Achieving High Energy Savings in Multifamily Properties

The key to achieving high energy savings (over 20% consistently) is offering a turn-key (“one-stop-shop”) approach to implementing deep retrofits. This has traditionally been the model utilized by Energy Service Companies (ESCOs) on large projects in the MUSH (Municipal, University, School and Hospital) market. Emerging, small firms have enhanced the ESCOs approach and now deploy it for multifamily (MF) residential properties to implement deep energy retrofits combined with other services using a “one-stop-shop” model. These smaller ESCOs serving primarily affordable housing but also market-rate MF housing, are able to cater to small or rural properties, while providing the same access to financing and other services offered by traditional ESCOs. The one-stop-shop approach reduces the hurdles of lack of time, availability of personnel, lack of knowledge and access to financing that prevent MF owners from implementing green rehab projects. But these smaller ESCOs typically do not provide the guaranteed savings of traditional energy performance contracts (EPC) – thereby eliminating some costs and reducing others. They approach each MF as a whole building rather than a compilation of rebate programs being offered by the local utility. This holistic evaluation of the MF property allows these smaller ESCOs to combine the fast payback energy conservation measures (ECMs) with longer payback ECMs and offer the owner a project that can yield high energy savings. By providing this one-stop-shop service to these traditionally underserved markets, these smaller ESCOs are able to provide energy efficiency, water conservation, indoor air quality and other services in a manner that is hassle-free, comprehensive, simple and yet affordable. Utilities can take advantage by partnering with these smaller ESCOs to offer scalable and high energy saving programs that can transform their traditionally underserved MF housing market. The Need: A Solution to Limited Resources With the current political and economic environment, government budgets are being slashed—including those of the U.S. Department of Urban Housing and Development (HUD)— and needed funds to retrofit/rehab affordable housing multifamily properties are in short supply. This lack of government funding will at minimum hinder and in many cases prevent owners from making the necessary retrofits/rehabs (“green rehab”) needed on their properties. The problem will exacerbate as federal, state and local jurisdictions revise their building codes to account for energy consumption, carbon emissions reduction, water conservation, and the 1 http://nlihc.org/sites/default/files/FY14_Budget_Chart_HUD_USDA.pdf and http://www.housingonline.com/NewsArticle.aspx?NewsArticleId=239354 and http://www.nahro.org/budget‐ appropriation. 2 “House Approps Approves Cuts to HUD Programs; CNI and HOME Programs Impacted.” Housing Online.com. May 22, 2014. http://www.housingonline.com/NewsArticle.aspx?NewsArticleId=239354. 212 6©2014 ACEEE Summer Study on Energy Efficiency in Buildings impacts of indoor air quality on resident health. In essence, while funding is being reduced, the need for green rehab continue to increase. Energy service companies (ESCOs) and utility programs, the traditional sources of technical and financial resources, respectively, do not currently, and are reluctant to serve the multifamily market (affordable and market-rate housing) because of the myriad issues faced by this market including their complex financial structures and variety of ownership models (multiple owner LLCs, single owner, REITs, etc.), the classic ‘split-incentive’ issue (owner does not pay utility bills but has to fund the green rehab), and the wide range of building stock (from 5-unit apartments to hundreds of units that are garden style, high-rise, etc.) and typically small size of these projects as compared to projects in the MUSH market. Because the multifamily sector is underserved, a niche exists for smaller ESCOs (whose primary mission is to provide services to this underserved market segment) across the nation to take the lead in upgrading this housing stock in order to preserve its affordability for both owners and residents. Multifamily property owners, especially those with small portfolios (as little as just one property), have limited resources in terms of man-hours, expertise and knowledge, and access to financing to devote to green rehab. Again, smaller ESCOs utilizing a “one-stop-shop” approach can make it simple and hassle-free, provide the requisite expertise and knowledge for the owner to make the right decisions, and provide access to financing to help execute green rehab projects and achieve high energy savings. The one-stop-shops can also provide O&M services and occupant engagement programs that help maintain and encourage further energy and cost savings while adding to the services provided i.e. higher revenues/MF unit. Financial Constraints By focusing more on affordable green rehab, smaller ESCOs may provide a clear benefit to MF properties. The total cost of housing is not only the rent but also utilities. As energy costs increase, owners (if they are paying utilities) are forced to either increase rents or reduce other services and the renters (if they are paying utilities) have less disposable income for paying rent. The smaller ESCOs can reduce the utility costs in a cost-effective manner, thus making housing more affordable. For affordable housing MF properties, public funds are diminishing, for political and economic reasons. Government budgets do not set aside adequate funds to cover the growing green rehab needs of these types of properties, as they continue to grow older. Such constraints lead to an obvious need for property managers and owners to obtaining funding for the required green rehab. “Physical Needs Assessment of Public Housing.” U.S. Department of Housing and Urban Development. http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/programs/ph/capfund/physicalas sessment. 4 Stuart, Elizabeth, Peter H. Larsen, Charles A. Goldman, and Donald Gilligan. “Current Size and Remaining Market of the U.S. Energy Service Company Industry.” Environmental Energy Technologies Division Lawrence Berkeley National Laboratory. September 2013. Table ES-1: Median ESCO market penetration estimates. P. 5. Figure ES-3: Range of estimated existing ESCO market penetraition (2003-2012) and remaining ESCO market potential by customer market segment. P. 16. http://emp.lbl.gov/sites/all/files/lbnl-6300e_0.pdf. 5 “FY14 Budget Chart for Selected Department of Housing and Urban Development (HUD) and Department of Agriculture (USDA) Programs.” National Low Income Housing Coalition. 14 Jan 2014. http://nlihc.org/sites/default/files/FY14_Budget_Chart_HUD_USDA.pdf. 213 6©2014 ACEEE Summer Study on Energy Efficiency in Buildings Utility programs provide limited rebates. ESCOs typically utilize utility rebates and market-rate financing to implement energy efficiency projects. A smaller ESCO takes a broader approach. A key ingredient to the ‘one-stop-shop’ approach is identifying every available source of funding so that the MF property owner receives maximum benefit from federal funding, state and municipal grants, private foundation grants, custom utility rebates, low-cost financing options, etc. Because of their mission-based approach, these ESCOs can access low-cost financing from foundations or corporations as part of their mission-based investments or program-related investments. And if working on MF affordable housing properties, they can access Community Reinvestment Act (CRA) funds from Community Development Financial Institutions (CDFIs) for below-market rates. Another vital aspect of this one-stop-shop process includes not only identifying funding/rebate opportunities but also facilitating the access to those funds/rebates/incentives. For example, a MF owner will have little to no knowledge of the various sources to gain access to grant funds or low-cost financing. Even for utility rebates, an owner will not have the understanding and experience of the ESCO to extract the largest amount of rebates through a custom rebate program. Another area where these smaller ESCOs can provide affordable services is in their different approach to EPC. For a MF property where the cost of the green rehab is, say, $500K with deemed savings of about $50K/year, then signing a EPC contract adds costs to the project that increases its payback period as shown in Table 1 below. Assuming the energy conservation measures (ECMs) cost the same and the energy savings are the same, the difference lies in the energy performance contract (EPC). In order to guarantee the energy cost savings per year, the ESCO will contractually obligate the property owner to implement certain controls to assure those savings. These include both equipment installs that control the energy systems in the facility and the labor spent on monitoring those control systems for the duration of the contract (which increases with the increase in payback years). These stipulations add cost to the project as seen above. Some of these stipulations are not enforceable for a MF property e.g. keeping windows and doors closed so that conditioned air (heated or cooled) does not escape. Table 1. A green rehab cost comparison: ESCOs vs. smaller ESCOs Typical EPC One-stop-Shop Cost of ECMs $500,000 $500,000 Costs for Savings Guarantee Labor (for M&V over 14 years) $150,000 $0 Legal $10,000 $2,000 Equipment (control systems and for M&V) $30,000 $0 Re-commissioning Costs $0 $10,000 TOTAL $680,000 $512,000 Savings each year $50,000 $50,000 Simple Payback 13.6 years 10.2 years 214 6©2014 ACEEE Summer Study on Energy Efficiency in Buildings The costs provided above are to indicate the cost differentials and are not reflective of actual costs incurred because each project and firm will have a different actual cost