BPS is Good for Business
By James Ball, Vice President Business Development
Building performance standards (BPS) are the new policy tool of choice for state, county, district and city governments to bring about the next stage of improvements in the energy efficiency of our existing building stock. This is a critical next step in addressing the big energy users within our built environment, while improvements to building codes ensure that new additions to our building stock are held to a high level of energy efficiency. While I support the use of building performance standards as a new policy tool, we lack a unifying vision on how this policy will improve the industry’s ability to deliver the intended results; and without businesses able to properly (and profitably) implement the policy – it will inevitably fail.
Governments that are innovating building performance standards should model their approach on the lean startup business model. This model teaches us that while creating something new it is critical to collect a lot of feedback right away so that you can learn quickly and incorporate that feedback into your progress, continually and rapidly iterating until you achieve a successful outcome. I have seen this agility and community responsiveness in government, and it is exactly what our climate crisis and building performance standards need right now. With this model in mind I offering here a start to the conversation regarding how building performance standards will be good for business. While I will discuss both the opportunities and challenges around these standards, at the conclusion I remain resolute that if government and industry implement these standards hand in hand – Building performance standards will be good for business.
BPS for Service Providers
The most obvious BPS business opprotunity is for the energy efficiency and building technology companies that will provide services to building owners and property managers to comply with the standard. There is a robust industry that already supports this voluntary market and businesses that understand the economic benefits of lower energy costs that result from high performing buildings. We will discuss in the next section the business case for these property owners, but for now let’s all agree that the energy engineers, consultants, installers and measurement and verification professionals will have more work to do within a BPS policy environment. The International Energy Agency (IEA) estimates an energy efficiency focused recovery from the COVID pandemic could create over 7.7 million jobs and at a local level the Building Performance industry can position itself as regional, national and even international experts in this transition.
What remains to be seen with BPS is how value-based or commodity-based these services will become. At the beginning of a new market, services are often more highly valued while they are provided by fewer market leading companies. This was true of LEED and the green building movement that helped bring voluntary green certifications to the market. Mandated services often quickly drive down both costs and perceived value in large part because they are a lower risk market for any service provider to enter, and thus the lowest cost provider sets the market price. This lower cost business model is a dangerous one, as we have learnt over 40 years of building science that energy efficiency done wrong can cause serious heath, safety, and building durability, risks. At the end of the day BPS is a rising tide that will lift all boats; how high the boats gets lifted depends on each program’s structure and how well the market creates value for BPS services.
BPS for Property Owners
The BPS business case for property owners, despite a lot of industry debate and confusion, is actually quite simple. Reducing energy consumption reduces utility costs, provides access to additional (and often lower cost) capital, and improves asset value. I caveat this only to say this business model is not the only model for building owners to make money. There is great diversity in business models around real estate and, while many of them will remain in the BPS market, I believe the following economics will optimize profit for companies that own energy efficient buildings.
Calculation of total lifecycle cost is critical to understanding the beneficial economics of energy efficiency improvements. In both new construction development and existing building assets, investing in energy efficiency takes an upfront cost to provide predictable ongoing savings that create favorable rates of return. To state the obvious, those are the same economics of many investment strategies, and yet energy efficiency while financed with competitive rates and a solid rate of return is also a much lower risk compared to other investment classes. The professional industry that services this investment market has for 40 years developed a sophisticated set of predictive energy modelling tools, system-based building science, professional credentials, and third-party quality assurance programs to back these investments.
To address one common barrier often raised, if the building tenant (either an apartment resident or an office business) is paying the utility bills while the building owner is making the investment in efficiency improvements that lower those bills, this creates what is known as the ‘split incentive’. Solutions to this have already been created through green lease agreements and ‘all included’ rental agreements that allow owners to sell the value and recoup the cost of their investment. While this business case fits best with long-term holders, it will be interesting to see how mandatory public disclosure of building performance data will impact appraisals at the time of sale and start to increase asset value.
BPS for Tenants
To make the economics of energy efficiency work for building owners it cannot be assumed that rental costs for tenants will go down. As discussed above, for the economics of energy efficiency to work the investment needs to be recouped by the investor. The attraction of BPS for tenants is gaining a more comfortable and higher performing building at a comparable cost. Of course this proposition is different for offices, market rate housing and affordable housing tenants and we need to ensure that we address each of these markets with a sensitivity to their unique purposes. Economic and social disparities can be improved while we improve building performance if we do it correctly. This takes a human-centric approach to looking at buildings and an understanding of each tenant’s goals in order to effectively engage them in buildings performance improvements. With this type of inclusive approach, the benefits of higher performing buildings can lead to an improved quality of life for all tenants.
BPS for All
We all have something to gain from BPS as individuals, businesses, a community, and a region. We are competing on a global scale to attract investment, residents, and businesses to our communities. There is no question that implementing solutions to climate change through energy-efficient high-performing buildings is a global priority and competitive agenda for the coming decades. We have a lot to gain and little to lose from coming together to create a common vision and coordinated effort to achieve this shared goal that we can all benefit from. Let’s have the necessary conversations that show how all stakeholders will benefit from successfully implementing Building Performance Standards. As always, I welcome your feedback.