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Report: how to develop the business case for deep retrofits

The Empire State Building shows that deep retrofits can have attractive paybacks.
The Empire State Building shows that deep retrofits can have attractive paybacks.

A new guide to assist investors to calculate the true increase in returns achievable through deep energy retrofits has been released by the Rocky Mountain Institute.

The How to Calculate and Present Deep Retrofit Value model moves past the standard capital cost versus energy savings equation to consider a wider range of factors including higher tenant returns and property resale value gains.

The authors state that this approach more clearly shows the overall financial benefits of deep energy retrofit projects and can therefore assist proponents to achieve a “yes” from key decision-makers to requests for retrofit capital.

“Real estate investors have an opportunity to earn higher returns from their properties by implementing certain types of efficiency investments known as deep energy retrofits,” the report states.

“Deep energy retrofits employ an integrated array of energy efficiency measures, often as part of a multi-year or portfolio-level plan, to reduce energy consumption by 30 per cent or more compared to the pre-retrofit energy use while achieving superior sustainability performance.

“These types of retrofits reduce operating costs and are able to improve the satisfaction and health of occupants. Further, the improved energy performance that deep retrofits deliver plays a critical role for tenant companies in increasing sustainability leadership, reputation, and risk management.”

The deep retrofit value methodology incorporates five “value elements”: development costs; non-energy operating costs including maintenance, insurance and tenant churn; retrofit risk analysis; tenant based revenues; and sales revenues.

“Tenant-based revenues from deep retrofits are generated when building owners are able to monetize enhanced demand resulting from a deep retrofit by increasing rents, occupancies, absorption and tenant retention,” the report says.

“Sales revenue premiums from deep retrofits result from higher net operating income [due to expense savings and increased tenant revenues], increased investor demand [which can lower cap and discount rates], and risk reduction [which further contributes to cap and discount rate reduction].”

Most energy-efficiency improvement activity focuses on projects that can deliver a 30 per cent return – 3.5-year payback – on energy savings alone. This has confined the majority of projects to lighting upgrades and upgrading fans and motors on heating and cooling equipment. There are, however, three RMI case studies that show deep retrofit projects can also come close to the 3.5-year payback.

The Empire State Building retrofit project comprised eight measures expected to result in a 38 per cent reduction in energy use.

They included remanufacturing the existing integrated glazing units for the building’s 6500 double-hung windows to improve thermal performance; adding reflective barriers behind more than 6000 radiators located around the perimeter of the building; a chiller plant retrofit; lighting system upgrade; new VAV air handling units; tenant energy management programme; installing demand control ventilation; and a building controls upgrade.

1525 Wilson in Rosslyn Virginia has achieved a 35 per cent reduction in energy use, generating $250,000 in savings on energy bills in the first year and gaining an improvement in Energy Star rating from 63 to 97 out of 100, putting in the top three per cent of buildings in the US for energy efficiency.

The project was undertaken while the building was 100 per cent occupied, and works included replacement of HVAC and lighting systems, controls upgrade, assessment of air tightness of building envelope and glazing performance, and a tenant education program.

A simple payback of under two years was achieved following completion.

The Aventine’s retrofit achieved LEED Existing Building Platinum and an Energy Star rating of 100, with energy use now 75 per cent less than the US national average for commercial offices. Retrofit activities included replacing compressors and installing chillers, new lighting and controls.

Prior to the retrofit the building’s owners had been experiencing early lease terminations and low occupancy. Tenants are now reporting higher levels of indoor environment quality satisfaction, and a degree of pride in occupying space in an ultra-sustainable building, operating costs have also gone down for both tenants and the building owner.

The RMI DRV guide also sets out a methodology for assessing which buildings should be prioritised within a portfolio, based on the interaction of local energy-efficiency demand and capacity, and property-level disruptions, such as the need to spend money on capital works due to end-of-life equipment, refinancing, major changes in tenant occupancy, requirement for upgrades to meet codes, or factors such as need to reposition or opportunity to repurpose.

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