With the Ukraine war in the news, everyone is talking about Russian oil & gas, so I'm launching a short series of podcasts on innovative ways to reduce demand. First up, a clever new idea to scale up deep retrofits in commercial buildings.
This episode was so good. Here's to hoping having an energy tenant becomes the new normal among older, larger buildings. Maybe I'll even dare to hope we soon hear Germany's finance minister say they're all in on supporting the "gemessene Energieeffizienz-Transaktionsstruktur" as one way to transition from Russian oil and gas.
The discussion you had about the value utilities provide to tenants is an important one. This is a problem somewhat similar to one we have in the accounting industry. Traditionally accountants have billed their time by the hour, and new staff accountants in firms that bill by the hour learn very quickly that the key thing their boss wants from them is to "keep the charge hours up." Nobody's happy with an employee who figures out how to do the same work in half the time, because then the firm's revenue has been halved. And so, predictable habits set in: people putter around the office looking for excuses to make tasks take longer, they work 60+ hours a week (remember white-collar workers are exempt from overtime rules), and more than anything else, people become convinced that what they sell is their time. But of course, as emotionally difficult as it is to admit, the client doesn't care how much time you spent on their tax return--what they care about is that they got a correctly-prepared tax return. Whether it took 10 hours or 2, its the same value to them. Similarly, tenants in a building don't care how many kWh of electricity the utility delivered; they care about having enough electricity to run their business or live the lifestyle to which they've become accustomed. Whether the utility delivers that service using megawatts or negawatts (to use a bad word, apparently), the tenant has no reason to care.
A pricing method that punishes businesses for delivering the same value to the customer in a more cost-efficient, pro-social way is a dysfunctional pricing method. And I suspect it's a problem in more industries than just energy utilities and accounting. In my experience, pricing methods are too often decided by what's easy to measure, or what fits some people's intuitions of what's "fair," rather than by thinking about the consequences to parties' incentives.
David, that was insanely great. Seems like the concept is getting some traction. I've been thinking a lot about the disconnect between political statements/targets of "decarbonizing" and the glacial pace of "deep retrofit" and electrification market adoption. Activists and staffers seem to keep trying to sweeten a pot of pretty stale "incentives." When there are still few takers, folks just say, "Ohhh well we need to wait for innovation," meaning technical innovation or cost declines which ain't gonna happen.
I think I have Mr. Harmon beat on one count. I worked on my first energy efficiency project in 1980 or so. A Beadwall solar greenhouse. Fortunately I was just a laborer, not the contractor or owner.
I posted a link to this podcast to a national real estate lawyers listserv, hope you get a ton of inquiries and some business as a result.
David, Thanks for the fun time. If folks want more info, they can find it at MeetsCoalition.org
As the team leader on that 1982 energy conservation project you mentioned, I am more than impressed about where your work and thinking have led. Projects like that were abundantly available then, and probably still are. We did the gritty work of retrofits that called to us for attention. There were no lack of opportunities for improvements. It was hard to document the results of our work. That is the major breakthrough in expanding a bright idea into a real program. Congratulations in making the connections and refining the presentation.
Fantastic episode - what a creative solution to a tricky problem. Really enjoying this series on innovative ways to reduce demand for fossil fuels. Thanks David and Rob!
That was wonderful! I bought a volts subscription after hearing this episode.
If I'm envisioning the energy tenant's role correctly, ensuring the performance of the system would make them responsible for a lot of the physical plant maintenance. They'd need to be involved with fixing roof leaks, window repairs, HVAC maintenance, maybe even landscaping if that's part of the efficiency package.
If that's the case, then the landlord stands to reap savings over and above the rent paid by the energy tenant. I don't know how much big commercial landlords spend running and maintaining their physical plant, but I'd expect that to be quite a lot of $$$ that they no longer need to spend.
Wouldn't that alone be sufficient incentive for the landlords to take on the energy tenant? Maybe you don't need rent to make the system work?
This was a great episode. Thank you Rob and David!
I would dearly love to make all sorts of energy upgrades to my home, but for various reasons I find myself in a rented house with an uninterested landlord and a split incentive problem. I've been lamenting this sort of problem myself for a little while, and I'm thrilled to learn that serious people are working on this in serious ways.
What are the prospects for generalizing this approach beyond large commercial real estate? Does the model break down in meaningful ways when the transaction scale shrinks to, for instance, a single-family home?
Fantastic episode. But I left it with two rather large holes in my understanding, and feel like I might need to go back for a second listen:
1. How is efficiency metered? What actually happens now, that didn't happen in the past, to make that possible?
2. What does an energy tenant actually do? The term "energy nanny" makes it sound like an actual person who goes around turning down the HVAC system or unused lights or whatever. Or is it closer to some collection of smart plugs, or something else? Or is it a contractor who makes a bunch of physical changes to the building and then sells energy to the building?
I found this fascinating though admit that I had some challenges understanding parts of the structure. I think it is the discomfort with efficiency as a type of energy that is hard to overcome. Anyway, I had a few questions:
1. Is there any challenge finding the energy tenants?
2. Is there any conflict between actual tenants and energy tenants in terms of defining the efficiency measures. It was described as though everything was win/win - is this always the case?
3. I did not understand how this would work with new passive house or very high building standards. Are you defining efficiency gains against a counterfactual benchmark?
4. Related to this, what are the characteristics of buildings for which this model works best? 9is it about available/affordable efficiency gains, or about the types of tenants and PPA, etc?).
Excellent episode. Brilliant concept. I wonder if Tesla is considering the future of its energy+roofing division as an "EESCO" since they have yet to finalize/formalize their relationship with CA and its utilities...
This was so fascinating, thanks so much for a great discussion.
The part of the model I had trouble figuring out is how the long time horizons for payoff of efficiency investments works. As I understand it, the energy tenant finds the money to make investments in energy efficiency that may be expensive and take decades to pay off. But their source of income is selling efficiency back to the utilities, presumably at the price per kWh that the utility sells energy.
At the beginning of that time horizon it is easy to see how the value of that efficiency is predictable and easy to price so the revenue from selling to the utility is knowable and stable. But 15 years from now or more, how do you know the value of the energy savings at prevailing rates in the future? Especially given the uncertainty associated with bringing more inexpensive renewable energy online.
And, secondarily, how do you make sure that the utility (or, importantly, a utility's successor) honors the agreement for the duration of the payback horizon? Once the investment is made by the energy tenant, the utility has gotten all the benefit forever. If it stops paying the energy tenant for energy efficiency, it's not like the energy tenant can go back and remove insulation from the building or convert it back to a natural gas furnace.