Wednesday, January 18, 2012

Incorporating Energy Savings into Underwriting for Energy Efficiency Loans in Multifamily Properties

Earlier this week, Deutsche Bank released a study, Recognizing the Benefits of Energy Efficiency in Multifamily Underwriting, suggesting an approach to underwriting against fuel savings projections that balances the need for simplicity with that for accuracy. The study is impressive and worth the read if you are a lender looking to make energy efficiency loans.

The study and approach is based upon analysis of 231 buildings in New York City including 21,022 residential units that had undergone energy efficiency retrofits. There were a number of interesting findings. One was that improvements associated with fuel measures (such as replacing atmospheric boilers with sealed combustion units or installing a cogeneration system or switching from oil to gas) saved considerably more than improvements associated with electricity measures (such as lighting retrofits). Another was that actual energy savings were strongly correlated with pre-retrofit fuel use intensity (in kBtu per square foot normalized for weather). Higher pre-retrofit fuel use intensity translated into greater savings potential. Furthermore, heating system and building age were found to be good proxies for fuel use intensity. The study also examined the energy audits associated with these retrofits and evaluated how well the projected energy savings matched the actual energy savings (the study used the term “realization rate” to mean actual savings divided by projected savings). Across all projects, the fuel realization rate was 61% with a 90% confidence interval of +/- 14%.

The study proposes a methodology by which lenders can mitigate the risk of “over-projected” savings by limiting an energy auditor’s projected savings to a conservative threshold of expected savings as defined by the statistical correlation between pre-retrofit fuel use intensity and fuel savings. For example, if a multifamily building that uses 140 kBtu/SF pre-retrofit was projected to save 60 kBtu/SF, the capping methodology proposed in the study would suggest that this be reduced to the threshold of 40 kBtu/SF. If that same building was projected to save 25 kBtu/SF, which is below the threshold for a multifamily building of that pre-retrofit fuel use intensity, then the audit projection could be regarded as conservative for the basis of underwriting. It may sound complex, but if you obtain the study and review it, you will find that the approach does make sense.

The primary causes of under-realization of energy savings identified in the study included an inappropriate or inadequate retrofit scope of work (generally involving a lack of understanding), improper execution of the retrofit scope and unexpected post-retrofit operations and maintenance or tenant behavior.

In the final analysis, the study is a first effort to compile an historical database of actual building energy performance resulting from improvements, a database that is sorely needed by the lending industry in order to accelerate energy efficiency lending.

No comments: