The Financial Calculus Of Energy Retrofits

Figuring out an upgrade path to meet the requirements of the Climate Mobilization Act, or Local Law 97, can be daunting for any co-op or condo board. A green committee at one of your co-op clients is tackling this now. What kinds of improvements has this co-op made in the past?

In 2013, Bright Power performed an energy audit as part of benchmarking, or Local Law 84, compliance. In our audit, we identified energy upgrades to improve the property’s performance, and the board implemented a number of them, both in common areas and in the apartments. The board focused on improvements to the heating system, such as balancing the steam distribution, installing indoor temperature controls and adding pipe insulation. The board upgraded the domestic hot water system by installing low-flow fixtures in the apartments. They also did an LED lighting upgrade in common areas and made improvements to the building envelope to reduce air infiltration.

Did they spent a lot of money to do all this?

It was a moderate investment, by no means the largest they could have made.

So now, under the Climate Mobilization Act, fines kick in in 2024 and again in 2030 for buildings that fail to meet their carbon-reduction caps. If this board does nothing else, will they be paying a fine?

Yes. If they do nothing else, they’re facing a fine of about $190,000 per year starting in 2031.

What kinds of additional improvements can they make to avoid or reduce these potential fines?

For any property, there are going to be separate sets of improvements that can be done. First, there’s the ongoing maintenance types of improvements to continually update and improve on previously performed projects. These usually are low to moderate in their cost and have low to moderate impact on the building’s performance. Second is the low-hanging fruit or less complicated types of improvements. These are low to moderate in their cost as well and mostly have low to moderate impact on the building’s performance. These are usually improvements to the existing common-area systems and have good financial profiles. Third are the more complicated upgrades to optimize the existing systems. These include capital improvements that are usually more expensive and may require financial planning, but they’ll provide greater benefits for improving the building’s performance. And fourth is an electrification project. These are to leverage the installation of high-efficiency equipment to maximize the reduction in carbon emissions. These projects can be more expensive, may require financial planning and may consist of more construction throughout the property. But they yield the greatest reduction in carbon emissions. This forward-thinking co-op previously completed most of the low-hanging-fruit upgrades and has adopted a policy for continuously completing ongoing maintenance improvements.

You mentioned electrification.

To get the impact that they need to reduce their carbon emissions for Local Law 97 compliance, this board will need to focus on either optimizing the existing systems or getting rid of fossil fuels and converting to electrification. Optimizing the system includes completing a natural-gas conversion and replacing the existing boilers. The cost estimate is around $6 million. We estimate that these upgrades will bring the co-op below their 2030 carbon-emissions cap by about 23%.

The other option is an electrification project, which is installing a variable refrigerant flow system for their heating and cooling needs. The cost estimate is around $7 million. We estimate electrification would bring the co-op about 54% below their 2030 carbon emissions cap, likely eliminating fines even in 2035, and it represents to the fullest extent what the property can do for Local Law 97.

If they were to electrify tomorrow, give me a sense of what would happen to their energy costs.

Electrification is the choice way to reduce carbon emissions. But when we consider the energy costs associated with going fully to electricity for heating and cooling, they will see a near-term increase in energy costs on an annual basis because of what it costs for a unit of energy from electricity as compared to natural gas or fuel oil. The benefits of electrification are out in the future as the grid continues to get cleaner and more renewable energy is added to the grid. The anticipation is that electricity costs are going to come down over time.

So this board, like many boards, is facing spending millions of dollars over the next few years for some sort of upgrade — or choosing to pay recurring fines. Is that the choice?

Yes. And so when we look at the options that most properties have, it’s important to ask: Are they doing what they can? Are they investing in their property? Because there are going to be some buildings where they’re not going to have a choice to stay on fossil fuel like natural gas. Not all buildings in New York City are going to have gas available to them. So maybe their choice is to stay on fuel oil or switch to electrification. And there is going to be some sort of mechanism in the future where a property is going to be able to exhibit what they’ve done. I think what’s really going to be important is that a property can prove that they’ve done what is practically reasonable.

So for board members, what’s the takeaway?

Four things. First, start planning now. It’s not too early to start planning for 2030. Upgrades need to be completed by December 2029 for their impact to be seen in calendar year 2030 bench-marking results. If you need to get below the 2024 caps, you need to start planning today. Second, have a green committee or a few board members focus solely on energy efforts, such as how to improve building energy-efficiency grades and Local Law 97 carbon-emissions compliance. These individuals will need to be the internal advocates for reducing energy consumption. Third, work with an energy engineer to understand how to implement your projects, whether all at once or over time, depending on the technical complexity and the financial investment required. Lastly, keep in mind that a large number of properties will need to complete projects by 2029. Don’t wait too long because you may not be able to hire the people you want to work with.

Darren Johnson is a senior account manager for co-ops and condos at Bright Power, an energy and water management firm.