A New Energy Yardstick

Jan. 1, 2007

In looking for a new topic for this column, I did a search on Buildings.com for articles published by Buildings magazine using the phrase "energy management." I was pleasantly surprised to find that no less than 162 articles were listed over the past 2 years covering energy matters. So, congratulations to the editors for giving this topic so much ink (as they say in the trade). You cannot say you have not been informed about energy management. Nevertheless, with a deadline looming, I had to select some development that would be timely and useful to kick off the new year. As is often the case, my clue came from the federal government. Federal actions that come with good intentions also usually come with unintended consequences. Such is the case with the Energy Policy Act of 2005 (EPAct 2005). Among their many laudable goals, lawmakers attempted to induce more efficient use of energy by offering tax incentives for energy retrofits in commercial and industrial buildings. Unfortunately, nowhere in any of the articles I surveyed did I find any mention of productivity impacts; yet the avalanche of global competition being faced by American business requires that CEOs continually find ways of increasing the ratio of output to input. There is the rub.

To review briefly, the Internal Revenue Service (IRS) released its advance Notice 2006-52 "Deduction for Energy-Efficient Commercial Buildings" in June 2006. The notice provided information about tax deductions available for owners or lessees of commercial buildings, excluding non-profit government buildings, that install energy-efficient property between Dec. 31, 2005, and Jan. 1, 2008. The IRS notice, which is required by EPAct 2005, offers tax deductions of up to $1.80 per square foot for taxpayers who own or lease buildings that achieve 50-percent energy savings or better. Building upgrades obtaining less than 50-percent (but at least 162/3-percent) energy savings qualify for deductions of up to 60 cents per square foot.

Building property that qualifies for the energy-efficient tax deduction includes the building envelope, interior lighting systems, and HVAC and hot-water systems. Taxpayers who qualify for the deduction are required to submit certification of the energy savings achieved in their buildings. Certification is required by independent professionals who have met qualifications specified in IRS Notice 2006-52 and who use U.S. Department of Energy-approved energy-efficiency calculation software. A qualified individual is:

Not related (does not have an employer/employee relationship) to the taxpayer claiming the deduction.

An engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located.

Has represented, in writing, to the taxpayer that he or she has the requisite qualifications to provide the certification required or/and to perform the inspection required.

So far, this sounds like incentive enough to get busy until you read the 24 pages of legalese that make up the IRS regulations. I wonder how many building owners have actually read the regulations, hired a tax lawyer to explain them, spent the necessary money to re-engineer their systems, did a cost-benefit analysis to see if the retrofits cost more than they are worth, hired a contractor to implement them as instructed, and then hired the qualified professional needed to verify their claims. If you have not, perhaps you should consider the following discussion of potential unintended consequences.

Energy use in a building is commonly measured in terms of watts per square foot for electricity and British Thermal Units (BTU) per square foot for energy in general, as some of you know. A controversial element of energy management has been determining a measurement that reflects energy efficiency in terms of improvements over some benchmark. Standards set by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) have commonly been adopted by government agencies to establish benchmarks and measures of improvement. To earn a tax deduction, the IRS requires in Notice 2006-52 Section 2.02(1)(c) that: "It is certified that the interior lighting systems; heating, cooling, ventilation, and hot-water systems; and building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building's heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of (ASHRAE) Standard 90.1-2001."

Fortunately, the folks sponsoring the Silver Spring, MD-based National Lighting Bureau (NLB) - manufacturers, utilities, and associations - have thoroughly analyzed the implications of EPAct 2005 and issued a comprehensive discussion of its potential for unintended consequences. The following is abridged by permission from the NLB publication, The Energy Policy Act of 2005 - New Tax Incentives Make High-Benefit Lighting Less Expensive Than Ever Before. This document gets right to the point by warning: "Be careful! While improved energy efficiency is something we all want, high-efficiency lighting has to be ‘High-Benefit Lighting' in order to be genuinely cost- and energy-effective. How do you achieve ‘High-Benefit Lighting'? It's actually pretty simple: All you have to do is rely on experienced designers who know how to design a lighting system that delivers quality without waste. That's lighting that creates an illuminated environment designed specifically for the workers and tasks involved, so they can perform their visual tasks faster, with fewer errors. Lighting that creates visual comfort free of glare. Lighting that enhances the [productivity] of a space and everything - and everyone - in it. Lighting that uses the high-tech equipment and controls available to deliver the absolute maximum ‘bang for the buck,' which is exactly what ‘High-Benefit Lighting' is all about." The point here is that lighting is not installed merely to consume energy, but to enable human occupants in buildings to perform some useful work most productively. Otherwise, candles would do nicely, thank you very much.

Since the same kind of thinking applies to all energy-using equipment in a building, how about considering a new measure for energy management (i.e. "high productivity"). After all, whatever its source or form, energy is used for some productive purpose. Shouldn't the efficiency of that purpose be of prime concern in selecting and controlling the equipment that translates human energy into productivity? As such, watts per square foot and BTU per square foot may not tell the whole story because they only relate to a static building whether it is occupied or not. Maybe a new energy yardstick is needed. I don't know what that measure should be yet, but it seems that we cannot afford to fall into a trap of saving a few tax dollars if, in the process, we may kill the economic generator that makes this country so dynamic.

The NLB observes, "Many people believe that the less energy their lighting system uses, the better. But, that may not be the case." Obviously, you can turn the lights off and save a lot of energy, and tax incentives may prompt some energy retrofits of fabulous new technology. But, what would the changes do for human productivity? If you don't know, maybe it is time for a new energy yardstick. (Visit www.nlb.org for more on "High-Benefit Lighting.") For a comprehensive review of lighting technology, you may download free reports from the California Public Interest Energy Research Program at www.energy.ca.gov/pier/final_project_reports/CEC-500-2005-141.html.

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