After a professional energy audit , you receive 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, emissions avoided, and payback period.
To select the ideal combination of energy efficiency measures for a building, the first step is to define what you want to achieve. For example, a building owner may be looking for a combination of ECMs that maximizes return on investment. Another owner may aim to reduce the property's emissions below a certain level to meet an obligation such as 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'll give you some recommendations to help you choose building upgrades after getting a professional energy audit. Implementing all proposed measures is always a possibility, but it also has a high cost.
1) Selection of energy conservation measures to maximize financial performance
If you are considering an energy retrofit and your goal is maximum savings, you may choose ECMs based on their financial performance. To facilitate comparison, the consulting team can calculate financial metrics such as the following for each of the proposed measures:
- Net present value (NPV): Economic value of each measurement in current dollars.
- Internal rate of return (IRR): A useful measure for comparing 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 initial costs, or how long you must wait to recoup 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 payback period, from shortest to longest, but remember that payback periods can be misleading.
The simple return calculation assumes that you pay the full cost of each measure upfront and this amount is then divided by the annual savings. This is different from what happens in many real projects: energy upgrades are often financed with loans and savings are used to cover loan payments.
Simple return 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 exceeding the loan payments, the project will pay for itself, and the payback period can be reduced to zero.
2) Selection of 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 New York. This law introduces building emission limits in 2024, and these limits will then be reduced in 2030 and 2035. All buildings larger than 25,000 square feet must reduce their emissions below their respective annual limits, or be subject to a fine of 268 dollars per metric ton of CO2 equivalent. Furthermore, buildings that meet the initial limits may still require improvements, as the limits will be reduced.
- If the goal of your energy retrofit is to meet LL97 2019, you need to find a combination of ECMs that reduces emissions below your building's respective threshold.
- This limit is calculated individually for each property based on occupancy classification and square footage.
The proposed measures can be ranked based on global emissions avoided, but it is also possible to compare them in terms of dollars invested per tCO2 equivalent avoided. To comply with LL97/2019 at the lowest possible cost, measures with the lowest costs per metric ton of avoided emissions can be prioritized.
When a building exceeds the LL97 limit by a wide margin, low cost measures and short payback periods may not be sufficient to avoid penalties. You may be forced to choose measures that have 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 directly reduce project costs, while low-interest loans can spread costs over several years to make them more manageable. Financial metrics such as NPV and IRR improve when energy incentives are included in the cash flow projection. In projects where the objective is to reduce emissions, these benefits reduce the cost per metric ton of avoided emissions.
Note that incentive programs and low-interest loans often focus on specific energy conservation measures or renewable energy systems. This means that it is also necessary to consider local programs when choosing ECMs: there are cases where certain building improvements are fully covered by subsidies and rebates.
