Institutional Inefficiency

Guidelines for overcoming the market failure
that is now causing widespread energy waste

One of the articles in Designing A Sustainable Future (IC#35)
Originally published in Spring 1993 on page 16
Copyright (c)1993, 1996 by Context Institute

This article condenses highlights from a 66-page report prepared in 1992 by E SOURCE, a membership-based, energy-efficiency information service; 1050 Walnut St., Boulder, CO 80302. Non-members can order the complete report for $250.

Amory Lovins, E SOURCE’s principal technical consultant, is cofounder and director of research for Rocky Mountain Institute and an internationally recognized energy efficiency expert.

Buildings rarely are built to use energy efficiently, despite the sizeable costs that inefficient designs impose on building owners, occupants, and the utility companies that serve them.

The reasons for this massive market failure lie within the institutional framework that shapes how buildings are and have been financed, designed, constructed, commissioned, operated, maintained, leased, and occupied. Nearly all of the roughly two dozen actors who play a role in this process have perverse incentives that reward inefficient practice and penalize efficient practice. As a result, our buildings cost more to build and operate, are less comfortable, and use far more energy than they should. In the US alone, and considering only space cooling and air handling, the unnecessary expenditures made over the past several decades on space conditioning equipment and the electricity supply infrastructure to run it total many hundreds of billions of dollars.

The forces that created this dysfunction are legion, their effects enormous:

  • Developers – typically desiring fast, cheap buildings that favor appearance over long-term value – rarely take energy efficiency into account. Their profits usually are based on the immediate resale value of their buildings – not on the building’s actual long-term financial performance. Yet developers control the design choices that largely determine that performance.

  • Lenders and their advisors perpetuate the use of old, inefficient, but familiar technologies because they have neither the time nor the inclination to study innovative designs. They are generally rewarded for closing deals as quickly as possible, with as little controversy as possible.

  • Commercial appraisers tend to know even less about energy systems, thereby reinforcing developers’ and lenders’ short-term priorities. The competitive value of energy-efficient commercial buildings is seldom reflected in their appraised market value or in their perceptions of risk/reward ratios, nor is it part of any current due-diligence process in commercial lending.

  • Designers, architects, and engineers all too frequently work in isolation; rarely does anyone involved in a project take the responsibility for the entire interactive system. A building’s location, footprint, height, orientation, and relationship to existing shading often are specified before the building architect is even hired.

    Mechanical engineers – the people who design heating, ventilating, and air-conditioning (HVAC) systems – usually are the last to be consulted. Specific design elements are drawn up independently from other design considerations, killing the opportunities to save labor and material costs that a coordinated design effort can offer.

  • Mechanical and electrical equipment often is grossly oversized. Engineers, fearful of losing their jobs or being sued for underestimating a building’s particular needs, are likely to "round up" when in doubt. Oversizing HVAC and other systems by up to tenfold is not unheard of. Equipment oversizing is further encouraged when busy designers delegate such decisions to manufacturers – a clear conflict of interest.

  • The best designs often require an investment of time for learning new methods or seeking out whole-system solutions. Only truly integrated design can yield projects that are both ecologically and economically green. Yet tightly scheduled, "just-in-time" designs assume that design is a linear science rather than a systemic art, precluding whole-system solutions and reducing the psychological freedom to innovate.

  • To make matters worse, prevailing fee structures and bidding systems reward obsolete rules-of-thumb and pre-packaged designs. This "catalog engineering" is at the root of today’s appallingly low mechanical-system efficiencies. Further, these fee structures, instead of being based on the engineer’s qualifications, work record, effort or success, often are tied to a project’s cost. Project oversizing and complexity, not efficiency, are rewarded by this percentage-of-cost fee structure. Creators of innovative, less costly, and more efficient designs are penalized.

  • Contractors, operating on a fixed budget, are rewarded for cutting corners, not for adding value. Today’s accelerated design and construction schedules discourage the use of unfamiliar though more efficient technologies. Expedience often leads to a divergence from blueprints, including the substitution of sub-optimal equipment, resulting in poor building performance.

  • Once a building is completed, poor operation and maintenance often render efficiency measures useless.

  • Prevailing leasing practices marginalize efficiency. Tenants and building operators, particular those paying flat energy bills, rarely are rewarded for energy savings. Landlords have no incentive to install upgrades that will benefit their tenants but not themselves. Some landlords mark up tenant utility bills, creating an incentive to oppose efficiency. And leasing agents don’t use a building’s energy efficiency as a selling point. To the contrary, higher rents fueled by higher energy bills can mean higher commissions.

Fixing these problems is possible, practical, and rewarding. Improvements that could pay for themselves within a few years could save upward of half of the energy used to cool and ventilate buildings in countries like the US, a nation whose buildings use one-third of all energy produced and two-thirds of the electricity generated here. The US air-conditioning savings alone could displace 200 giant power plants (two-fifths of the nation’s total generating capacity).

Doing all this requires a combination of education, incentives, and organization, based on an understanding of each of the actors and how they interact. What is really needed is no less than reinventing the building design process, and with it, many current real-estate practices. Here are some suggestions for how this might be done:

  • Restructure design professionals’ fees so that they are rewarded for efficient results. One promising approach involves rebates from utilities directly to the design team, as Ontario Hydro has already done. These can double normal design fees and still be very cost-effective for the utility. Another promising approach is "value-based compensation" in which the design fee is split into a basic part and an incentive term that rewards the designer for cutting energy cost or total life-cycle cost.

  • Re-integrate the now dis-integrated design process. Only a fully coordinated, multidisciplinary design team – with one person designated as the "energy conscience" – seems capable of producing exemplary results.

  • Stage a frontal attack on the use of design rules-of-thumb and return to classical concepts of engineering optimization. Ensure that design and construction professionals have access to cutting-edge technologies.

  • Educate developers about the effect of energy costs on project economics, including effects on capital costs. Show developers how lower energy costs can lower rents, giving them a competitive edge in real-estate markets, and how advanced energy retrofits can restore distressed properties to financial health.

  • Increase energy efficiency education at universities and through professional associations. Through industry groups and government agencies, systematically plan and manage the flow of technology from basic R&D through commercialization and into the marketplace.

  • Encourage utility design professionals to consult with developers before a project is built – not after – to enhance design integration. Increase utility involvement in marketing efficient buildings and encourage the use of "feebates," in which property owners either pay a fee or receive a rebate depending on a building’s energy efficiency.

  • Improve building maintenance and operation. Enhance preventative maintenance. Increase spending on operator training.

  • Reform leasing practices to promote, not discourage, the wise use of energy. Enable tenant and owner to benefit from energy efficiency. Replace master meters with per-occupant meters for multiple tenancies. Provide complete information on energy costs to tenants, landlords, and brokers.

These and related measures can do much to overcome institutional problems and fragmentation. They can go far toward unleashing the latent creativity of many design professionals and rewarding them for money- and energy-saving choices. The rewards for all of us will be a substantially more efficient and sustainable society.

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