Energy Efficiency: A Look at the Financial Returns from Building Green
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| John Mandyck |
Moreover, putting all political positions aside, it has become abundantly clear that emerging energy efficient technologies and policies for buildings are important not only for a cleaner environment, but also as a means to boost the economy. Years of research have borne this out.
Here in the United States for example, improving energy efficiency in buildings by 30 percent would create a $275 billion market for advanced technology, engineering and design services, and construction activity. In corporate finance terms, investing in this same 30 percent improvement in building energy efficiency would have an internal rate of return (IRR) of 28.6 percent over a 10-year period. An IRR of 28.6 percent is four times better than average corporate bond yields or average equity performance, and more than double the returns even high-performing venture capital firms enjoy.
This was one of many findings of a recent report by the Rhodium Group and United Technologies, entitled “Unlocking American Efficiency: The Economic and Commercial Power of Investing in Energy Efficient Buildings.”
To be sure, energy efficiency has played an important role in past American productivity improvements, but we can now safely say that building efficiency is simply a smart and attractive corporate investment strategy. Improving the energy efficiency of a company’s building portfolio increases the productivity of existing assets, guards against future energy price hikes, and offers some of the most attractive rates of return available to the business community today.
And if we look beyond U.S. borders, we’ll see that urbanization trends over the past decade have increased the energy needs of developing countries by 70 percent more than the International Energy Agency predicted back in 2002. With more than half of the world’s population now living in urban areas, energy efficiency in both current and future buildings must improve, or we risk further straining global resources and environmental quality.
The good news is, significant improvements are possible with existing technology and design practices. In fact, today’s building efficiency technology and design options cost the same or only slightly more than conventional alternatives, but deliver powerful energy cost savings.
Let’s explore some additional data revealed by the Rhodium Group report:
• Globally, companies now pay more than twice as much for energy than they did a decade ago. And with growing demand from emerging economies, the International Energy Agency predicts that energy prices will rise by a further 17 percent over the next two decades.
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• The developed world accounts for less than 45 percent of global energy demand today, down from 51 percent in 1990.
• Over the next two decades, the U.S. will account for only 2 percent of global energy demand growth, while China, India, and the Middle East will account for 36, 15, and 8 percent respectively.
• U.S. government and utility-sponsored programs are only beginning to have an impact on the efficiency finance opportunity, reaching only 5 percent of eligible businesses and households. As awareness of the benefits of building efficiency grows, these types of financing programs will need to be expanded.
The first step to improve energy efficiency in buildings is to increase public awareness of the need and the opportunity. We must let building owners, tenants, and investors know the scale of the opportunity at hand. Americans spent an estimated $432 billion to power their homes, stores, and offices in 2011. That’s on par with what U.S. businesses spend on employee health insurance and more than they pay in payroll taxes.
The next step is smart policy. Policies that improve building efficiency will serve as a catalyst for the investment in building efficiency solutions. This should include things like building labels and codes, effective standards, efficiency finance, portfolio standards, and regulatory reform.
With a growing appreciation of the environmental and economic benefits of reducing energy consumption, renewed by the dialogue on carbon emissions in America and abroad, now is the time to make energy efficiency the driver of world-class innovations — and there’s no better place to start than with our buildings. Buildings consume 40 percent of all energy and present immediate opportunities to make good business decisions that are also good environmental decisions.