assembly, is an effort to align incentives. It is touted as a method to unite environmentalists, building owners, and the construction industry. “This bill is a triple win for Californians: It puts people back to work, lowers energy costs for businesses and consumers, and protects our resources,” said Assemblywoman Nancy Skinner, co-author of the bill.

All of the work is seen as not only money- and energy-saving, but as a key to job creation in a buildings sector slowed since the financial crash of 2008. A recent study from the Rockefeller Foundation and Deutsche Bank said retrofitting buildings for energy efficiency could help boost the economy by creating jobs and saving $1 trillion over the next 10 years.

This legislation and other efforts around the country are built upon the ideas that our existing building stock, on average, can use 50 percent less energy through efficiency retrofits and that such retrofits are a great business decision.

RMI sees deep energy retrofits as critical to transitioning our country off of fossil fuels and nuclear power. There’s a $1.4 trillion opportunity on the table that building owners and energy service providers can capture simply by aggressively adopting straightforward efficiency techniques in both new construction and retrofits. “It’s great to see legislation is beginning to help realize deep energy retrofits and their underlying benefits,” said Mike Bendewald, an RMI consultant.

Of the few who are currently doing energy retrofits, many merely switch out lighting or HVAC motors with more efficient versions of the same size and count. This leaves out bigger savings stemming from deeper measures like new windows, which can reduce loads to the point where big-dollar items can be reduced in size and cost. These types of strategies are typically not considered because of high up-front cost and perceived higher risk.

If approved, beneficiaries of the California legislation should be careful to not be short-sighted in utilizing the financing. A deeper and more thoughtful approach should be the goal. Doing so can dramatically increase returns and energy savings. It also can capture other benefits, such as managing utility costs, attracting and retaining employees and tenants, and complying with present and future sustainability reporting requirements.

A deep energy retrofit takes into account the business-as-usual scenario, considering all major capital needed in the building over the next several years, and builds upon them to create higher efficiencies cost effectively. “While it’s difficult in most cases to know what capital cost is attributable to energy efficiency and what is for business-as-usual upgrades, we’ve seen deep energy retrofits require as low as a 3 percent cost premium,” noted Bendewald.

To help owners and managers of building portfolios think through how they can use deep energy retrofits, RMI has issued a 2012 Portfolio Energy RetroFit Challenge. The Institute plans to work with six portfolio owners to dramatically rethink and reduce building energy use.

This is the second of two Outlet posts on building retrofits. The first post announced RMI’s Portfolio Energy RetroFit Challenge