Thursday, December 17, 2009

Growing State Budget Deficit Results In Raid On Energy Conservation Program Funds

Ten Northeast and Mid-Atlantic states participate in the Regional Greenhouse Gas Initiative (RGGI) which implemented the first market-based, mandatory cap-and-trade program in the country. Carbon dioxide emission allowance auctions began in September 2008. Since this first auction, more than 140 million allowances have been auctioned off raising almost a half a billion dollars in proceeds for the ten participating states, proceeds that are suppose to support state clean energy agendas. Under the Memorandum of Understanding signed by the 10 RGGI states, the states agreed to use auction proceeds for energy conservation and clean energy programs. New York State, for example, developed a plan to use its share of the proceeds to fund energy efficiency and renewable energy programs to help families, businesses and local governments reduce their energy bills while investing in clean energy technologies that will create jobs and reduce the state's carbon footprint. A number of initiatives to help reduce the disproportionate energy cost burdens on low income families were also included in the program.
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Then came the worst recession since the Great Depression, and even the best laid plans can go astray! New York State found itself with a budget deficit estimated to be close to $3.9 billion. On October 15, 2009, New York State Governor David Patterson proposed using $90 million of the RGGI proceeds (of which New York's total share to-date is $180.7 million) to help close this budget deficit, rather than for energy conservation and clean energy programs as originally planned. Nearly all of the remaining RGGI funds have been committed to other initiatives, effectively zeroing out this pioneering program's budget. The Governor's proposal still needed approval by the State Legislature and many did not expect much support for the proposal, but on December 2, 2009, the State Assembly and Senate passed a deficit reduction program worth $2.7 billion that, unfortunately, included provisions to transfer $90 million in RGGI proceeds to the General Fund. So much for the best laid plans of state politicians!
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It was not long ago when I can remember politicians and environmentalists wanting to get New York State into the RGGI program proclaiming and promising that RGGI proceeds would only be used for energy conservation and clean energy measures. And to anyone who thought that the RGGI cap-and-trade program would increase energy costs, they argued strongly that it would not, and even went so far as to suggest consumers would see a reduction in energy costs because RGGI proceeds would have the net effect of saving money. What a bill of goods we were sold! But there is a lesson to be learned, and that is "what politicians givith, they can just as easily taketh away!" This lesson should not be forgotten by anyone, including those in our industry, who are planning to rely on government incentives and grants to justify their return on investment.
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As the year comes to a close, this will be my last blog of 2009. As such, I want to take this opportunity to thank all of you who routinely emailed me your comments and provided me with suggestions for new blog material. I wish each and every one of you a very happy holiday and a happy and healthy New Year.

Friday, December 11, 2009

Should Commercial Real Estate Energy Consumption Benchmarking Be Re-focused?

The difficulties and complexities associated with benchmarking the energy consumption of commercial buildings are well known. It would appear that until such time as a truly representative (for each property class, type property within each class, and geographically distributed) and statistically supportable building energy consumption database is developed, building energy consumption benchmarking should either not be done or be relegated to comparisons against other similar buildings in an owner's portfolio. Who better than the building owner will know what properties are truly comparable? For example, an experienced owner of a portfolio of hotel properties would easily be able to compare the energy consumption of a candidate hotel to be acquired with the energy consumption of similar hotels in the portfolio. Considerations for this comparison might include the presence on-site of restaurant facilities, retail establishments, conference facilities, a pool, an atrium, the shape of the building envelope (e.g., tall and box-like, short and spreadout, etc.), the age of the building and when the last major renovation occurred.
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For states such as California or cities such as New York to pass legislation that includes labeling the energy consumption of buildings and disclosure to prospective purchasers, tenants or lenders makes sense to facilitate improved energy efficiency; however, these results should not at this time be compared with other buildings, unless of course it can be guaranteed these "other" buildings truly are similar. Unfortunately, today the odds of these "other" buildings truly being similar are very low. Moreover, there is too much at stake in the highly competitive commercial real estate market for seriously deficient analyses to be passed off as "acceptable." This must be resisted at every level. It is only natural that prospective purchasers, tenants and lenders want to know how a building compares with other buildings, and undoubtedly there will be considerable pressure to do benchmarking. However, if you cave into this pressure, there is a very strong possibility that your benchmarking conclusions will be inaccurate and misleading. The importance of true building similarity can not be overstated.
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As indicated in previous blogs, U.S. DOE's Commercial Buildings Energy Consumption Survey (CBECS) database of less than 5,000 buildings is used by Energy Star and many others for benchmarking, despite the fact that it is wholly inadequate in addressing the many significant differences between buildings in the same property class. It clearly is too small a sample to represent the more than 5 million existing buildings in the country today. Interestingly, there is an effort underway in Washington to get DOE to expand the number of buildings included in the survey to at least 15,000-20,000. Even if this was possible to accomplish in 2011, it would still be at least 2013 before the data would become publicly available. The fact is that at this time we simply do not have an adequate database for benchmarking
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So what is the bottom line? The bottom line is that if any benchmarking is done at all today, it should be done by the property owners themselves who are in a much better position to compare the energy consumption in a building being considered for acquisition with truly similar buildings in their portfolio. These individuals typically are experienced in commercial real estate and intimately familiar with the nuances between buildings in the same property class. At the same time, we as an industry must demand a better building energy consumption benchmarking database that truly is statistically representative of the myriad of buildings out there in the commercial real estate market, and vocally reject anything short of this!