Nils Kok

Energy dependence and the electrification of our society

I'm in Boston for the Pension Real Estate Association (PREA) meetings, which have been torpedoed by a power outage that has now lasted for more than 16hrs. I have to commend PREA for their focus on energy efficiency -- this is certainly the most efficient hotel I've stayed in. And it's quite cosy to have candlelights in an otherwise sterile hotel like the Westin (even the bathrooms look like they're from some romantic movie...). But from a practical perspective, no electricity is killing. No electricity = no hot water, no heating, no lifts (not nice if you have a room on the 30th floor), no projector (not nice if you have to give a talk), etc. Then there's being disconnected from the world, which is a strange experience -- it almost seems like my tweet about Au Bon Pain having power and internet has backlashed. This place is now filled with internet junkies that collectively slow down the internet to pre-2000 speeds.

This experience is a good wake-up call though: our society crucially depends on electricity, and this dependence is bound to increase going forward. The era of electrification is fueled by the advent of electric cars, energy-guzzling appliances and increasing urbanization. Buildings remain critical, because that is where we spend our time (remember: 75% of electricity consumption happens in buildings). We should start to think more about local energy generation, so we're not just relying on an old grid. We need much better integration between demand (i.e., buildings) and supply (i.e., central or decentral generation), which can only be achieved by "bringing buildings online." Renewables could solve part of the capacity problems that we're currently facing (especially with nuclear plants going offline in many countries), but balancing their volatile supply with peaks in demand will be challenging. The fact that more than 15 tri-generation plants are ready to roll, but are currently not being used in Sydney still blows my mind (I just tried to explain the concept of tri-generation to a big real estate investor, and I failed miserably. Which tells us something about the importance of sharing learning experiences in order to speed up the diffusion of new technologies beyond national borders). Governments should act much more forcefully to deregulate energy markets and allow for competition. The vested interests of traditional utilities are just too high.

The focus on energy is now broadened from just "efficiency" to "reliability" and "dependence." It all comes down to better understanding energy demand from buildings, and putting buildings to use rather than letting them standing passively. Something to think about when my battery runs out...

Green Cities (Sydney) Prezi: A Primer on Finance, Sustainability, and Buildings

I'm currently in Sydney for a conference called "Green Cities." I love this place (if only Sydney were closer to Europe or the U.S.), especially the forward thinking on energy efficiency in buildings. I was picked up from the airport in a Prius, and while talking about the weather (there are some flooding issues due to heavy rainfall), my cab driver mentioned that he was making about AUD900/quarter on his solar panels (as with all cab driver stories, let's discount this by 50 percent, but that's still a serious net cash flow). Apparently, the government promised a feed-in tariff of some 70 cents/kWh when they first started promoting solar. They quickly learned that every ray of sunshine would cost the government dearly, as retail and commercial investors rushed to cash in (Spain did something similar in the early days). Now the feed-in tariff is back to "normal" levels. With current prices of solar, it's cost-competitive anyway -- if only the sun would shine a little more.

This is my new Prezi, with some slides on IEQ. It features One Bligh Street in Sydney, which is almost as cool a building as 101 California in San Francisco (the streamed version of the talk is here):

A Primer on: Finance, Sustainability, and Buildings on Prezi

 

 

 

Retrofit ("Green") Financing Takes Off

The New Year is off to a good start for energy efficiency financing:

Sustainable Development Capital, a London-based corporate finance and advisory business specializing in sustainable infrastructure assets and services including energy, water, waste, transport, healthcare and education, received a capital infusion from First Eastern, a Hong Kong-based investment group (Download Press release). Over the past few years, SDC has been trying to work out a sound business model to profit from energy efficiency retrofits, and has been moderately successful in pulling off deals. I strongly believe there is a massive market opportunity in China, where even buildings built as recent as 5 years ago can be improved substantially. If the speed in getting properties to market is paramount, building quality may suffer. So basic building optimization (including commissioning of the existing equipment) is a good start, followed by more rigorous retrofits. A (slightly) dated presentation here (Download APG presentation retrofit fund) gives a preview of an institutional investors' view on investment opportunities in retrofits of (commercial) buildings in China (credits to Michael Friedman).

In the US, it seems like PACE is finally taking off. In this recent article in the Huffington Post, Scott Henderson, Finance Director of the buildings program of the CCI/C40, lays out the fundamental challenges in financing energy efficiency retrofits, and, more importantly, the solutions to these problems. Scott is arguably the most knowledgeable person in this field, and his work has been instrumental in many business models that have popped up to profit from the potential of energy efficiency (including the model mentioned above). Scott visited Amsterdam last week, after a C40/CCI meeting on financing infrastructure projects in Basel and it was good to hear what's happening around the world. Australia seems to be the first (again) to have tax-lien financing up and running: the Sustainable Melbourne Fund and Low Carbon Australia are two parties offering low-cost financing for energy efficiency projects, with the possibility of tying a municupal tax lien on a property to the interest and principal repayment. If financing were to be a barrier (I believe it is, but not for the top of the market, rather for the smaller, private investors), this should resolve the market efficiency and lead to many more existing building retrofits.

At a large conference in Istanbul last week, the "International Green Building Summit," I learned more about what happens in green building financing around the world. Romania, of all places, has succeeded in setting up a "green mortgage," backed by the national central bank (for what it's worth...). This mortgage incorporates the lower outgoings for energy, allowing for a higher debt/income ratio, and accounts for the more stable (or even higher) value of energy-efficient homes, allowing for a higher loan-to-value ratio. Now that's forward looking (and ultimately rational, if you believe that energy efficiency is capitalized in home prices, which has been shown previously for a large sample of homes in Europe (see this paper). I was also inspired by a presentation of the Department of Energy's Roland Pfisser, who was previously at PG&E (one of the largest utilities in the US), and has taken an evidence-based approach towards implementing energy efficiency solutions in buildings. Interestingly, DOE now throws in some bait to challenge the industry: $5mln for the manufacturer that can come up with rooftop HVAC systems that at 50% (!) more efficient than current market standards (Carrier and another vendor both came up with models that are price-competitive), $5mln. for the manufacturer that comes up with 50% more efficient lighting, keeping constant lighting quality (my Dutch friends, Philips, won this contest, not surprisingly). These examples reinforce my believe that the market can innovate its way out of the current challenges, provided that demand is really there…. The Massachusetts Green Retrofit Program is another example of a (local) government initiative that is very much market-oriented, and yet so simple.

Yes: it's about benchmarking! That's also what many cities and countries across the world have introduced over the past few years. (NABERS in Australia, the EPCs in Europe, etc). I'm impressed by the work in New York, where all buildings larger than 50,000sq.ft. have to report on (standardized) energy consumption through the Energy Star portfolio manager. Last year's data will remain a well-kept secret (even to academics, other than a selected few at NYU and Penn, shame on you NY!), but this year's data will be made public. Yes, naming and shaming. Full transparency in the energy performance of all (large) buildings should, presumably, inform the market, and trigger landlords to improve the performance of their properties. I made a compilation of some of the slides (credits to the presenters...)

Selection of Slides Green Building Summit, Istanbul

 

More on the demand side: an increasing number of large building managers and owners are revisiting the energy efficiency of their real estate portfolio. In a recent conversation with Bill Mitchell of Microsoft, he showcased the work done at the Puget Sound campus (one of the largest campuses in the world!). As always, lots of no-brainers, low-hanging fruit, and all the exclamations that you tend to hear when owners/managers finally get to work… More interestingly, good-old Microsoft seems to get into the energy game as well. Shift away from the Windows anchor, and now think cloud-based storage and computing. Exactly: the challenge of the next 20 years is connecting buildings (residential and commercial) with building management ("smart") software, sources of energy generation (that includes the traditional utilities, but also local generation from renewables) and new forms of energy demand (most importantly, electric cars). Food for thought...

Some new, high-quality (academic) papers on energy and energy efficiency

I recently gave a talk at the annual convention of Economics for Energy, a Madrid-based energy think-tank. Some interesting numbers on the growth of renewables were presented by Bloomberg New Energy Finance -- massive growth in China (and of course solar in Europe. We'll pay later through our energy bills, but nobdoy seems to realize that...). Resi PV is now at parity at many countries, which may lead to even faster diffusion. My Berkeley "colleague" Max Aufhammer presented some very interesting stats on the effects of increasing temperatures on energy demand in California -- expect an exponential increase in energy consumption from cooling residential and commercial buildings. (Being from Europe, I have no doubts about the heat-up of the earth.)

The most recent Journal of Economic Perspectives has a whole section on energy. Papers can be downloaded for free, certainly worth reading some. Ok, it's academic, but the abstract usually tells the story... Last, this is a very cool paper on economic development and night lights -- using aerial pictures the authors relate the intensity of night light to economic prosperity, quite innovative (Download Henderson et al. - Bright Lights).

Of course, writing about other people's work is a smart way to cover up my own lack of productivity... Well, Matt Kahn and I have finally finished our project on commercial building electricity consumption (results are quite interesting indeed), but we're waiting for a sign-off from the data provider. I also revised a couple of existing papers on energy literacy of private consumers, the economic implications of energy efficiency labels in the European office market, and the value of the BREEAM label in the UK.