Who Benefits from an Energy Renovation?

Last week the Vice President of the Energy Alliance Group, Curt Monhart, took a tour of a company operation that has a $75,000 monthly electric bill! The company’s sustainability manager wants an energy renovation so his company can improve their energy efficiency and lower the cost of utilities. The company is looking for immediate solutions!

During the tour Monhart began detailing the most immediate solutions that would provide substantial savings (outdated HVAC systems, overloaded compressed air system, lighting on 24/7). Even though solutions are readily available, a huge barrier needs to be overcome first – the barrier is known as the “split incentive.”

A simple explanation of the split incentive is this. If the building owner is responsible for paying energy expenses they have an incentive to install the latest energy efficient technology but the tenant has little incentive to conserve energy. It the tenant pays for energy their incentive is to lower energy used but the building owner has little incentive to upgrade the energy technology!

If an energy renovation doesn’t benefit both the building owner as well as the tenant – it’s easier to do nothing!

The company Monhart toured leases the building. Their lease is a triple net lease which means they are responsible for all expenses not related to the building structure. If they want to be more energy efficient, they will have to pay for all upgrades or buy out the lease and look for a more energy efficient property – both are costly propositions. If the landlord does not see any benefit in paying for the energy efficient equipment, the project is probably dead from the start.

What is needed is a solution where both parties benefit!

The Solution – Building Owner’s Energy Efficient Financing Paid for by the Tenants Energy Savings!

What if the building owner could finance an energy efficient upgrade without using any of their own cash and have the financing paid for out of the tenant’s energy savings with no reduction in rent payments?* A huge win for both parties! The owner would benefit from the FREE “green advantage” that research has clearly defined is a component of energy efficient buildings (increases property value, decreases vacancy rates, increases rental rates, minimizes tenant turnover, increased tenant comfort and productivity) while the tenant would benefit from reduced energy costs and a more comfortable environment. A true win-win solution!

That win-win solution is made possible by a program that is known as property assessed clean energy (PACE) and it provides the perfect opportunity to overcome the split incentive barrier.

“As the state’s energy agency, we’re setting an example by pursuing these energy improvements through innovative PACE financing,” Michigan Public Service Commission

One of the key ingredients of the PACE program is that the projects they fund must be cash flow positive. The Michigan Public Service Commission (MPSC) is using PACE to make one of the properties they rent an example of how energy efficiency can benefit both the building owner and the tenant. In the MPSC project when the benefits of the PACE program were explained to the building owner his response was “why in the world would I not want to do this?”

Monhart hopes to report the same response to the sustainability manager of the company he is consulting with!

The PACE program makes significant energy efficiency projects possible because of the many barriers that it overcomes. If you want to learn more about PACE click HERE.

The Energy Alliance Group is a leader in clean energy PACE project development and financing in Michigan

* A PACE project results in an increase or added “assessment” to the property taxes that pays for all project costs. That assessment, by statute, must be less than the monthly energy savings. The tenant in a triple net lease is responsible for the pro rata property tax payment. Since the energy savings per month has to be more than the monthly dollar value increase for the assessment, the result is a net cost reduction for the tenant with no cost increase to the building owner.