Switching to less power-hungry light bulbs is relatively easy, and the payoff relatively swift. But replacing furnaces or boilers or reconfiguring the building’s shell involves sinking millions of dollars into an asset that the owner may want to get rid of long before the investment has paid off.
In a new twist, some investors, a technology company, a municipal utility and an environmentally oriented foundation have joined forces to show that major energy-efficiency improvements in commercial buildings may provide alluring new revenue to all involved.
A program at the Bullitt Foundation’s new building in Seattle is aimed at attracting the notice of commercial building owners around the country who may be reluctant to make heavy investments in such technologies. Under this plan, if they, or investors, put in the capital for major efficiency retrofits, new revenue, based on precise measurements of energy savings, will keep coming in for decades.
Currently, building owners, utilities and utility regulators who underwrite some efficiency measures remain somewhat skeptical of what are called “deep retrofits,” like swapping out furnaces, boilers or the building shell itself. This has been particularly true for older, smaller commercial buildings, which, according to a new report, account for 47 percent of all commercial real estate outside the world of malls.
Seattle City Light, a municipal utility, has agreed to the long-term purchase of energy savings from the Bullitt Foundation, whose new building is known for being ultra-thrifty with water and power. The savings will be measured by a new software program from EnergyRM, using a new kind of meter that will, from one day to the next, track and verify how much savings have occurred.
“This is a whole new frontier,” said Brett Phillips, the chief sustainability officer of Unico Partners, based in Seattle.
“Traditionally commercial real estate and how we go about paying for products is very conventional,” he said. “Change is hard to come by. The more we can innovate our financial instruments, the better.” But he cautioned that the Bullitt Center’s experiment would have to show real results before even he, a businessman working in an environmentally conscious setting, would be persuaded.
The basic plan intends to ensure that utilities lose none of the revenue that supports their fixed costs — wires and other infrastructure — while allowing them access to a new power source. The energy not used by Bullitt or any other building is purchased by the utility in a 30-year contract, just as if they were purchasing hydropower or coal-fired electricity.
And how does unused electricity get its value? The building has already paid market rates for the unused kilowatt-hours. Seattle Power and Light buys them back for resale, paying for what were christened “nega-watts” more than three decades ago.
While the calculations for Bullitt are still being worked out, the working estimate is they will use about one-third of the electricity a new building constructed to city codes would use — a saving of more than 500,000 kilowatt-hours annually. For that savings, Seattle City Light would pay about $44,000.
The utility was not easy to convince. As “Disruptive Challenges,” a recent report from the Edison Electric Institute shows, the industry is getting increasingly nervous about its long-term ability to finance its infrastructure costs in a new world of efficiency and renewable energy.
As Jorge Carrasco, the superintendent of Seattle City Light, explained it, any utility executive must think “about what does this new approach do from a financial standpoint to an entity that makes its living by selling energy?”
He added, “this program ties the savings to performance,” It ensures, he said, that “you don’t pay any incentive until you realize the savings.” The building owner continues to pay the full retail rates they would have paid before the retrofit, ensuring that the utility has cash up front to pay its fixed costs; if the owner himself invests in major efficiencies, he shares in the revenue from the long-term contract for his “nega-watts.” Or the investors do. Or both.
For investors, a guarantee of a long-term payment from a financially stable municipal or investor-owned utility is supposed to make the cost of capital cheaper, because the risk is lower.
Bill Campbell, a principal at Equilibrium Capital, a San Francisco investment group, said, “Utilities are regulated to be an investment-grade credit.” The solidity of this backing, he said, makes assembling capital, “a much simpler and more straightforward task and therefore one that costs less.”
If the investors are banking on the creditworthiness of the utility, Seattle City Light is banking on the accuracy of the metering software developed by Energy Resource Management, a Portland company.
Every external factor affecting a baseline established by the meter — a week that is warmer or wetter than the same week in earlier years or an energy-intensive tenant moving out and a low-energy company moving in — is supposed to be accounted for. The metering software is a virtual accountant making sure the efficiency calculations are correct.
Denis Hayes, president of the Bullitt Foundation, argued, “The powerful thing about this proposal is that it works best for existing buildings.” Given the turnover of commercial building space is less than 2.5 percent a year, it is the old buildings that could produce the greatest savings.
