Zooming out on energy efficiency retrofits in buildings

By Ilya Minevich

Is it sensible to ask why solar PV installations have not made more inroads in Siberia?  Putting aside the shock of the juxtaposition of two such seemingly dissimilar images, there are lots of factors that make PV installation reasonable in such a cold place: the white snow refracts light allowing panels to capture more sunlight, PV technology depends on actual irradiance rather than ambient temperature, and finally the substitutes are so expensive that it should make the cost surmountable even for a green energy technology.  However, when focusing on these details and asking why there are not more installations in Siberia, we lose sight of several high-level questions: 1) why not first figure out what’s going right with solar in a sunnier place like Spain and then see what aspects differentiate the two geographies? 2) Who needs electricity in Siberia and how likely are they to adopt a new technology?

When it comes to our discussion on energy efficiency applications in the commercial building segment, I would make a similar analogy.  Zooming out to the level of energy efficiency in buildings broadly speaking, it is easy to notice that the business model has been successful already.  Namely, there are energy service companies (ESCO’s) which have been systematically implementing retrofit measures in the MUSH and federal segments for decades.  Ameresco, the largest U.S. ESCO started just 12 years ago, has aggregated 2,000 customers while performing $3bn of installations.  Similarly, residential outfitters like Solar City have been steadily building up a customer base among individual home owners by cross-selling from their core residential PV business.

What makes the non-commercial segments more penetrable?  It’s largely the lack of all the obstacles we discussed in class.  For MUSH users, energy costs represent a lot more than 5% of total operating costs, hence much more attention is devoted to energy cost reduction.  On the residential side, homeowners are the immediate benefactors of the energy savings without an intermediary landlord to complicate the flows of capital.  The factors that make this deployment a no-brainer simply don’t exist in the commercial building sector.  Consequently, as the graph below from a study published by Lawrence Berkeley National Laboratory shows, we can expect the commercial segment to remain a small portion of the overall space.

Minevich

However, we need to be wary of claiming that all other segments have been figured out and it’s time to address the commercial segment (as perhaps was the perspective of the Lundberg case).  Although there has been lots of progress on an absolute scale, on a percentage basis both MUSH and residential segments remain relatively untouched.  That means there are plenty of customers in these segments who will be retrofitting their facilities due to palpable cost reduction opportunities.

The obstacles we’ve raised for the commercial segment may not change too much over time. However, as the amount of projects performed increases, improvement in cost of implementation and technological capacity to monitor energy use will make it more plausible to reach the commercial segment.  At some point we will reach an inflection point when the obstacle costs are truly drowned out by the sheer dollar value of the opportunity.  That will be a more natural time to discuss how to help mitigate the obstacles rather than trying to force a strategy before there is a true driving force behind it.

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One thought on “Zooming out on energy efficiency retrofits in buildings

  1. You raise a good point about the logical order of energy developments and energy efficient retrofitting specifically. I agree that there is still opportunity across all segments of the market and that reaching the commercial building segment has additional unique challenges as you’ve pointed out.

    Ultimately, however, I think financing is the biggest challenge and that’s common across most of the segments, though it’s different for those with government ownership. Most commercial, industrial and residential building owners don’t have access to appropriate long-term low-cost financing that they could match with the long-term savings from retrofitting and incurring debt. Creating a mismatch is going to be unappealing until the savings outweigh nearly all the alternatives the business can pursue with its capital. I am really interested to see how the YGRENE model, which we read about briefly in the Lundberg case, turns out. YGRENE is coordinating funding for the retrofitting and recouping the cost through increased property taxes. It is clearly a model that requires a number of public and private partners, but if it proves to be successful I think it can be replicated although perhaps not in markets with weaker institutions so Siberia won’t be next on the list.

    Speaking of Siberia and to make another analogy using solar panels, you reminded me of microfinance institutions I worked with that provided loans to nomadic people in Mongolia so they could buy solar PV panels. In this case a small amount of concessionary financing at a point in the ecosystem enabled access to renewable energy and now 500,000 people who are off grid have access to electricity. I think energy efficiency retrofitting models like YGRENE that propose a solution to the financing challenge may be very close to unlocking a similarly dramatic shift.

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