Zero Net Energy (ZNE) buildings are an emerging revenue growth mega-wave for the construction industry. The financing of ZNE investments through zero-down, fixed monthly payments should propel ZNE to the multi-billion dollar investment scale achieved by roof top residential solar. What will drive ZNE to this scale of growth is California’s ambitious building code revisions starting in 2014. These code revisions, called Title 24, have a goal of creating economies of scale for smarter, cleaner and healthier technologies that will make ZNE the cost solution to rising monthly utility bills.
California Title 24: The mass-market launch of ZNE buildings
California’s launch of a massive building code revision targets achieving sea-changing growth in energy efficiency investments. Beginning in 2014 Title 24 codes will be revised to move the building industry toward comprehensive building solutions with a goal of achieving Zero Net Energy (ZNE) residential and commercial buildings. In a ZNE building, the building’s annual energy consumption is equal to the building’s annual onsite renewable energy generation. California has set a goal for all new residential construction to be ZNE by 2020 and for all new commercial construction to be ZNE by 2030. Additionally, the repurposing and remodeling of existing buildings that are of a size-threshold defined by Title 24 will also have to comply with Title 24 revised codes.
Title 24 is a huge bet by California that smart, energy efficient and renewable energy technologies can be grown to economies of scale that will deliver price competitiveness. It is also an unprecedented path for sparking growth in a California construction industry still recovering from the Great Recession. If successful, Title 24 will open the door to increased amounts of energy efficiency financing, expanded sources of capital and lower financing costs. If successful, Title 24 will revolutionize the economics of smart building technologies that will reshape America’s homes and offices to be cleaner, smarter, healthier and less costly to operate.
Building energy efficiency’s conflicted financing challenge
Today, an increasing number of homeowners have a sour taste toward utility-sponsored energy efficiency programs. They invested in the utility’s proposed energy efficiency suggestions but too often failed to see a lower electric bill. The result is stalled market penetration in utility sponsored energy efficiency campaigns.
Commercial building investment in energy efficiency confronts two challenges. The first is CFOs blocking the financing of building energy efficiency investments because they are “non-strategic” to core business growth and/or because non-strategic investments are qualified based upon their ability to achieve two-year paybacks (a not unreasonable CFO viewpoint when 75 percent of all stock transactions are “day trades” and a company’s valuation is often based upon 90-day results).
The real estate industry’s tenant contracts create a second barrier to the financing of energy efficiency in commercial buildings. Triple-net leasing agreements place the cost of utility service on the tenant. So a landlord investing in energy efficiency does not see the financial benefit since the cost savings flow to the tenant through reduced utility bills.
California’s revised and new Title 24 codes will cut through most of these barriers to energy efficiency investments. CFO’s can no longer reject energy efficiency investment if they want to their building construction project to win a building permit. Title 24 creates a strong incentive for the real estate industry to resolve the financial conflict between landlords and tenants tied to energy efficiency investments. It will also accelerate the adoption of smart building technologies that will generate the type of big data analytics that is proven to enable energy project financings.
Information technology path to financing Zero Net Energy buildings
The challenge of financing any energy efficiency or renewable energy project is in providing assurances to the source of capital that the project will actually generate sufficient cost savings to cover financing costs plus repayment of invested capital. The number one challenge for winning energy efficiency investments is the uncertainty in documenting bill savings results. Too often, the cost savings generated by an investment in energy efficiency is lost in higher electric bills as new loads are added and utilities raise rates.
Information technologies that monitor, control and financially operate a building through links to real time prices of grid-supplied electricity are the foundation for enabling ZNE project financing. Smart ZNE buildings will operate to optimize the economics between reducing building demand, reducing energy consumption, on-site generation, use of on-site energy storage and purchases of grid electricity.
What will further enable the financing of ZNE buildings is the ability of enabling information technologies to “look forward” in time to proactively shape a building’s operation and grid purchases to financially support the building’s project financing. The technologies that can achieve these results have already been invented. What California is pursuing through its Title 24 code revisions is a massive economies of scale push for these technologies to drive their costs down and increase their ability to be financed.
The sales pie just got bigger…a lot bigger
Title 24 will blow the sales doors open for smart building technologies, energy efficiency technologies, onsite energy storage and renewable energy technologies. Title 24 will create a new competitive landscape for architects, general contractors, sub-contractors and vendors based upon their ability to offer price competitive services and products that comply with Title 24 codes. The construction industry’s sales path for energy efficiency projects will no longer be anchored by utility incentives that support targeted energy efficiency upgrades like re-lamping a building with more efficient lights. The new sales path will be based upon cost-effectively delivering code compliance to achieve financeable building performance. New competitive advantages will be won by contractors and architects that offer building performance assurances to building owners and financing sources.
The new Title 24 sales strategy: Empowered Energy Solutions
Title 24 will push California’s building industry into the Information Age. Information technologies that realize the economic potential of a building’s operation by arbitrating between load shifting, energy efficiency, self-generation, energy storage use and grid purchases will be the foundation for building designs. Architects and general contractors that have competitive advantages in smart building technologies will be in the position to bid jobs that include building performance assurances to building owners and sources of capital. The building industry is now entering a new bid environment where bids are won not only on price but also on performance assurances.
Ted Torre-Bueno is president of Empowered Energy Solutions. He is both a general contractor and a technologist. The following six-minute video interview profiles his strategy for winning bids based upon his smart building technologies that enable his ability to offer both competitive job costs and building performance assurances.
About the author
This article draws from Bill Roth’s coaching program for trade professionals entitled “How To Grow Sales From Title 24 Code Revisions” that was conducted on November 5, 2013 at the San Diego Gas & Electric Energy Innovation Center. Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017