Retrofitting existing buildings to make them more energy efficient is by far the most effective way to dramatically reduce the CO2 emissions associated with the built environment.
Over 90% of buildings in the U.S. are over five years old and inefficient enough that they could not be built under current energy requirements, according to a review of U.S. building stock by Lawrence Berkeley Labs. That's a huge opportunity for retrofits. In fact, says Gary Lawrence, urban strategies leader for international engineering and planning firm Arup,
"There's no way the U.S. can meet its CO2 reduction goals without retrofits to address energy use and water efficiency." Of course, that's also "a huge unfunded mandate for CO2 and climate change."
So, what's the hold up?
Well, the "unfunded" bit is a big part of it.
In its 2009 Green Cities report, Living Cities (a collaborative of 21 of the world's largest financial institutions) reported that many cities cited funding as their number-one challenge when it comes to large-scale green building programs.
Even well-funded programs may not be enough. According to George S. Hawkins, director of the Department of the Environment in Washington, D.C., "even with $25 million for retrofits, it is not anywhere near enough, given the scale of development that is already here, which is not energy efficient, and which needs to be transformed."
Retrofitting isn't simple, either.
"It's just easier to deal with new buildings—they aren't occupied yet, you don't have to worry about moving tenants out around retrofits and compensating them for their inconvenience, and you don't have to worry about auditing where they're at now and mandating where they need to be," explains Laura Tam, green building policy director for the San Francisco Planning and Urban Research Association. "It's also a matter of cost—it actually costs more to do a green retrofit on an existing building than to build a new building green."
Some new financing strategies are beginning to emerge. Los Angeles' multi-million dollar program to retrofit existing city buildings, for example, is financed through its public utility, which is lending the city the money to make buildings more efficient. The city will then pay that money back with the energy savings it realizes over time.
But the reach of such a program is modest for now. LA is starting with 20 buildings – out of more than 1,000 existing city-owned structures.
Carbon Cap + Smart Grid = Financing for Green Retrofits
Fortunately, things are beginning to slot in place for green retrofits.
First, a federal carbon emissions cap could help make it necessary (not to mention more financially attractive) for building owners to reduce emissions in any way possible. According to a 2007 McKinsey report, four of the five most cost effective ways to cut emissions are building retrofit measures: insulation, lighting, air-conditioning and water heating.
Second, the build-out of the smart grid could help make the case for green retrofits.
A viable retrofitting financing model has already emerged for larger buildings in the form of Energy Service Companies (ESCOs) for larger, institutional and corporate customers. ESCOs sell performance contracts wherein the company that conducts the retrofit charges a lower up-front cost but shares in the financial benefits created by an energy efficient retrofit. As the smart grid is built and buildings begin to include more meters, sensors and building automation systems, those financial benefits will be easier to calculate and predict.
Meanwhile, in the residential market, which has languished without a financing model that provides enough incentives for homeowners to retrofit, home energy monitoring systems connected to the smart grid could provide the push needed. Some interesting financing models are also starting to emerge.
Bill Campbell, managing director of Equilibrium Capital Group, says his firm is working on a business model that translates the ESCO idea into something that works for the residential market.
In essence, rather than selling homeowners energy services that they'll be able to pay for over the long term with their energy savings, Equilibrium is developing a model whereby the energy services company bears all of the upfront cost and reaps all of the financial benefit—the homeowner's utility bill stays the same, but they don't bear any of the upfront cost of an energy efficient retrofit, a home improvement that could dramatically increase their property value.
Clean Energy District Financing is another approach that could help fund residential green retrofits. Pioneered by the City of Berkeley and now in place throughout California and Louisiana, Clean Energy District Financing allows a city to make proceeds from taxable revenue bonds available for home energy improvements and to retire the bonds over 20 years through a special tax levied on the properties whose owners who participate.
It's a pretty good deal for every party involved. The 20-year term can make deeper investments feasible; the obligation is tied to the property, not to the owner; and property taxes, including the special assessment, are deductible for federal and state income tax purposes.
Green Retrofits = Energy Savings + Jobs
While it has taken longer for green retrofits to take off than green construction, momentum is building.
In addition to the incentives provided by eventual carbon regulation and the potential inherent in the smart grid, the federal stimulus package provided some $250 million to energy efficient retrofits via its Green Retrofit Program for Multifamily Housing.
In an effort to help spur the green retrofit market, the USGBC also re-launched its LEED for Existing Buildings (LEED-EB) program in January 2008. It had more than 1,000 new registrants last year. To put that in perspective, over the lifetime of the LEED-EB program, from 2004 through the end of 2007, only about 500 projects sought certification for existing buildings.
It's not quite a boom in green retrofitting, but it could be soon.
That would not only help cities achieve a real and meaningful reduction in greenhouse gas emissions — buildings account for half the national energy demand and about 38 percent of U.S. greenhouse gas emissions — but it could also create new jobs for those in the building trades, as well as for metering and energy experts.
According to a report by the The Schuster Group and Cascadia Capital, approximately 250 billion square feet of buildings in the United States need to be retrofitted with the latest green technologies, a task that could create between 200,000 and 400,000 jobs annually and inject an additional $200 billion annually into the U.S. economy.