After a professional energy audit, you get a report with a list of building upgrades that are capable of reducing utility bills and greenhouse gas emissions. You will also notice that energy conservation measures (ECM) vary in terms of cost, savings achieved, avoided emissions, and payback period.
To select the optimal combination of energy efficiency measures for a building, the first step is defining what you want to achieve. For example, one building owner may be looking for a combination of ECMs that maximizes return on investment. Another owner may have the goal of reducing property emissions below a certain level to meet a mandate like Local Law 97 of 2019. Depending on what building owners want to achieve, energy consultants may recommend different combinations of ECMs for similar properties.
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In this article, we will give some recommendations to help you choose building upgrades after getting a professional energy audit. Implementing all the proposed measures is always a possibility, but this also comes at a high cost.
1) Selecting Energy Conservation Measures to Maximize Financial Performance
If you’re considering an energy retrofit and your goal is maximum savings, you can choose ECMs based on their financial performance. To make the comparison easier, the consulting team can calculate financial metrics like the following for each of the proposed measures:
- Net present value (NPV): Economic value of each measure in present day dollars.
- Internal rate of return (IRR): A useful measure to compare the profitability of different investments.
- Benefit-cost ratio (BCR): The economic value (avoided costs) offered by the project for each dollar invested, expressed in present value.
- Simple Payback Period: Annual savings divided by upfront costs, or how long you must wait to recover your investment.
When financial performance is the priority in an energy upgrade, you can prioritize ECMs with the highest NPV, IRR and BCR. You can also prioritize measures based on their payback period, from shortest to longest, but keep in mind that payback periods can be misleading.
The simple payback calculation assumes that you pay the full cost of each measure upfront, and this value is then divided by annual savings. This is different from what happens in many actual projects: energy upgrades are often financed with loans, and the savings achieved are used to cover loan payments.
Simple payback calculations are useful as a starting point, but a cash flow projection gives a better picture of how costs and savings behave over time. You can choose a combination of ECMs that will result in savings higher than your loan payments, the project pays itself, and the payback period can be reduced to zero.
2) Selecting Energy Conservation Measures to Minimize Emissions
Depending on where a building is located, it may be subject to climate mandates such as Local Law 97 of 2019 in NYC. This law introduces building emission limits in 2024, and these limits will then be lowered in 2030 and 2035. All buildings larger than 25,000 square feet must reduce their emissions below their respective annual limits, or they are subject to a penalty of $268 per metric ton of CO2 equivalent. Also, buildings that are compliant under the initial limits may still need upgrades, since the limits will be lowered.
- If the goal of your energy retrofit is meeting LL97 of 2019, you need to find a combination of ECMs that will reduce emissions below your building’s respective limit.
- This threshold is calculated individually for each property, based on occupancy classification and square footage.
The proposed measures can be ranked based on overall emissions avoided, but you can also compare them in terms of dollars invested per tCO2-equivalent avoided. To meet LL97/2019 at the lowest possible cost, you can prioritize the measures with the lowest costs per metric ton of emissions avoided.
When a building exceeds the LL97 limit by a wide margin, measures with low costs and short payback periods may not be enough to avoid penalties. You may be forced to choose measures with a negative impact on financial performance, especially if they have a long payback period or negative present value. However, you will still achieve compliance at the lowest possible cost.
Energy Incentives and Loan Financing Conditions
In both scenarios described above, energy incentive programs can reduce project costs directly, while-low interest loans can spread costs over several years to make them more manageable. Financial metrics such as the NPV and IRR improve when energy incentives are included in the cash flow projection. In projects where the goal is cutting emissions, these benefits reduce the cost per metric ton of emissions avoided.
Note that incentive programs and low-interest loans often focus on specific energy conservation measures or renewable energy systems. This means you also need to consider local programs when choosing ECMs: there are cases where certain building upgrades are fully covered by grants and rebates.