A deep energy retrofit not only reduces carbon emissions in an existing building but also increases property values and net operating income (NOI).
Buildings account for nearly 40% of global greenhouse gas emissions, and retrofitting existing buildings to reduce their energy consumption is a practical and effective way to address this issue.
What Is a Deep Energy Retrofit?
A deep energy retrofit is the comprehensive process of upgrading an existing building to significantly reduce its energy consumption.
The process typically involves improving the tightness of the building envelope (the walls, roof and windows) with better insulation and air sealing. Building retrofits also include upgrading heating, ventilation, and air conditioning (HVAC) systems, and installing Internet-connected building automation systems and high-efficiency lighting and appliances.
In some cases, renewable energy technologies like solar panels or geothermal systems may also be added… When a building uses 100% of its energy from on-site renewable sources, the result is a “net zero” building.
Why Are Deep Energy Retrofits Important?
The existing building stock is a significant source of carbon emissions, and retrofitting these structures can make a real impact on reducing those emissions.
Deep energy retrofits can reduce energy consumption in existing buildings by 50% or more… This may translate directly into increased profitability for the building owner. As commercial buildings sell for a multiple of net operating income, a deep energy retrofit can provide an attractive return on investment (ROI) for the owner that can also increase building value based on its cap rate.
For tenants, a deep energy retrofit may also improve indoor air quality, increase occupant comfort, increase occupancy rates and enhance building resilience.
Deep energy retrofits are also a practical approach because they leverage existing infrastructure, rather than requiring the construction of new buildings or infrastructure.
Retrofitting existing buildings can also create local jobs and economic opportunities, and improve property values.
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Challenges of Deep Energy Retrofits
While deep energy retrofits are a promising approach to reducing emissions in the existing building stock, there are several challenges to implementing them:
- Up Front Cost: One of the biggest barriers to a deep energy retrofit is the upfront cost, which can be significant. Certain energy conservation measures (ECMs), such as LED lighting upgrades, will pay back in a year or less, whereas a building envelope efficiency overhaul – including the cost of replacing leaky windows – may take a decade or more to pay for itself. As such, building owners may be reluctant to approve investments in energy efficiency improvements that have a long payback period. This is true for opportunistic real estate fund operators who may have a short-term strategy of holding investments for 5 years or fewer. Luckily, if the savings to investment ratio for the ECMs is positive, long-term CPACE financing may be available that obviates the need to come out of pocket to pay for a deep energy retrofit.
- Tenant Alignment: Modeling the performance of a deep energy retrofit requires making predictions based on the current building performance and assumptions about coordination of multiple stakeholders, including the tenants. In many lease structures, tenants control their energy use and may not have an incentive to change behavior in the leased space. Building owners, contractors, architects and engineers need to plan ahead about performance and tenant behavior… This can create incremental logistical challenges and may make it more difficult to implement retrofits on a large scale.
- Predictability of Performance: Certain ECMs/improvements are predictable because of basic math, such as the reduction in kWh usage from replacing inefficient lightbulbs with LED lighting that has lower watts but identical lumens. However, relying on historical heating and cooling degree days and weather patters does not reflect actual energy use, changes in building occupants, occupancy levels and human behavior… None of these is easily predictable.
How can we overcome these challenges?
There are several ways to overcome the challenges of deep energy retrofits.
CPACE Financing: One approach is to provide financial incentives or financing options, such as CPACE financing, that make these retrofits more affordable for building owners. Some municipalities are offering incentives for decarbonization, and state focused energy efficiency organizations, such as NYSERDA and the CT Green Bank, can also provide programs, technical resources or create streamlined processes for permitting and approvals to make the retrofit process more efficient.
Green Leases and Education: A green lease can help you incorporate your building efficiency goals into your commercial lease agreements. A green lease aligns the incentives of both the landlord and the tenant toward conservation of resources and efficient operation while helping maintain a healthy, productive interior environment.
In a traditional commercial lease, the tenant is typically responsible for paying its rent, plus additional pass through costs, such as its proportionate share of the property taxes, building insurance, and maintenance costs. Conventional leases may discourage an owner’s investment in green building upgrades because they may not provide a sufficient return.1
Instead, in a green lease the landlord pays some of the costs usually passed to the tenant, thus incentives are more aligned between tenant and landlord. In this set-up, the landlord can recoup its investment through reduced operating costs and continued high efficiency. In order to affirm tenants have a stake in the building’s efficiency, some costs need to be passed through to the tenants to provide the proper incentives. For instance, landlords could require tenants to achieve LEED for Commercial Interiors certification, participate in recycling programs, specify green improvements and disposal of waste, use of energy efficient light bulbs, motion sensing light timers, low-flow toilets, or Energy Star rated appliances in their leases.
Another approach is to provide education programs to stakeholders to facilitate collaboration and knowledge sharing. This can help to ensure that all parties are aligned in their goals and that projects are designed and implemented effectively. Educating building owners and occupants about the benefits of the building improvements in a deep energy retrofit can help improve performance in these types of projects. When stakeholders see the financial and environmental benefits of retrofits, they are more likely to support these improvements.
Summary
Deep energy retrofits are a practical and effective approach to reducing emissions in the existing building stock.
While there are challenges to implementing these retrofits, there are also solutions – such as green leases and CPACE financing – that can help to overcome those barriers.
While not without risks, a deep energy retrofit can result in significant reductions in energy use while also increasing property values.
Footnotes
- The landlord pays, but most of the benefits go to the tenant in the form of lower maintenance and operations costs. If the landlord undertakes green construction, he or she may not realize a share of the resulting savings. For more efficient buildings, landlords will likely be able to charge a higher rent, but that increase may not generate a return sufficient to justify the investment.
