Why efficiency is smarter than renewables

The Gunther Report

Why efficiency is smarter than renewables

“Real estate is the largest source of clean energy in this country, and it’s very inexpensively tapped.”

So said Tony Malkin, the president of Malkin Holdings, owner of the Empire State Building.

Malkin spoke this week at the annual Energy Efficiency Forum in Washington, D.C., and he’s got a point, albeit a controversial one.

If we — or, more to the point, the people who represent us in Washington — have $1 to spend, better that it be spent on energy efficiency than on clean energy. That’s not way things work now. Today, wind and solar power get generous tax breaks and subsidies. Energy efficiency investments do not. The government  has it exactly backward.

Why? First, let’s stipulate that money spent on efficiency and on clean energy creates short-term jobs. The efficiency-related jobs are more likely to be US jobs (because most solar panels are made in China) but set that aside for a moment. What matters is what happens after the insulation goes into a building, or the solar panels go up on the roof.

The problem with clean energy is that electricity from wind turbines or solar panel, as a rule, costs more than power generated by burning coal or natural gas. If it didn’t, the wind and solar industries wouldn’t need the investment tax credits and renewable portfolio mandates that are vital to their business. But over time the higher costs of clean energy create a drag on economic growth, whether they are paid by the government or by energy users.

By contrast, money spent on efficiency reduces costs over time. So, whether we are talking about more efficient factories, commercial buildings, homes or even cars, the spending on efficiency makes the economy more productive, driving economic growth and creating jobs in the long run.

Yet the government generously subsidizes wind and solar. Efficiency, not so much.

Actually, it’s a bit worse than that. Since businesses can deduct legitimate expenses on their tax returns, they pay less than the full cost of their electricity bills.

“I get a tax deduction for wasting energy,” Dave Myers, president of the building efficiency business at Johnson Controls, said wryly during the forum.

“It is absolutely insane to me that energy can be expensed on your tax bill,” Malkin agreed.

Let me hasten to add that we need both energy efficiency and clean energy, and in my view, both deserve strong policy support. Remember, scientists say that to avoid risky climate change, the world needs to curb its greenhouse gas emissions by 80% by 2050. That will require the aggressive deployment of  low-carbon energy sources, as well as dramatic gains in efficiency. But we also should be clear about how the costs and benefits work, so we can get the policy right, and especially think about why the government isn’t doing more to promote efficiency.

As it happens, markets by themselves are driving some efficiency gains. Johnson Controls, which organizes the energy efficiency forum, just released a global survey called the Energy Efficiency Indicator, which delivered mostly good news on the building efficiency front. JCI’s Dave Myers reported that 83 percent of the 3,500 global respondents said they were planning to spend as much or more money this year as they did last year  to make their buildings more efficient. That’s impressive, given the sluggish global economy, and with uncertainties hanging over Europe. “Energy cost savings, and the savings in dollars, continue to be the No. 1 driver of investment,” he said. No surprise there.

The question is, how can building efficiency by driven further and faster? Sometimes, the payback from investments — in lighting, heating, cooling, windows, whatever — takes more than two or three years, or there are split incentives between building owners (who might have to invest the capital in the infrastructure) and tenants (who pay the bills). Other times, building owners can’t come up with the financing to pay for capital improvements, even if they would pay back quickly. That’s where policy, which can take the form of carrots or sticks, comes into play.

In my capacity as a senior writer at GreenBiz.com, I moderated a panel on building efficiency at the forum, where we talked about how to speed up progress. Right now, it struck me that we’re relying on carrots, and mostly non-financial carrots at that. Maria Vargas of the U.S. Department of Energy talked about the Better Buildings Challenge, which she oversees; it’s a program that offers recognition to companies that agree to cut their energy consumption by 20 percent by 2020, and dozens of big companies have signed up. Roger Platt of the nonprofit U.S. Green Building Council described the rapid growth of LEED-certified buildings, and Greg Hale of NRDC’s Center for Market innovation talked about the group’s pioneering efforts to bring building owners, tenants and energy services companies together to retrofit existing buildings, and then share what they’ve learned across the real estate industry.

All of this is laudable, but I wondered whether the efficiency industry needs either more powerful carrots or a few sticks. If we can agree, for example, that the government should provide tax credits or incentives for renewable energy, shouldn’t it do the same for efficiency? Right now, if I put solar panels on my roof, I get a 25 percent federal tax credit. I can’t get the same tax break for insulating my attic or installing windows that will save energy.

Alternatively, building codes could require contractors to meet minimal efficiency standards (such as California's innovative Title 24). “Having a minimum standard would be really good for this country,” Platt said. Or the government could provide low-cost financing, or underwrite loans for efficiency upgrades. Or, at the local level, cities or states can require building owners to disclose their energy use to potential tenants, bring transparency to a market that is often opaque; San Francisco is doing this. So-called green appraisal standards could also play a role.

Not being expert in any of this, I won’t to venture a guess as to which policy would be best. (Except to restate my preference for a revenue-neutral carbon tax.) But I do know that policy shouldn’t be guided by the fact that wind turbines and solar panels are sexier, or at least more photogenic, than insulation and HVAC.