93675 Knowledge Series 019/14 Improving Energy Efficiency in Buildings Energy Efficient Cities Mayoral Guidance Note #3 For more information related to energy efficiency in cities, please visit ESMAP’s website at: www.esmap.org/Energy_Efficient_Cities. Additional Resources ESMAP Energy Efficient Cities Case Studies Database: http://www.esmap.org/node/231 Mainstreaming Building Energy Efficiency Codes in Developing Countries: http://elibrary.worldbank.org/doi/book/10.1596/978-0-8213-8534-0 Global Buildings Performance Network: http://www.gbpn.org/ 2  |  Energy Efficient Cities Initiative Ta b l e o f C o n t e n t s EXECUTIVE SUMMARY 1 I M P R O V I N G ENE R G Y EFF I C I EN C Y I N B U I L D I N G S 3 The Opportunities 4 Barriers and Challenges 5 Solutions 6 P A R T I : ENE R G Y EFF I C I EN C Y I N NE W B U I L D I N G S 9 Mandatory Enforcement of Building Energy Efficiency Codes 10 Incentivizing Investors and Developers to Exceed Mandatory Standards 13 P A R T I I : R E T R OF I T T I N G E X I S T I N G B U I L D I N G S 14 Retrofitting Municipal or Public Buildings 14 Retrofitting Commercial Buildings 15 Retrofitting Residential Buildings 17 PA RT I I I : M ANA G I N G ENE R G Y U SE I N P U BL I C AN D C O M M E R C I AL B U I L D I N G S 19 C ON C L U S I ON 20 EN D NO T ES 21 R EFE R EN C ES 21 A C R ON Y M S AN D ABB R E V I AT I ONS 22 Improving Energy Efficiency in Buildings i Ex e cutiv e Summ a ry About one-third of global energy is consumed in residential, public, and commercial buildings (collectively referred to as buildings), where it is used for space heating, cooling, ventilating, lighting, cooking, water heating, refrigerating, and operating electric and mechanical devices. Global energy use in buildings is expected to grow as cities in developing countries continue to modernize and per capita income levels continue to increase. Because of their high energy consumption, residential, public, and commercial buildings also offer unparalleled opportunities for energy savings. According to the International Energy Agency, buildings account for some 41 percent of global energy savings potential by 2035, compared with the industrial sector (24 percent) and the transport sector (21 percent).1 This guidance note outlines how cities can tap into a wide array of proven technologies, policies, and financing mechanisms to improve energy efficiency and capture cost-effective energy savings in buildings. It offers city leaders advice on how to get started in introducing energy efficiency measures, and provides lessons and examples from successful programs that have been introduced worldwide. There are three primary ways in which energy efficiency can be improved in residential, public, and commercial buildings: 1 | Through improved design and construction techniques that reduce heating, cooling, ventilating, and lighting loads 2 | Through building upgrades and the replacement of energy-using equipment 3 | By actively managing energy use The main junctures at which energy efficiency interventions can be launched are as follows: ■■ When designing and constructing new buildings. Well-designed and well- constructed new buildings represent the best opportunity for reducing heating, cooling, ventilating, and lighting loads. The most effective way to ensure that energy efficiency is factored into the design and construction process is by introducing and enforcing Building Energy Efficiency Codes. A building energy efficiency code sets out the minimum energy efficiency requirements of a building, including the thermal performance of a building’s “envelope” and the energy efficiency standards of its internal equipment and devices. ■■ By retrofitting existing buildings. Retrofitting existing buildings and replacing energy- consuming equipment are critical for improving energy efficiency in cities where building stock turnover is low. Cities need to be opportunistic in order to capture this potential by incentivizing and/or requiring energy efficiency upgrades as part of all significant renovations and equipment-replacement activities. For this to happen, an enabling environment and effective project financing and delivery mechanisms must be in place. ■■ By establishing and maintaining energy management systems. Establishing and maintaining effective energy management systems for monitoring and controlling energy use in large public and commercial buildings is a low-cost means with which to improve energy efficiency and reduce energy demand. There are a number of key barriers that must be overcome in scaling up energy efficiency in buildings. These include the high cost of gathering reliable information on a building’s Executive Summary 1 energy performance; a lack of technical capacity with which to design, construct and maintain energy efficient buildings; a lack of incentives to invest in energy efficiency; limited access to financing; and difficulties in coordinating the building sector’s many stakeholders. Overcoming these barriers requires strong commitment and leadership from city authorities as well as a willingness to work closely with national and regional governments, building and home-owners, developers, financiers, the building trades and industries, and energy utilities. Cities looking to systematically improve energy efficiency in buildings should initially consider the following steps: ■■ Carrying out a rapid energy efficiency assessment of the building sector that identifies key opportunities and challenges, assesses stakeholders and resources, and determines priorities and next steps; ■■ Implementing energy efficiency initiatives in public buildings—such as municipal offices, schools, and hospitals—in order to lead by example; and ■■ Tapping into the expertise and resources of key stakeholders—building owners, energy utilities, national and regional governments, and international donors—to initiate energy efficiency programs for residential and commercial buildings. 2 Improving Energy Efficiency in Buildings I mpr o vi n g E n e rgy E f f ici e n cy i n Bui l di n g s The technical potential for energy savings in buildings is tremendous, especially with “passive” designs that cut or even eliminate the need for active energy use. In cold climate regions, for example, super-insulated and air-tight residential buildings (often called passive houses) use only 10 to 25 percent of the active heating energy that is needed to heat the average new residential building today.2 Passive design techniques for buildings in warm climates, such as white roof, sun shading and natural ventilation can also achieve significant cooling load reduction. In addition, market competition and government energy efficiency (EE) policies can lead to new generations of EE equipment that also help bring down the energy use in buildings. Energy use and efficiency in buildings is generally characterized along end-use categories such as space heating, cooling, and lighting. EE in these end-use categories is generally determined by the design and construction (which includes the materials and components used) of a building and by the technical efficiency and operational management of a building’s energy-consuming devices. Energy consumption is further influenced by variations in building function, climate, energy prices, billing methods, and human behavior. This guidance note offers city leaders strategic advice on how to turn potential EE opportunities into tangible benefits. In following these steps, cities can achieve large energy cost savings, help create new businesses and jobs, increase energy security, and improve the quality of life of their constituents. Improving Energy Efficiency in Buildings 3 This guidance note first presents a summary of the main EE opportunities in buildings,3 followed by a description of some of the common barriers and challenges. It then outlines a range of specific policy tools and instruments available to overcome barriers and challenges. The note then provides specific guidance and empirical examples of three areas of intervention: delivering EE in new buildings (Part I); developing and implementing strategies for retrofitting existing buildings (Part II); and managing energy use in public and commercial buildings (Part III). The Opportunities Scaling up EE in buildings is a value proposition for both mature and fast-growing cities. Given that most of the buildings in existence today were constructed with little or inadequate attention to EE, the global building sector is a huge untapped source for energy efficiency gains. City authorities should aim to pursue EE measures that make financial or economic sense, depending on local resources, on the basis of lifecycle cost and benefit. Simple payback time is a quick means of evaluating the financial attractiveness of EE measures. Many EE interventions can pay for themselves under five years, although their relative cost effective- ness depends on factors such as whether they are applied in new or retrofitted buildings, local climate conditions, and energy prices. The entry points at which to increase energy efficiency in buildings fall into three focal areas: (i) reducing heating, cooling, ventilating, and lighting loads through improved building design and construction; (ii) increasing the efficiency of energy-using equipment through upgrades and replacement; and (iii) actively managing energy use in buildings. Table 1 shows the technical approaches to maximize energy efficiency in each focal area. Table 1 | Approaches for Improving Energy Efficiency in Buildings Focal Area Technical Approach Reducing heating, cooling, ventilating, Apply local climate-sensitive passive design and lighting loads for new buildings or techniques, such as building form, orientation, surface when renovating existing buildings color, sun shading, building envelope insulation, air tightness, ventilation, etc. Increasing the efficiency of energy-using Optimize system design and operation to match devices and equipment actual heating, cooling, and lighting loads through commissioning and retro-commissioning Upgrade or replace heating, ventilation, and air conditioning (HVAC) systems, indoor lighting, water heating, home appliances, and other electric and mechanical devices Manage energy use in public and Monitor, analyze, and control energy use through energy commercial buildings performance benchmarking Establish new maintenance standards, label building energy performance, and communicate energy performance indicators to building owners/tenants Organize information and awareness raising campaigns Source | Author 4 Improving Energy Efficiency in Buildings Barriers and Challenges There are a number of barriers and challenges inherent in improving EE in buildings. And while many of these at first can seem daunting, experience from different countries and cities over the past three decades demonstrates a number of ways they can be surmounted. Table 2 outlines and provides examples of some of the most common challenges and barriers. Some barriers to greater EE are specific to certain stakeholder groups. For example, high transaction costs relative to returns and the perceived unreliability of repayment often deter commercial banks from financing building EE projects. Other barriers are sector-wide, such as energy subsidies and/or a widespread lack of data and informa- tion on EE opportunities, costs, and benefits. Addressing systemic problems such as these typically requires policy interventions and support at the national and regional level, although municipal governments can be influential in policy design and implementation. Table 2 | Common Barriers to Improving Energy Efficiency in Buildings Barrier Categories Common Barriers Lack of knowledge and know- Lack of reliable and credible information about energy how performance and the costs and benefits of efficiency improvements Lack of implementation capacity: shortage of relevant technical skills in local markets to ensure compliance of building EE codes Risk aversion to unfamiliar materials, methods and equipment, or uncertain outcomes Institutional and regulatory Lack of national and/or local commitment to EE in general, and deficiencies to EE in buildings in particular Government internal procedures and lines of responsibility that discourage EE in public buildings (e.g., budgetary and procurement policies not conducive to contracting EE services) Poorly designed social protection policies that undermine price signals for efficient use of energy (e.g., generally subsidized energy prices) Financing challenges Local government budget constraints Lack of long-term financing at a moderate cost High transaction costs due to small individual investments Unattractive financial returns Unreliable repayments Market failures and Split incentives: EE investment decisions are made by actors inefficiencies that do not receive direct financial benefit Suboptimal decisions or choices due to insufficient information Fragmented building trades: multiple professions involved in different stages or decision processes Source | Author Improving Energy Efficiency in Buildings 5 So l u t i o n s Before committing significant private and public financial resources, it is important for city leaders to develop a clear view of the main opportunities, issues, and options available in improving the EE of new and existing buildings. A key first step is to carry out a sector EE assessment that can cover either the entire building sector or a specific segment of it. The basic approach for conducting EE assess- ments for buildings is described in a separate guidance note for city EE assessments.4 City governments should also lead by example by initiating cost-effective measures that boost EE in municipal buildings and/or testing new EE policy initiatives. It is critical for city governments to work with national and state/provincial governments, as well as other stakeholders—such as energy utilities, banks, building owners, and energy service trades—to address the major barriers to scaling up EE in buildings. The most common policy and regulation instruments and tools to increase EE in buildings are listed below. These measures tend to be accompanied by specific support programs, as a portfolio of actions is generally more effective than a single, stand- alone EE intervention. 1 | Energy regulatory policies. Usually formulated at the national or regional level, energy regulatory policies address general inefficiencies in energy markets. Examples include policies to replace general pricing subsidies with targeted social assistance schemes, that require users of network-based energies be charged based on metered consumption, and which introduce incentives encouraging energy utilities to carry out demand-side management activities. Mandatory standards and codes. Generally developed at the national and 2| regional level and updated periodically, mandatory standards and codes address key market failures or inefficiencies, in this case, defined as situations in which rational decisions taken by market participants have led to negative or suboptimal economic outcomes for society as a whole. The case of split incentives (see Table 2) is a main reason for introducing mandatory building energy efficiency codes (BEECs). Minimum energy performance standards (MEPS) for major energy-consuming equipment are targeted at manufacturers, but supported by demand-side promotions (e.g., rebate programs for appliance replacement) implemented by energy utilities or city authorities. 3 | Labels and certificates. These are means of recognizing and encouraging EE efforts that go above and beyond the mandatory requirements outlined above. Examples include the voluntary Energy Star program for buildings, components, and equipment in the United States and the Green Mark scheme for buildings in Singapore. 4 | Financial facilitation schemes. These include fiscal and monetary incentives to encourage investments in energy efficiency. Examples include tax credits, cash rebates, and capital subsidies, as well as special funding vehicles and risk-sharing schemes to increase funding and lending for investments in EE. This topic is discussed in a separate guidance note on mobilizing municipal EE financing.5 5 | Requirements for energy management. Several cities in the US and the European Union have introduced mandatory energy performance benchmarking and disclo- sure programs that require large public and commercial buildings to monitor and 6 Improving Energy Efficiency in Buildings report their EE performance and compare with peers, thus, helping to improve operational and maintenance practices and identify opportunities for cost-effective retrofits. Energy management requirements can also help municipal governments better target support for building retrofits and bridge existing information gaps related to building energy performance and costs. 6 | Public sector financial management and procurement policies. These can have a significant impact on municipal efforts to retrofit public buildings and upgrade inefficient energy-consuming equipment. This topic is discussed in a separate guidance note on integrating energy efficiency requirements into public procure- ment procedures.6 7 | Awareness-raising and capacity-building initiatives. Outreach and public informa- tion initiatives can help increase the knowledge and know-how of stakeholders and enable the design and implementation of effective EE programs and invest- ment projects. These may involve general awareness campaigns, as well as initiatives to train specialized trades such as architects, building managers, and construction workers. A city’s ability to develop and deploy these tools and instruments varies, depending on the particulars of the local governance structure. Table 3 provides a general map of the key policy tools, the barriers they intend to address, and the potential role of municipal authorities. Table 3 | Key Policy Interventions and Support: Matching Barriers with Policy Tools Examples of What City Policy Tools Issues Addressed Intervention Government Can Do Energy Regulatory Weak financial incentive Remove general price Support and participate Policies to invest in EE by subsidies for public, in national or regional consumers residential, and policy reform programs Disincentive for energy commercial users utilities to invest in DSM Decouple energy activities due to lost utility revenue from sales sales* Mandatory Split incentives, Building energy Set and/or enforce Standards and fragmented building efficiency codes standards Codes trades, fragmented Minimum energy Encourage or mandate building ownerships, etc. performance (public sector) purchase Underinvestment in EE standards for of EE equipment by equipment makers equipment Labels and Lack of credible and Energy Star label Promote the adoption of Certificates consistent energy for equipment or nationally/internationally performance information buildings recognized labels and and/or recognition of Green building rating certificates excellence systems (continues on next page) Improving Energy Efficiency in Buildings 7 Table 3 | Key Policy Interventions and Support: Matching Barriers with Policy Tools (continued) Examples of What City Policy Tools Issues Addressed Intervention Government Can Do Financing Insufficient financial Subsidies for EE Use public funds to Facilitation incentive investments leverage private and Lack of commercial Dedicated EE fund commercial investments lending to EE and credit line Risk concerns of Partial risk/credit commercial lenders guarantee Energy Lack of transparent and Energy performance Require energy Management consistent monitoring benchmarking and performance and control of energy disclosure benchmarking and use disclosure for large public and commercial buildings Public Sector Disincentive for EE Revise budgetary Make adjustments Financial efforts in budget- rules to allow based on a city’s own Management supported public entities retention of energy policy-making authority and Procurement Difficulty for public cost savings for Policies entities to contract other justified public energy service providers, spending or make EE equipment Revise public preferred purchase procurement rules to choices allow for contracting of energy service providers and adopt EE purchase requirements Capacity Building Inadequate knowledge Train building Organize trainings and and Awareness and skills for BEEC trades on BEEC sponsor awareness Raising compliance requirements and campaigns Lack of general proper approaches awareness and Public campaign to sensitivity to energy promote efficient waste use of energy Lack of specific Train building knowledge and skills managers of to perform energy large public and management duties commercial buildings *Examples at http://www.epa.gov/statelocalclimate/documents/pdf/guide_action_chap6_s2.pdf Source | Author 8 Improving Energy Efficiency in Buildings P a rt I : E n e rgy E f f ici e n cy i n N e w Bui l di n g s Newly constructed buildings represent the best opportunity and greatest potential for reducing heating, cooling, and lighting loads and introducing EE technologies that can pay for themselves over the course of their life cycle. These gains can most effectively be achieved by introducing and implementing building energy efficiency codes (BEECs). The development and implementation of BEECs is an elaborate process, requiring a variety of data and analyses. It also requires extensive consultation with, and the active participation of, a broad set of stakeholders.7 An effective compliance enforcement system is crucial to ensure that buildings are designed and constructed according to BEEC requirements. Depending on the standard content of a finished building, EE requirements for installed equipment and devices are either directly covered by BEECs or referred to in separate EE standards, such as minimum energy performance standards for appliances. Whether a well-designed and constructed new building achieves expected energy savings will largely depend on user behavior and operational management. Assuming that both are present, there are two primary ways to capture EE opportunities when constructing new buildings: 1 | Mandatory enforcement of BEECs 2 | Incentivizing investors and developers to go beyond them Part I: Energy Efficiency in New Buildings 9 Box 1 | Enforcement of More Stringent BEEC Brings Greater Benefit The city of Tianjin in China reduced the heating load of residential buildings built after 2005 by 30 percent (compared with those in compliance with the national code) through enforcement of its new and more stringent residential BEEC. Residential buildings built between 2005 and 2009 have saved energy equal to avoided investment in a new 300 MW-thermal district heating plant that would consume 200,000 tons of coal annually. This represents a significantly larger economic benefit than the incremental cost of complying with the more stringent BEEC. Source | ESMAP 2011 M a n d ato r y E n f o r c e m e n t o f B EE C s The mandatory enforcement of BEECs is generally stipulated by national and/or state/ provincial governments and then implemented through city governments. Initial compli- ance is often voluntary so that a government can develop the necessary capacity to enforce BEEC standards and stakeholders in the building supply chain can develop the necessary skills, materials, and products to meet them. In general, cities can enact and enforce more stringent BEECs than regional or national governments, provided that they are technically feasible and economically justified. Such proactive efforts can bring substantial benefits to cities (Liu et al. 2010; Box 1). While some municipalities enforce BEECs on their own, a third-party enforcement option can be of particular interest to developing countries and cities that are in the process of building up a general building code compliance system. A third-party approach, which requires significant efforts to develop private sector capacity, enables a government to Box 2 | Key Components of a BEEC Implementation Program ■■ BEEC Administration and Enforcement. A unit must be established within the general building code enforcement department with budget and staffing to administer and implement a BEEC program. ■■ BEEC Compliance Process. A BEEC compliance process must be established. Key elements would include the development of administrative procedures, compliance forms, checklists and procedures, user manuals or guidebooks, compliance tools, and software. ■■ Training and Capacity Building. Programs should be launched to raise awareness about BEECs among code officials, designers, architects and engineers, manufacturers, and suppliers. ■■ Demonstration Projects. Funding should be provided to cover the additional up-front costs of adopting new BEECs in the design and construction of more energy efficient buildings and the installation of more energy efficient equipment and materials, as well as monitoring and evaluation. ■■ Setting a firm date for enforcement. Developers, designers, contractors, manufacturers, and suppliers should be apprised of new regulations with as much lead time as necessary so that when the rules take effect, each can comply. ■■ Evaluation of energy savings and BEEC effectiveness. For future code revisions, the evalua- tion of actual results and experiences is important so standards and procedures can be improved. This evaluation process can include formal surveys, but should also be based on issues raised by designers, builders, and other involved parties. Source | Liu et al. 2010 10 Improving Energy Efficiency in Buildings leverage limited resources while also normalizing BEEC compliance checks within the regular construction supervision process.8 An effective compliance enforcement system ensures that buildings are designed and constructed according to BEECs. Depending on the local system for enforcing the general building codes, the government may or may not need to cover the entire process of BEEC enforcement (Table 4). Cities that have done well in implementing BEECs tend to have some or all of the following factors in common: ■■ Strong political support, which is expressed by adopting strict BEECs and providing incentives (Table 5) for building owners to exceed BEEC standards Table 4 | Institutional Options for Enforcement of Building Energy Efficiency Codes 1. Government 2. Private Third 3. Self-certification to Agency Party Owner or Public Agency Key Features Government Private third party Builder provides compliance department or is certified by statement to owner or agency wholly government government responsible Support Government Trained and certified Checking of compliance Infrastructure inspectors third-party staff; some statements; perhaps Needed training of public-sector certification of builder staff if spot checking Cost to High but may be Moderate Low Government recovered from Moderate if builders are builder certified Cost to Owner/ Low unless High Low Developer agency charges Information and Trained Trained private Knowledgeable builders and Infrastructure government assessors; certification owners; energy labels and Needs assessors process certificates for buildings; some trained public-sector staff to check compliance Noncompliance Low, provided Low to moderate. High, unless owner places high Risk adequate funding Third party depends on value on EE and training of certification for income Moderate if self-certification to inspectors (but also on satisfied government builders) Low if builders are certified Examples United States: China (with some Germany (to owner) prevailing public oversight), option France, Mexico, some in uk, some in us, pilot in Turkey Source | Liu et al. 2010 Part I: Energy Efficiency in New Buildings 11 Table 5 | Market Incentives for Adopting or Exceeding BEEC Requirements Intended Direct/Indirect Example of Type of Incentive Beneficiary Benefits Practice Grants (partial) Developer, Owner Reduce incremental costs Singapore (Green ■ For design costs (of design, of EE building Mark) materials, equipment, and ■ For homes/ construction) commercial buildings beyond BEEC Direct: reduce incremental costs ■ For demonstration of buildings complying Indirect: provide Denmark, Tunisia with voluntary code information on costs/ benefits of EE buildings ■ For audits Subsidized Loans/ Developer, Owner Reduction of first cost Austria, Germany, Interest Rates Japan, Netherlands, South Korea, USA EE or Green Mortgages Owner Secure otherwise Mexico, USA impossible mortgage Lender Recognition; marketing advantage; lower default risk Tax Benefits (e.g., Developer, Owner Reduction of first cost USA reduced import tax duties or VAT rates for EE equipment) Nonmonetary Incentives Developer Reduced costs of doing South Korea, USA Expedited Permits business; increased earnings Relaxed Zoning Restrictions (size, density) Awards Developer, Builder Public recognition and China, USA (Energy marketing advantage Star buildings) Rating Systems Developer, Owner Recognition; marketing Energy Star (USA), advantage; higher market LEED and other value of rated building green building rating systems in China, India, European Union countries, etc.  ost incentives to go beyond code are conditional on a building achieving a certain EE rating or the building or an appliance achieving a Note | M certified percentage of energy savings that go beyond BEEC requirements. Source | Liu et al. 2010 12 Improving Energy Efficiency in Buildings ■■ Popular support for EE buildings ■■ Extra funding at the beginning of a BEEC enforcement campaign, which allows for the development or enhancement of enforcement capacity, the hiring of extra staff, and the training of code officials and building professionals ■■ A strong EE champion in the local administration ■■ A streamlined inspection and review process, which includes correction lists and change orders to be fulfilled before construction and occupancy permits are issued ■■ Strict plan reviews that set expectations at every construction site, as compliance tends to improve if the enforcement of regulations is considered firm and fair ■■ The training of code officials, designers, and the building industry to improve the understanding and application of codes and make code officials more aware of technical issues I n c e n t i v i z i n g I n v e s to r s a n d D e v e l o p e r s to E x c e e d B EE C Sta n d a r d s The main drawback of mandatory BEECs is that they are minimum requirements that are usually based on the average or even below-average performance of the building market. This weakness can be addressed by regularly updating BEECs—at three- to five-year intervals, for example—so that EE requirements can be tightened as technologies improve. In general, there are no inherent incentives in BEECs for those able to innovate and/or exceed BEEC levels. This is where an EE rating system for buildings—and, increasingly, green building rating systems—can be an important means of recognizing market leaders. There are a number of well-established green building rating systems that cities may adopt, for example the Building Research Establishment Environmental Assessment Method (BREEAM) that originated in the UK and the Leadership in Energy and Environ- mental Design (LEED) that originated in the US. Singapore’s Green Mark scheme is sanctioned by the government and used as a tool for achieving national green building targets (Box 3).9 Box 3 | Singapore Building Construction Authority Green Mark Scheme Singapore’s Building Construction Authority (BCA) Green Mark Scheme was launched in January 2005 with a strong focus on energy efficiency. It provides a meaningful way to differentiate the EE of buildings in the real estate market, thereby creating a positive effect on corporate image, leasing, and resale value of buildings. The Green Mark Scheme is a key component of the government’s Green Building Masterplan. It integrates mandatory requirements and voluntary ratings and financial incentives for high achievers and is used as the basis for technical capacity building and to help determine government financial incentives for new construction or retrofits. As a result of the scheme, the number of green buildings in Singapore rose from 17 in 2005 to almost 1,700 in 2013. The current Green Building Masterplan aims to green 80 percent of Singapore’s building stock by 2030. Source | http://www.bca.gov.sg/ Part I: Energy Efficiency in New Buildings 13 P a rt I I : R e tr o f itti n g Exi s ti n g Bui l di n g s In cities where the building stock is stable or growing slowly, the retrofitting of existing structures and the replacement of old energy-consuming equipment is often the best means to achieve EE gains. The equipment inside an existing building can generally be replaced over periods ranging from 10 to 20 years, whereas a building’s shell, or envelope, is often unchanged for decades except for basic maintenance. Renovating a building’s envelope is often necessary to reduce heating and cooling loads. Technical approaches to buildings renovations need to be guided by specific climate conditions and sound economic justifications. Despite the EE potential in retrofitting buildings, it has generally been difficult to develop “bankable” retrofitting projects and secure the necessary long-term financing to undertake them. In cities where large-scale building retrofits have been initiated—such as Chicago and London—strong city government leadership has been essential (Box 4). This section outlines how cities can encourage and carry out retrofitting in the municipal, commercial, and residential sectors. R e t r o f i tt i n g M u n i c i pa l o r P u b l i c B u i l d i n g s To provide examples of their benefits, city authorities may wish to initiate retrofitting projects in municipal buildings. There are three key elements cities should consider when Box 4 | City-Led, Large-Scale Building Energy Efficiency Retrofit Programs London’s public building retrofit program, known as RE:FIT, aims to retrofit 40 percent of London’s public buildings by 2025 through a combination of financing, which includes bank loans, public funds, and the London Green Fund, a dedicated climate investment fund. All retrofits are initiated under guaranteed- savings contracts by prequalified energy service companies or ESCOs. A pilot retrofit program to reduce energy use in 42 public buildings, implemented from 2008 to 2010, demonstrated overall energy cost savings of £1 million per year against a total investment of £7 million. This success convinced the Mayor of London to expand the program to all the city’s public buildings. As of 2012, the retrofitting of 111 buildings had or was close to being completed at a total investment cost of £13.3 million. The program currently has a pipeline of 400 buildings with estimated investment of £44 million (http://www.london.gov. uk/priorities/environment/climate-change/energy efficiency/buildings-energy efficiency-programme). Retrofit Chicago is a municipal government initiative that is retrofitting one million square feet of city-owned assets. The work is being carried out by ESCOs under guaranteed-savings contracts financed by the Chicago Infrastructure Trust, a public-private partnership backed by funds provided by large private investors. The program has also established a voluntary initiative with the aim of reducing energy use by at least 20 percent within 5 years and has created a residential partnership providing a one-stop-shop at which building owners can access free EE measures, receive rebates on new equipment, and take advantage of low-cost financing for other upgrades (http://www.cityofchicago. org/city/en/progs/env/retrofit_chicago.html). Source | Author 14 Improving Energy Efficiency in Buildings starting a public building retrofit program: the scope and depth of a retrofit scheme, the delivery mechanism of the retrofit program, and the financing and repayment arrangements for the project. These issues are usually addressed through a market study that involves consultation with stakeholders—such as the government depart- ments, schools, and hospitals that own or operate the buildings that are to be retrofitted—as well as with energy service providers and potential financiers. The choice of which retrofit option to pursue is based on detailed energy audits, which are usually performed by the entities who undertake the retrofits, such as energy service companies or ESCOs. The scope and depth of a retrofit scheme. Cities need sufficient evidence-based information on the costs and benefits of different retrofit measures and options. There are three levels of efforts a city can consider, depending on the availability of resources: 1 | Housekeeping activities amount to fine-tuning or improving the management of a building’s energy systems. These low-cost, low-risk efforts can generate savings of 5 to 20 percent over payback periods of 12 months or less. 2 | A partial retrofit typically involves the cost-effective replacement of inefficient equipment or components such as light fixtures, ventilators, air conditioners, pumps, and windows. While components may be replaced individually, it is generally more effective to replace them as part of a package. A partial retrofit package may entail moderate to significant costs, but can result in savings of up to 30 percent over a payback period of less than 5 years. 3 | A comprehensive retrofit takes an integrated “whole building” approach that addresses the EE of individual components and, by upgrading a building’s envelope to reduce a structure’s heating, cooling, and lighting loads. Such retrofits usually yield energy savings of 40 percent or more but are generally consider- ably more expensive and complicated to implement than partial retrofits. Payback periods associated with such retrofits can extend to a decade or more. Delivery mechanisms. The implementation of retrofit projects is generally outsourced to energy service providers. Depending on the complexity and financing arrangements, cities may follow several commonly used contracting models. The guaranteed-savings contracts used in Chicago and London are best suited for cities that can arrange separate financing for a retrofit. They only require ESCOs to implement the retrofit projects, and can guarantee a stable stream of annual energy cost savings to repay the financers.10 Financing instruments. Although public-building retrofit projects can be financially viable, many cities in developing countries have difficulty in accessing the long-term, low-cost financing with which to fund or bring them to scale. For instance, national regulations may limit a city’s ability to borrow or raise funds in the financial market, while commercial banks may often be reluctant to lend to cities with low credit ratings. It is therefore critical to have a credible mechanism that captures energy-savings cash flow that can be used to repay borrowed money. An innovative approach used in Armenia is described in Box 5.11 R e t r o f i tt i n g C omm e r c i a l B u i l d i n g s City governments can use a combination of regulatory and incentive instruments to help scale up EE investments in private-owned commercial buildings. Overcoming financing Part II: Retrofitting Existing Buildings 15 Box 5 | Capturing Energy-Savings Cash Flow for Repaying Energy Efficiency Investments The R2E2 Fund is a national investment facility for renewable energy and energy efficiency in Armenia, which finances municipal building retrofit projects through the scheme illustrated in the chart. It enables municipalities to retrofit their public buildings, using energy-cost savings through an escrow account to repay extra budget investment provided by the R2E2 fund. Two critical conditions are needed for this scheme to work: (i) a dedicated EE fund whose main objective is to invest in financially viable public sector EE retrofits and (ii) participating cities’ ability to set aside utility payments in a protected escrow account. R2E2 Fund Utility Energy Payment for recovery Actual Services of investment costs utility Agreement and service fee bills Contracts for Escrow Account design and works Baseline utility payments Payment partially based on performance Public Facilities Installation of energy saving measures ESCOs Source | Author and incentive barriers remains the main challenge. The 1200 Buildings Program of the City of Melbourne, Australia, is a notable large-scale commercial building retrofit program.12 A key government intervention under the program was the establishment of a long-term, low-cost financing mechanism, the Environmental Upgrade Finance, by which the city collects a surcharge from building owners who have voluntarily agreed to participate in the scheme. The surcharge, part of which is generally passed on to a building’s tenants, is then used to repay the capital advanced by participating financial institutions. The surcharge will remain on the property until the funds advanced by the financier are repaid in full.13 Government financial incentives—such as grant subsidies for commercial retrofits— could be used to encourage comprehensive retrofit projects. This can help prevent the cherry picking of partial retrofit projects by market participants. 16 Improving Energy Efficiency in Buildings R e t r o f i tt i n g R e s i d e n t i a l B u i l d i n g s Encouraging retrofits of buildings in the residential sector is generally more challenging than in other sectors because of the highly disaggregated nature of home ownership and the small size of individual investments and returns. Most efforts in this area have focused on equipment replacement such as large-scale campaigns to replace incandescent lamps and inefficient air conditioners and refrigerators. The often-used approach for equipment upgrades is to encourage or require electric utilities to carry out demand-side management (DSM) programs. Comprehensive retrofit of older residential buildings in cold climate regions can yield large energy savings.14 For this to happen, three key issues must be resolved: securing long-term, low-cost financing; finding ways to aggregate small investments (delivery mechanism); and establishing a reliable repayment mechanism. Examples of successful financing and delivery mechanisms for large-scale residential retrofits in cold climate regions are often associated with grant subsidized national programs, such as the Thermo Modernization Program of Poland, which subsidizes commercial bank-originated residential retrofit loans (Box 6). Supporting the establish- ment of such national programs would benefit cities. Box 6 | Implementation Arrangements of Poland’s Thermo Modernization Program 1) EE investor (e.g., condominium Verifying association) hires an energy auditor to BGK Institution (4) conduct an energy audit and design EE measures (4) (6) 2) EE investor submits both loan and grant application to the participating bank 3) The participating bank appraises Participating application package (3) (4) Banks 4) BGK (the national development bank) reviews whole application package and commissions an independent (2) (8) verification of the energy audit (7) submitted 5) Once approval by BGK, Contractors EE Investor start to implement EE measures 6) Upon project completion, BGK (1) (5) disburses the grant (up to 20% of loan amount) to the participating bank to reduce the outstanding principal of Energy the EE loan Contractors Auditor 7) Participating bank makes payments Contractual Arrangement Fund Flow to contractors after receiving their invoice 8) EE investors repay bank loan by installments, for example, through increased condo fees Source | Author Part II: Retrofitting Existing Buildings 17 Successful experience of large-scale residential retrofit at the city level is still emerging. The Property Assessed Clean Energy (PACE) scheme in the US is an innovative financing and repayment scheme that supports EE and renewable energy projects in residential and commercial buildings by providing up-front capital that is subsequently paid back through a special assessment on participants’ property taxes or a special surcharge. Two examples of city-level PACE programs are provided in Box 7.15 Box 7 | Innovative Residential Retrofit Programs at the City Level Babylon, NY: Begun in 2008, the Long Island Green Homes program uses funds from the town’s solid-waste reserve fund to provide financing for efficiency or renewable energy projects. After undergoing an audit, the town pays contractors directly; property owners pay back the cost via a trash bill surcharge with 3 percent interest. Boulder County, CO: The ClimateSmart Loan Program provides financing to residential and commer- cial property owners for efficiency or renewable energy projects. The program was established with US$40 million in funding financed by tax-exempt bonds issued by the county. Source| http://ase.org/resources/property-assessed-clean-energy-financing-pace 18 Improving Energy Efficiency in Buildings P a rt I I I : M a n a gi n g E n e rgy U s e i n P u b l ic a n d C o mm e rci a l Bui l di n g s Energy management for public and commercial buildings provides a quick “win” for cities and builds long-term capacity to develop EE projects and monitor and control energy use. As the experience of Lviv, Ukraine, shows, a city government’s commitment and organizational efforts can go a long way toward improving energy management and saving operational costs in public buildings (Box 8). 16 The most effective means to sustain, expand, and enhance the energy monitoring and targeting efforts in large public and commercial buildings is through the introduction of a system of mandatory energy performance benchmarking and disclosure (EPB&D). The principle behind EPB&D requirements for buildings is the old adage: you cannot manage what you do not measure. Mandatory EPB&D requires building owners to periodically submit building perfor- mance information to the government, potential buyers, and/or the public at large. The main components of an EPB&D program are the benchmarking of a building’s energy performance and the disclosure of that information to selected entities. The benchmarking of a building’s energy performance is a comparison of how efficiently a building uses energy compared to a baseline measurement. Benchmarking is supported by a specially designed tool/software. 17 Energy use is measured on a per-square-meter (m2) basis and controlled for building size, operational type, tenancy type, and weather (Box 9).18 Box 8 | Lviv, Ukraine: Energy Management System in Public Buildings The Ukrainian city of Lviv was able to reduce annual energy consumption in its public buildings by about 10 percent and tap water consumption by about 12 percent through a Monitoring and Targeting (M&T) program to control energy and water consumption. The M&T program, which was launched in December 2006 and became fully operational by May 2007, provided the city management with monthly consumption data for district heating, natural gas, electricity, and water in all of the city’s 530 public buildings. Under the program, utility use is reported and analyzed monthly and targets for monthly utility consumption are determined annually based on historical consumption and negotia- tions on an adjustment (in cases of foreseeable changes in consumption patterns). Actual consumption is reviewed monthly against the target, with deviations spotted and acted upon immediately. The performance of buildings is communicated to the public through a display campaign. This program generated an estimated net savings of 9.5 million UAH (US$1.2 million) as of 2010 against a program cost of about 1 million UAH. Strong city government leadership and commitment were key success factors of Lviv’s public buildings energy and water M&T program. A new Energy Management Unit (EMU) was established within the city administration and resources were mobilized to train all personnel with line responsibility on building utility use in an administrative division, unit, or building. The M&T system established acountability, created transparency, and enabled informed control of energy and water use in public buildings, laying a solid foundation for sustained improvements in energy and water efficiency. Source | Author Part III: Managing Energy Use in Public and Commercial Buildings 19 Box 9 | Elements of an Energy Performance Benchmarking and Disclosure Program for Buildings For the benchmarking component of the program the following processes need to be defined and documented: ■■ Benchmarking methodology. Methodology for comparing a building’s energy performance needs to be clearly defined and simple to use through specially designed software. ■■ Schedule of reporting. A date should be chosen as a deadline for the first submittal of benchmarking data and a schedule defined for future submissions. ■■ Reporting system. The system for how and where a building reports data should be clear, techni- cally simple, and provide guidance for owners. A central database is preferred. ■■ Disclosure trigger points. There are different points that can trigger disclosure of building perfor- mance information. ■■ Enforcement. Enforcement of the policy is essential to ensure participation. It can be done through penalties, incentives, or marketing triggers, such as proof of compliance at sale. ■■ Compliance support and outreach. Stakeholder outreach and education, trainings for skilled energy efficiency workers, and communication of these efforts. The disclosure component of the program can be organized in two distinct ways, transactional disclo- sure and scheduled public disclosure. Transactional disclosure is triggered at the point of sale for a building, with the information only being provided to the buyer or interested parties. For rentals, information can be provided to prospective tenants during negotiations. Alternatively, public disclosure of information can be triggered by a schedule of disclosure predetermined by the policy. For example, New York City makes the energy use of every large private-sector building—gathered via a citywide mandatory benchmarking process—available to the general public (available at: http://www.nyc.gov/ html/gbee/html/plan/ll84_scores.shtml). Source | Dunsky et al. 2009 Conclusion City governments can exert significant leverage on improving energy efficiency in buildings. As the examples in this guidance note show, achieving energy savings at scale requires strong leadership to orchestrate the necessary efforts to overcome the knowledge, institutional, and financial challenges. For cities that are just embarking on the pursuit of EE in buildings, the following actions by the city government are recommended: ■■ A rapid EE assessment of the building sector to identify key opportunities and challenges, assess stakeholders and resources, and determine priorities and initial steps. ■■ Lead by example by improving EE in public buildings, such as municipal offices, schools, and hospitals. As a first step, establish a long-term energy management system/program for municipal buildings (e.g., the M&T program implemented by Lviv). ■■ Tap into available resources of building owners, energy utilities, national and regional governments, as well as international donors to initiate EE programs for residential and commercial buildings. 20 Improving Energy Efficiency in Buildings Endnotes 1 International Energy Agency, World Energy Outlook www.institutebe.com/InstituteBE/media/Library/ 2012, page 328. Resources/Energy%20and%20Climate%20Policy/ 2 http://passiv.de/en/02_informations/01_whatisa Driving-Transformation-to-EE-Buildings.pdf passivehouse/01_whatisapassivehouse.htm 10 Driving Energy Efficiency Markets through 3 The guidance note focuses on measures which Municipal Procurement Mayoral Guidance Note improve the operational energy efficiency of #1 (ESMAP Knowledge Series 017-14) has more buildings and does not deal with the embodied specific advice on using energy savings perfor- energy of buildings, which includes energy used in mance contracts (ESPCs) to deliver EE retrofit manufacturing building materials and components, projects in the public sector based on global as well as in building construction. experiences. 4 ESMAP. 2014. City Energy Efficiency Assessment: 11 Financing Municipal Energy Efficiency Projects: Mayoral Guidance Note #5 (Knowledge Series Mayoral Guidance Note #2 (ESMAP Knowledge 021-14). Written by Feng Liu and Stephen Series 018-14) contains more specific advice on Hammer. Washington DC: Energy Sector how to select appropriate financing options. Management Assistance Program. 12 http://www.melbourne.vic.gov.au/1200buildings/ 5 ESMAP. 2014. Financing Municipal Energy Pages/Home.aspx Efficiency Projects: Mayoral Guidance Note #2 13 http://www.sustainablemelbournefund.com.au/ (Knowledge Series 018-14). Written by Dilip Limaye sites/default/files/EnvironmentalUpgradeFinance and William Derbyshire. Washington DC: Energy Brochure.pdf Sector Management Assistance Program. 14 The approaches to (thus cost implications of) 6 ESMAP. 2014. Driving Energy Efficiency Markets are retrofitting building envelopes in cold climate through Municipal Procurement: Mayoral Guidance is different from those in warm climate (hot and Note #1 (Knowledge Series 017-14). Written humid) where, for example, there is less emphasis by Jas Singh. Washington DC: Energy Sector on thermal insulation but strong emphasis on Management Assistance Program. shading. 7 Detailed description of the process is provided in 15 http://ase.org/resources/property-assessed-clean- Mainstreaming Building Energy Efficiency Codes energy-financing-pace in Developing Countries: Global Experiences and 16 Lviv, Ukraine—Energy Management System Lessons from Early Adopters (Liu et al. 2010). in Public Buildings, http://www.esmap.org/ 8 Chinese cities have been practicing and improving node/1246 the third-party enforcement system for years 17 The Energy Star Portfolio Manager is a widely used and provide good experiences and lessons on energy benchmarking tool in the United States. It is the subject. More details in Evans et al. 2010. available for free to users (http://www.energystar. Enforcing Building Energy Codes in China: gov/buildings/facility-owners-and-managers/ Progress and Comparative Lessons. Washington, existing-buildings/use-portfolio-manager). For DC: American Council for an Energy Efficient Economy. most commercial building types, Portfolio Manager generates an operational energy rating from “1” to 9 A case study of the Green Mark Scheme is “100” (100 is best) comparing the building’s energy included in Managan, K. et al. 2012. Driving performance to that of similar buildings nationwide. Transformation to Energy Efficient Buildings: 18 Dunksy Energy Consulting. 2009, November. A Policies and Actions (2nd edition). Milwaukee, Roadmap for the Northeast US: Valuing Buildings WI: Institute for Building Energy Efficiency, Energy Efficiency through Disclosure and Upgrade Johnson Controls Inc. Retrieved from: http:// Policies. References Dunsksy et al. 2009. Valuing Building Energy Institute for Market Transformation. 2011. A Efficiency through Disclosure and Upgrade Policies: Framework for Implementing U.S. Commercial A Roadmap for the Northeast U.S. Retrieved Energy Rating and Disclosure Policy. Retrieved from: from: http://www.neep.org/Assets/uploads/files/ http://www.buildingrating.org/sites/default/files/ public-policy/building-energy-rating/NEEP_BER_ documents/IMT-Building_Energy_Transparency_ Report_12.14.09.pdf Report.pdf ESMAP [Energy Sector Management Assistance Liu, Feng, Meyer, Anke and Hogan, John. 2010. Program]. 2011. “Good Practices in City Energy Mainstreaming Building Energy Efficiency Codes Efficiency: Tianjin, China—Enforcement of in Developing Countries (Working Paper # 204). Residential Building Energy Efficiency Codes.” Washington DC: World Bank. Washington, DC: Energy Sector Management Pacific Northwest National Laboratory. 2011. Assistance Program. Retrieved from: http://www. Advanced Energy Retrofit Guide: Office Buildings. esmap.org/node/1280 Retrieved from: http://www.pnnl.gov/main/ IEA [International Energy Agency]. 2012. World Energy publications/external/technical_reports/ Outlook 2012. Paris: OECD/IEA. PNNL-20761.pdf Endnotes 21 Acr o n ym s a n d A b b r e vi ati o n s £ British pound (currency) M&T Monitoring and targeting BEEC Building energy efficiency code MW Megawatt DSM Demand-side management PACE Property Assessed Clean Energy EE Energy efficiency UAH Ukrainian Hryvnia (currency) EPB&D Energy performance US / USA United States of America benchmarking and disclosure US$ United States dollar (currency) ESCO Energy service company VAT Value added tax LEED Leadership in Energy and Environmental Design 22 Improving Energy Efficiency in Buildings A C K NO W LED G E M ENTS The six guidance notes on making cities more energy efficient have been prepared by a multi-sectoral team led by Feng Liu and com- prising World Bank staff and external experts in energy, urban, transport, and financial sec- tors. The authorship of the guidance notes are as follows: 1 |  Driving Energy Efficiency Markets through Municipal Procurement, by Jas Singh 2 |  Financing Municipal Energy Efficiency Written by | Feng Liu Projects, by Dilip Limaye and William Energy Sector Management Assistance Program | The World Bank Derbyshire 3 |  Improving Energy Efficiency in Buildings, Photo Credits by Feng Liu Inside Cover: ©stock.xchng; Page 3: G. Pesantez / ©World Bank. 4 |  Toward Sustainable and Energy Efficient All other images ©iStock. Urban Transport, by Om Prakash Agarwal 5 |  City Energy Efficiency Assessments, by Production Credits Feng Liu and Stephen Hammer Production Editor | Heather Austin Typesetting | Circle Graphics, Inc. 6 |  Planning Energy Efficient and Livable Reproduction | Professional Graphics Printing, Co. Cities, by Serge Salat, Mansha Chen, and Feng Liu Copyright © August 2014 The guidance notes benefited from comments The International Bank for Reconstruction from peers and practitioners, including Judy And Development / THE WORLD BANK GROUP Baker, Ranjan Bose, Alexandra Le Courtois, 1818 H Street, NW | Washington DC 20433 | USA Matt Glasser, Mustafa Hussain, Ivan Jaques, Peter Johansen, Todd Johnson, Jeremy Levin, The text of this publication may be reproduced in whole or in part and in any form for educational or nonprofit uses, without special permission Onur Ozlu, Monali Ranade, Hiroaki Suzuki, provided acknowledgement of the source is made. Requests for Victor Vergara, Christopher Warner, and Yabei permission to reproduce portions for resale or commercial purposes Zhang of the World Bank Group, and Anthony should be sent to the ESMAP Manager at the address above. ESMAP Bigio of George Washington University, encourages dissemination of its work and normally gives permission promptly. The ESMAP Manager would appreciate receiving a copy of the Anatolia Kopets of the Energy Efficient Cities publication that uses this publication for its source sent in care of the Association of Ukraine, and Mohammed address above. Imtiaz of the City of Hyderabad. All images remain the sole property of their source and may not be used The team is grateful for the guidance provided for any purpose without written permission from the source. by Rohit Khanna, Program Manager of the Energy Sector Management Assistance Program. Editing and production management by Nicholas Keyes and Heather Austin of ESMAP are gratefully acknowledged. The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle- income countries to increase know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Denmark, Finland, France, Germany, Iceland, Lithuania, the Netherlands, Norway, Sweden, and the United Kingdom, as well as The World Bank. For more information about ESMAP’s Energy Efficient Cities program and activities, please visit us at www.esmap.org/Energy_Efficient_Cities or write to us at: Energy Sector Management Assistance Program The World Bank 1818 H Street, NW Washington, DC 20433 USA email: esmap@worldbank.org web: www.esmap.org