Policy Matters: The Johnson Controls Study and Energy Efficiency ROI.

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By Peter Troast - May 7th, 2009

Johnson Controls Inc.Johnson Controls released its study results yesterday from the Third Annual Efficiency Indicator Survey, finding that business leaders are "increasingly aware of the need for energy efficiency," (71 percent said they are paying closer attention this year than last) and understand the potential for efficiency to reduce operating costs, (58% called it a top priority) but... according to C. David Myers, president of Johnson Controls Building Efficiency division, "Economic and regulatory uncertainty, however, are inhibiting organizations from investing in proactive measures."

A closer look at the results reveals that business leaders have a very specific reluctance to invest in energy efficiency despite recognizing the inherent benefits and importance.

When asked about the barriers to capture potential energy savings, limited capital availability for investments (42 percent) and unattractive payback (21 percent) were cited. Nearly 50 percent of executives who oversee energy efficiency investments expect a payback period that is less than three years.  This is a striking comment about our mindset on returns. A staggering 70% of the electricity used in the United States is consumed by buildings, which contribute an impressive 48% of  carbon emissions.  Clearly we are in need of a sharper, more encompassing, rubric under which to examine return on investment. While the emphasis on speedy, cash-focused return on investment is understandable when the only consideration is short-term energy costs, that equation drops out the true cost of carbon, and presumably the future escalation of energy prices.

As Marc Rosenbaum of EnergySmiths argues compellingly in his article, "Cash-flow v. Payback in New Home Construction," energy efficiency improvements are best considered in the context of future energy costs, indoor air quality, and long term comfort in buildings. As Rosenbaum demonstrates, failure to recognize the full range of economic and health factors at the time decisions are made can result in long-term costs, and dissatisfaction for building occupants. While somewhat nebulous, these benefits are readily quantifiable once corporations examine  escalating healthcare costs. In the broader economic  terms, creating more efficient buildings not only reduces an economic drain, it also creates a boon. Reducing energy usage limits the need to drill, to build more nuclear plants or burn more coal. It is, as RESNET CEO Steve Baden recently said, "available in large amounts everywhere."

This is where the role of incentives and stimulus become key - to carry us over the short-sighted gap between upfront investment and long term benefits. While most if not all energy efficiency retrofits will bear better health and financial returns than many types of investment we might make, it's clearly time for more holistic math on how we calculate that return (in the economist-speak of my academic training--capturing the externalities).


Comments

You have made a key point about conservation, especially as it relates to real estate, but in truth probably about just about everything else, big and small. I think this is also a commentary of the very short-term thinking that is both a strength and weakness of the US and other countries.

Builders add "green" elements to new construction only when it increases the market value of their property. The up-front cost of a building is large, and even if the incremental cost of energy efficiency is small, buyers think mostly of what their loan and tax monthly hit will be, presumably on the assumption that all running costs are passed along to tenants.

Existing property owners have to decide to retrofit entirely on ROI claims. Such claims are always suspect, and usually based on predictions of unknowable things -- for example, a year ago would we have predicted energy prices would have taken the course they actually took? I doubt it.

Switch gears and consider my Mom's decision to buy a CFL bulb. Her ROI is probably less than 3 years, but the outlay compared to alternatives is high. Same decision.

Money today is far more real than the promise of money later, even if that payback keeps paying back over and over.

I would like to think that tax incentives (e.g. stimulus) would solve this problem. But I don't. I do think one-time incentives have very real and important short-term results:

1) economies of scale, and measurable experience reduce future costs (both real and perceived risk-associated costs), and 2) technological breakthroughs are accelerated, decreasing the ROI period or competitive cost differences for everyone and forever -- it's a jump start. But there's still that up-front investment cost.

Over the longer term, it seems to me that there are two effective ways (and politically sustainable) to get people over short-term-itis.

First, up-front costs can be amortized through financing, perhaps initially with some governmental incentive to the lender. Vehicle leasing has worked; why not efficiency retrofit financing. Second, long-term costs must capture not only the market value of the costs (e.g. energy), but also the external costs, such as greenhouse gas emissions.

The long-term solution provides some penalty for GHG emissions, as well as some incentives to encourage financing of greener alternatives. Sounds a little like cap and trade or other carbon taxation strategies, no?

Posted by Tom Harrison on May 8, 2009 3:55pm

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