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Geared for Change: Energy Efficiency in Canada’s Commercial Building Sector – Section 3

     

• Technical potential refers to the level of efficiency that current and emerging technologies are capable of achieving. It does not focus on the costs or practical feasibility of installing the technology.
• Economic potential refers to the portion of the technical potential that could be achieved cost-effectively in the absence of market barriers. The achievement of the economic potential requires additional policies and measures to break down market barriers.
• Achievable potential considers the economic costs and incorporates other factors that influence participation and penetration of policies such as time delays in technology adoption related to available skills, political will, and perceived risk. The achievable potential is generally the method applicable to making most policy decisions.

The Rebound Effect should be considered in the determination of energy efficiency potential to avoid overestimating the impacts of a policy instrument on reducing energy consumption and carbon emissions. The term Rebound Effect is used to describe “the increased use of a more efficient product resulting from the implied decrease in the price of use.”[29] For example, if cost savings are incurred as a result of investing in higher efficiency technologies, other energy-using equipment may be purchased with the available cash that offsets the energy savings. Also, even if more efficient equipment is installed, the consumer may not operate it at optimal performance levels. Finally, if over time energy consumption decreases, the price of energy could drop and cost saving incentives would be lost.

3.2 Energy Efficiency Technology Adoption Barriers

The following section highlights six barriers to energy efficiency technology adoption found to be affecting wide-scale deployment of available technologies in the commercial building sector:

• Risk management;
• Information gaps and lack of awareness;
• The commercial building value chain and the “principal-agent relationship”;
• First-mover disadvantage;
• Market price signals; and,
• Institutional and regulatory barriers.

3.2.1 RISK MANAGEMENT

This section identifies technology adoption barriers for investment in energy efficiency in Canada’s commercial buildings. Addressing these investment barriers will maximize carbon emission reductions from energy efficiency in the sector and help to determine the most effective and appropriate public policy response to overcome them.

• Technical risk: Investment in new technologies can be perceived to have higher levels of risk because of the greater uncertainties associated with unproven performance.
• Financial risk: The overall cost-effectiveness of the technology is largely dependent upon first cost (relative to the incumbent) and the ease with which companies and individuals can adopt the technology. Investing time in learning new operating processes can be costly to firms, and discount rates are often higher for building projects that differ from the norm. Although general industry perception is that the construction of energy efficient buildings is more costly, Canada Green Building Council reviews of LEED®^g certified buildings show that the life-cycle cost of these buildings tend to be lower.
• Market risk: This refers to the ability and willingness of the market to adopt new technologies. Declines in the real estate market and the general economy can lower the value of investment and may deter potential investors fromt the real property sector.

3.2.2 INFORMATION GAPS

Three specific barriers related to information are present in the market for energy efficiency in commercial buildings. These include problems related to a lack of information, an uneven allocation of information between stakeholders, and highly complex information. Lack of Information: There is a lack of complete data and information regarding energy and electricity use within commercial buildings in Canada. No public mandatory energy use reporting mechanisms are in place and, as a result, much of the available data in Canada is held by utilities, energy service companies (ESCOs), industry associations, and building owners. This lack of available information about how and why decisions are made and what influences them means that it is an ongoing challenge for researchers and policy makers to draw meaningful conclusions about the motivations for incorporating energy efficiency at the firm level in the commercial sector. The problem associated with this data gap is threefold: first, policy makers and researchers have very weak and incomprehensive baseline data in order to evaluate policy impacts and track progress over time; second, building tenants, operators, and owners are often not aware of how much energy they are using and/or their energy consumption patterns, and so are not aware of opportunities for savings and are unmotivated to change behaviours; and third, market information is unavailable to firms seeking to develop products to improve energy efficiency. Statistics Canada and NRCan have worked to produce the Commercial and Institutional Building Energy Use Survey (CIBEUS), the most comprehensive survey pertaining to energy use in the sector. Although aggregate statistics collected in this survey are generally considered reliable and accurate, attempts to break them down in more detail sometimes result in statistics that are considered unacceptable for the purposes of cost-benefit analyses. Uneven Allocation of Information: There is a lack of awareness about the energy efficiency technologies and practices among commercial building stakeholder groups. This may be partially attributed to a wide discrepancy in available resources and education programs. Formal training varies among stakeholder groups and some may have specialized education in the environmental management of buildings, while others may have very limited understanding of the role of energy efficiency in commercial buildings and how it can be maximized. Complex Information: The technical nature of energy efficiency in commercial buildings necessitates an understanding of available equipment options, design practices for systems integration, and an awareness of how systems can be optimized. Although those involved in the design, construction, and operation of buildings typically have a better technical understanding of the systems than the individuals that occupy the buildings, there is still a general lack of understanding of how well buildings are performing (relative to optimum levels) and how to get them to perform better. This relates to the issue of technical risk noted earlier. The overlapping jurisdictional control over commercial buildings noted in the sector profile also contributes to the issue of complex information. Stakeholders agree that a barrier to investment is the policy uncertainty present in the market, and the difficulty in discerning which policies and resources are applicable/available. Identifying energy efficiency as a priority in the design phase of building construction can ultimately save costs and be more effective in terms of ensuring the best equipment selection. However, in order for integrated design processes to occur, communication between the project’s architects, engineers, building contractors and the trades must be open and continuous, which is not often the case. The traditional silos-based approach to building design and construction leads to different communication vehicles and channels for disseminating information.

3.2.3 The Commercial Building Value Chain and the Principal-Agent Relationship

The commercial building value chain is very complex, comprising a number of stakeholders whose interests are sometimes competing. This complexity results in a technology adoption gap often referred to as the “principal-agent” or “split incentives” problem. The problem is described as the level to which the incentives of the agent charged with purchasing the energy efficiency measures are aligned with those who benefit from it. This is a particular challenge in the commercial building sector since motivations for energy efficiency are different depending on which party is paying for energy consumption. In the construction phase of building development capital costs for equipment are of primary concern, whereas during the operating phase energy consumption costs take priority. From the perspective of the initial capital investor during building construction, the return on asset (ROA) equation is top of mind and time periods for expected return tend to be very short (1-3 years), especially if the building is to be sold in the short term. If the building owners expect their tenants to pay for their own energy consumption it is not in their interest to invest in high-efficiency technologies since they will not reap the savings. Instead, they are motivated to install technologies with the lowest capital costs, which may not be the most energy efficient options. Table 3 summarizes the key elements of the commercial building value chain and identifies the primary drivers and implications for energy efficiency. This uneven distribution of information leads to competing priorities and different ways of understanding the value of energy efficiency. Factors such as the focus on first costs, fragmentation in the supply chain and regulatory framework, the principal-agent relationship, and lack of feedback in the value chain will all have to be addressed by policy makers in order to increase energy efficiency in commercial buildings. TABLE 3: Existing Value Chain for Commercial Buildings [30]

3.2.4 First-mover Disadvantage

The higher first-cost hurdle for innovators and first movers is an impediment to effective market transformation. When firms choose to construct highly efficient buildings with innovative technologies and design practices, they

• Often face higher financing costs through heavy discounting (due to higher perceived levels of risk);
• Potentially place their intellectual property at risk (the costs of developing unique and proprietary solutions may not be protected from competitors if the information is placed in the public domain);
• Experience longer transaction time for dealing with longer permitting and administrative processes; and
• Experience costly delays through trial and error.

Innovators are unlikely to recoup these costs through the sale of their buildings since they are part of the learning curve and not necessarily worth a premium to potential customers. From a business perspective, it is often more advantageous to allow other firms to incur the first-mover costs and then follow in their trail based on best practices and lessons learned. As a result, the market transformation is slower, and fewer companies are willing to take a leadership role. It is notable that in institutional buildings including those in the education, government, and health and social sub-sectors, the first-mover disadvantage may not be as important a barrier due to the fact that knowledge can be shared based on the experiences of others, and tight resources may be stretched further since building owners and operators are not faced with first-mover costs. However, if low upfront costs are sought by managers of institutional buildings, the first-mover disadvantage may be as significant a barrier as in the private sector. A solution for overcoming this hurdle is to place emphasis on lifecycle accounting for technology selection.

3.2.5 Market Price Signals

High energy prices drive energy efficiency investment in commercial buildings. However, market price signals can have additional impacts on energy efficiency. Three main price signals in the Canadian energy market have an impact on buying decisions:

• Subsidized Energy Prices: Government subsidies to the oil and gas industry [31] can shield the real cost of energy production from commercial building energy consumers, resulting in a lack of incentive for them to invest in energy efficient options, or for utilities to invest in new energy infrastructure.
• Average Cost Billing: Billing practices based on the average costs of energy production rather than on real-time or marginal costs reduce incentives for behavioural change since, as a result, building owners and operators do not care about when they consume energy, even though it costs more to produce energy during peak periods.
• Environmental Externalities: Environmental and health cost impacts resulting from the production and use of energy in the economy are not incorporated into energy prices, resulting in artificially low energy prices.[32] For example, health costs to society resulting from the continued use of fossil fuels have been estimated in the billions of dollars.[33] Consumers incur artificially low energy costs, and are less inclined to invest in energy-saving technologies and practices.

3.2.6 Institutional and Regulatory Barriers

The industry cites a number of current policies as institutional and regulatory barriers to investment in energy efficiency. Policies with short-term objectives can become outdated over time; for example, those promoting specific technologies can discourage overall innovation and may force consumers away from purchasing the most efficient alternative. Stakeholders have pointed to inadequate building code standards, slow bureaucratic permitting processes, and complex governing jurisdiction as key barriers to energy efficiency. It is important to note that even effective policy instruments require continuous monitoring and evaluation in order to improve over time. Building codes and equipment standards are considered effective policy instruments for driving improvements in energy efficiency;34 however, stakeholders often point to the lengthy process for updating these codes and standards as barriers to market transformation. As in the case with permitting processes, building codes that do not recognize innovative technologies and alternative system designs can make approvals more cumbersome for builders who are trying to achieve high energy efficiency performance.

3.3 Summary of Investment Barriers

From an investment perspective, the single-largest barrier to broader and deeper investments in this sector is market uncertainty. Investors are reluctant to engage in any sector that is perceived to be unstable or inequitable in terms of providing acceptable return on investment (ROI). Stakeholders have identified three main pre-conditions for investment:

• Pricing Certainty: Long-term capital investments (either for new energy efficient buildings or emerging sustainable technologies) are based on having a reliable and quantifiable pricing environment in order to make informed decisions.
• Policy Certainty: Changes and/or inconsistencies in policy design and execution often drive away capital investments due to the higher levels of risk exposure.
• Policy Fairness: Companies require a “level playing field” in order to maintain their competitiveness. They are less concerned with the policies themselves, and more concerned with having the policies applied equally and fairly throughout the market.

Table 4 sets out the main categories and types of energy efficiency technology adoption barriers identified by SDTC and the NRTEE. It includes the barriers outlined in Section 3.3, as well as several others that were identified through stakeholder consultation and research. TABLE 4: Summary of Energy Efficiency Technology Adoption Barriers in the Commercial Building Sector

CATEGORY	BARRIERS TO TECHNOLOGY ADOPTION
Risk Management	Market, technical, and financial risk Level of positive external/personal recognition for “doing the right thing” by installing the efficiency measure(s) Level of perceived risk that the efficient product may not perform as promised
Information Gaps	Lack of complete data and information Lack of public understanding of infrastructure needs and resource constraints, i.e. the functionality, cost, drivers and challenges are unknown to the public Skills and labour shortage in the construction industry Lack of training resources (time, available education, funding) for building operators, inspectors, and trades Lack of interdisciplinary programs to promote integrated design processes between universities and colleges Low awareness of available products and services Availability of installation and inspection services Low awareness of benefits: cost and co-benefit Required technical ability to assess the options Consumer preferences that do not value energy efficiency Existence of a viable infrastructure of trade allies
Value Chain and Principal-agent Relationship	Level to which the incentives of the agent charged with purchasing the efficiency measures align with those of the person(s) that would benefit
First-mover Disadvantage	Lack of enabling tools and techniques to facilitate market adoption of sustainable energy solutions Need to foster acceleration of advanced technologies Lack of performance monitoring of technology systems Access to appropriate financing Size of required energy efficiency investment vs. asset base Payback ratio – actual vs. required Level of effort/hassle required to become informed, select products, choose contractor(s), and install
Market Price Signals	Energy pricing at levels that do not integrate externalities associated with the whole lifecycle (full-cost accounting) Energy pricing signals that do not reflect real-time costs
Institutional and Regulatory	Codes, standards, and permitting processes that prohibit implementation of innovative energy efficiency technologies Constitutional jurisdiction for buildings includes all levels of government and results in different standards across the country Lack of long-term policy development due to short-term political agendas Limited horizontal cooperation/coordination to integrate policies and implementation Disconnect between longevity of infrastructure and short-term horizons on crucial decisions, such as budget allocations for maintenance and rehabilitation and rate structures Insurance industry acceptable practice, standards or levels of infrastructure service may lead to liability perceptions for professional designers, municipalities, developers

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