The Global Urbanist

News and analysis of cities around the world

How cities are financing their own energy efficiency by making retrofitting possible

New financial institutions and instruments created by cities such as New York, Melbourne and Berlin have made it easy for large building owners to retrofit their properties by financing projects without impacting owners' bottom lines, as Julia Thayne reports.

Julia Thayne

Julia Thayne

Cities: Melbourne, New York-Newark, Berlin

Topics: Private sector governance, Sustainability, Property and real estate, Climate change

Buildings contribute approximately one-third of global greenhouse gas emissions. They use about 40% of the world's energy, 25% of its water and 40% of its resources. In fact residential and commercial buildings alone consume approximately 60% of the world's electricity. As much as I would like to believe that turning off the lights for an hour every Earth Day (as I used to do during my elementary school years in the US) is more than just a symbolic gesture, it's not; we will not only have to alter our behaviours fundamentally, but also upgrade our buildings' energy systems, if we want to decrease the built environment's impact on the physical environment.

Innovative financing may be the ticket to inducing building owners to embrace energy efficiency by retrofitting existing properties or developing new sustainable ones. As building owners often lament, energy efficiency projects can be prohibitively expensive. Although they might ultimately have long-term benefits (one study estimates bnefits of energy retrofits on the world's commercial buildings at $1.4tn during the next 40 years), they are difficult to justify, in financial terms at least, in the short term. For example the estimated cost of retrofitting the Empire State Building is more than $100m. Estimated annual energy savings top out at just $4.4m. Recouping the investment will take between 15 and 20 years — a feasible time frame for the owners of the Empire State Building but an unreasonable one for owners of smaller properties.

New financial institutions

Recognising the cost barriers to retrofitting, some city governments have pioneered public-private mechanisms for financing energy efficiency in buildings. The New York City Energy Efficiency Corporation (NYCEEC) is among the most well known of these efforts. The NYCEEC is a private non-profit originally established by the mayor's office as part of PlaNYC, New York City's long-term strategic plan. It leverages seed funding from New York City, a grant from the federal government's American Recovery and Reinvestment Act of 2009, and private donations to finance projects in 22,000 of the city's largest buildings.

The NYCEEC operates by three main methods: it provides direct loans to some building owners, it gives information to others about which financing options might suit their retrofitting needs, and it connects building owners to energy service providers who through energy saving agreements (ESAs), will accept loan repayments over time by deducting the payments from buildings' energy savings. ESAs are perhaps the most innovative part of NYCEEC, by the way they incentivise owners to retrofit their properties by ensuring that the costs of retrofitting never hit their bottom line. Overall the potential benefits of the projects made possible by the NYCEEC are impressive. If the scheme is successful, CO2 emissions from these buildings, which currently account for a third of the city's total, could be reduced by 5%, or roughly 10% of the city's goal to reduce emissions by 30% overall.

Melbourne's 1200 Buildings programme incentivises the 1200 largest buildings in the city to improve their energy efficiency by 38% by 2020, and includes a new financing mechanism called environmental upgrade agreements (EUAs). As part of the EUAs, creditors loan building owners the funds for retrofitting projects at low interest rates; the government then charges building owners a tax at the level of the loan payment and redistributes the revenue to the credit agencies. The city government guarantees the loan, thus reducing the risk to financial institutions, and in the event of bankruptcy or foreclosure the amount of the tax is deducted from the sale of the building, thus reducing the risk to the government. The first four buildings have invested AU$5.6m in retrofitting projects, which will save close to 6,000 tonnes of CO2 emissions and AU$500,000 in energy costs per year.

Melbourne based its programme on a similar initiative in Berlin, which in many ways has served as the model for financing energy efficiency in buildings. The Berlin Energy Savings Partnerships (BESP) programme was established in 1996 between the senate department for urban development and the partly state-owned Berlin Energy Agency. BESP focuses on retrofitting large public buildings — town halls, schools, hospitals, etc. — as part of Berlin's goal to become carbon neutral by 2050. Under BESP, a privately owned energy service company (Esco) invests the upfront costs of retrofitting the public building. The costs are refinanced through savings in energy efficiency: during an agreed-upon payback period (usually eight to 12 years) and at an agreed rate of return, the building owner repays an amount, which is greater than the Esco's original investment but less than the value of energy savings during the payback period. Because the programme is such a win-win situation for investors and owners, BESP has fomented 25 energy savings partnerships for 1,300 public buildings, resulting in 600,000 tonnes of CO2 emissions saved from 1996 to 2011. The programme has grown to include pooled projects, in which buildings can group together to win financing. This enables smaller buildings to take advantage of a programme seemingly targeted towards larger spaces.

As evidenced by just these three examples, the potential benefits of retrofitting buildings to reduce electricity use, water consumption and waste in environmental and financial terms are huge. But they rely upon city governments putting energy efficiency in buildings at the top of their public agenda — and putting a little trust in the private sector that it will assist in what it does best: financing large projects. Fortunately the advent of these innovative financing mechanisms shows a step in the direction of finding that seemingly impossible balance between profit and sustainability. Modelling programmes like ESAs in New York, EUAs in Melbourne and BESP in Berlin, cities are able to achieve tangible differences in how infrastructure impacts nature.

Julia Thayne is a researcher at The Crystal, a sustainable cities initiative by Siemens.