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Energy and the Empire State

The King Kong of buildings makes efficiency pay, but how much energy renovation should come from regulators?

Anthony Malkin, the owner of the Empire State Building, is an environmentalist — but he's also a capitalist. If he's going to spend $20 million on an energy retrofit of his famous skyscraper, he wants a guaranteed three-year payback and long-term savings.

"There was no assurance that what we were going to do was going to be successful," Malkin recalled this month, a year after he launched the project with a green light show at the historic landmark, the 10th tallest building in the world. "We knew that if we could do this work at the Empire State Building, one of the largest tourist attractions in the world, the world was going to stand up and take notice."

So, Malkin and a team of experts from the Clinton Climate Initiative, a program of the New York-based William J. Clinton Foundation; Rocky Mountain Institute, a Boulder, Colo., "think-and-do tank"; Jones Lang LaSalle, a global real estate investment firm with headquarters in Chicago, and Johnson Controls Inc., a Milwaukee-based firm that serves the global building efficiency market, spent nine months quietly examining 67 ways to reduce energy use at the pre-World War II office tower.

When Malkin realized he could get an ironclad guarantee for a 38 percent reduction in energy use by 2013, together with an annual $4.4 million in savings, he went public with his plans.

The "deep energy retrofit" at the 102-story Empire State will refurbish 6,500 windows; install sensors, automatic dimmers and high-efficiency light bulbs; put reflective barriers behind radiators; renovate the heating and cooling systems; provide electrical meters for tenants' offices and work with tenants to make sure that they maximize the use of natural light. Far from being an outmoded liability, the skyscraper's windows are "a key to efficiency," Malkin said. With sensors, the office lights will automatically switch off when enough sunlight enters a room.

Many studies show that energy retrofits in commercial buildings deliver good bang for the buck: They reduce more greenhouse gases for less money than it would take to electrify the transportation fleet or upgrade industrial operations. And as Malkin has discovered, ambitious retrofits can have a financial payback for owners.

But progress in the efficiency field overall has been hampered by the up-front capital cost of renovations and the complexities of landlord-tenant relationships over who should pay.

Last year marked the end of the first decade of the Energy Star for building efficiency, a voluntary rating program administered by the U.S Environmental Protection Agency. To date, the EPA has qualified 9,700 commercial, or non-residential, buildings for the Energy Star label, out of 5 million commercial buildings nationwide.

Last year alone, a record 3,900 such buildings received the Energy Star label. At that rate, it would still take more than 1,000 years for the U.S. to upgrade its commercial building stock.

A 2009 report on building efficiency in the U.S., European Union, Japan, China, India and Brazil, a project of the World Business Council for Sustainable Development, a global CEO-led association of more than 200 companies, bluntly called the status quo "sleepwalking into crises."

"Building professionals, owners and users do not grasp the urgency and remain unmotivated to act," the report said. "Business-as-usual inertia is a drag on progress. ... The sleepwalking path achieves occasional advances, but these are soon lost and total energy consumption is much higher by 2050. The number of low-energy buildings grows erratically and slowly. ..."

"The building sector must radically cut energy consumption — starting now — if countries are to achieve energy security and manage climate change."

With Malkin, that's preaching to the choir.

"If we don't cut the energy consumption in cities, we cannot sustain life as we know it on Earth," he said.

Disclosing energy scores
Worldwide, commercial and residential buildings account for 40 percent of global energy consumption and resulting carbon footprint, according to the World Business Council. That's more greenhouse gas from buildings than from cars, trucks, trains and planes combined. In cities, where more than half the world lives, buildings account for up to 80 percent of the carbon footprint, and in that category, and office buildings emit more greenhouse gas than any other commercial structure.

"Everybody recognizes that over 70 to 80 percent of the buildings that exist today will exist in 2050," said Caroline Fluhrer, a consulting engineer who works for the Rocky Mountain Institute and conducted a "lifecycle cost analysis" for the Empire State. That's the deadline set by the Intergovernmental Panel on Climate Change for an 80 percent reduction in greenhouse gas emissions to head off the most severe impacts of global warming.

The institute recently launched pilot projects in three Ford car dealerships in the U.S. to see how the company might cut energy costs at 3,500 dealerships.

"We can't just focus on new buildings," Fluhrer said. "We need to retrofit our existing stock. It's a huge opportunity."

The market alone cannot produce an energy transformation in buildings, efficiency advocates say. Existing law provides a tax credit of $1.80 per square foot for building retrofits, but the U.S. Green Building Council, a Washington, D.C.-based nonprofit organization, and a leader in the industry, is part of a coalition lobbying Congress this month to increase the credit to $3 per square foot.

In March, Sens. Jeff Merkley (D-Ore.) and Mark Pryor (D-Ark.) introduced "Building Star" legislation with a big "carrot" for investment in energy efficiency renovations for commercial and multifamily apartment buildings. It included $6 billion in federal tax credits, grants and low-interest loans, and is supported by a coalition of manufacturers, contractors, unions, financial services companies, and building owners and managers.

Meanwhile, the cities of Austin, New York, Seattle and Washington, D.C., and the states of California and Washington are giving the market a push. On a phased-in basis, they are requiring the owners of large commercial buildings to obtain an EPA score for energy efficiency and disclose it to prospective buyers, renters or lenders. In some cases, the score must be made available to the public at large. In the European Union, energy efficiency labeling is required for all buildings, including homes.

The Institute for Market Transformation, an environmental nonprofit group, helped write the Washington, D.C., disclosure rules that went into effect Jan. 1. Andrew Burr, the group's program manager, likened them to the disclosure of miles per gallon in cars and calories per unit in food.

"This is a good starting point," he said. "It's a matter of governments helping the market work better so the government doesn't need to intervene with a heavy hand. The key is getting building owners to think about energy efficiency. If people aren't in that mindset, they say it's just another burden on them."

The disclosure rules don't require building owners to make any repairs to qualify for Energy Star status. But proponents hope the competition will nudge them in that direction. The EPA estimates that Energy Star buildings save 50 cents per square foot compared to average energy costs.

"These rules do make a difference," said Jason Hartke, a vice president of the Green Building Council. "Understanding your energy use has shown to improve energy efficiency as much as 15 percent. Getting this information out is powerful."

Opponents of disclosure rules include the Building Owners and Managers Association International, a Washington, D.C. trade group that encourages its members to obtain a rating from the EPA but wants the program to remain voluntary.

Karen Penafiel, the association's vice president of advocacy, said the group's careful position, while it may seem "a bit confusing," reflects a membership divided between the owners of new and old buildings. She said the association has worked closely with the EPA in the Energy Star program for years and aggressively promoted it with members.

"We feel like we're finally getting the message out that this makes sense, not just from the tree-hugger mentality, but also making the financial case," Penafiel said.

The association opposes provisions that would promote mandatory building energy performance labeling, such as those contained in the American Clean Energy and Security Act, which was narrowly approved by the House and is awaiting a vote by the Senate. The bill would provide federal funding to states that require energy labeling for buildings. A Senate bill containing similar provisions also is pending.

Penafiel said the association supports the creation of a national model for voluntary disclosure of energy efficiency scores to prospective buyers and tenants. A national model would be an improvement over dozens of different rules in cities and states, Penafiel said.

"We honestly believe more and more jurisdictions are going to move in that direction," she said. "It might be six today, but it could be 60 next year."

New York City recently made energy audits mandatory for large privately owned buildings. But the mayor withdrew a proposal for mandatory upgrades after property owners complained.

'First step to green'

The Energy Star goes to buildings in the top 25 percent for energy efficiency, compared to the national average, based on a review by an independent, third-party, licensed engineer. The average building has an energy score of 50, and an Energy Star building has a score of at least 75. The Empire State retrofit is expected to produce a score of 90: New buildings or retrofits may apply for certification after they have operated for a year.

Malkin doesn't own the only energy-conscious office tower in the country. The Chrysler Building in New York, Wrigley Building in Chicago, Phoenix Tower in Houston, Prudential Tower in Boston and Transamerica Pyramid in San Francisco, to name a few, are Energy Star-certified.

On the agency's list of top 25 cities for buildings that earned the Energy Star in 2009, Los Angeles placed first with 293; Washington D.C. was in second place with 204; New York was in 10th place with 90, and Louisville was No. 25 with 35.

"The effort to be environmentally sustainable is an important movement in the commercial building arena right now," said Maura Beard, an EPA spokeswoman. "These are real buildings operating and saving energy."

In a reference to the blue Energy Star logo, she added, "The first step to green is blue."

Industry analysts predict that 10 years from now, buildings all over the county will be rated for energy efficiency. In the meantime, they say, an owner's motivation for retrofits has more to do with vacancy rates than electrical bills.

"The incentive for an individual building owner is not to save money on energy," said Levin Nock, the author of a 2009 report on energy efficiency retrofits in commercial and government buildings for Pike Research, a Boulder-based consulting firm.

"That's a small, boring incentive, not a big exciting incentive," Nock said. "The incentives are from other things - low vacancy for someone who's renting space, or higher productivity for an owner-occupier, or higher sales. I think at some point it will be mandatory. As a national policy, it will become more important. The excuses for not doing it will become fewer and fewer."

Meanwhile, Malkin is out to prove by example that energy retrofits are a "commercially intelligent investment." He hopes the Empire State model will be replicated, and he's placed his team's findings online so that others don't have to reinvent the wheel.

"The heck with making people 'do the right thing,'" Malkin said. "I would rather get them to do what makes economic sense. Everything here is about dollars. I'm improving my competitive position. I'm improving my ability to attract tenants and make more money.

"On the other hand, I'm also trying to change the world. We're creating jobs. And we will reduce the amount of money that is sent overseas for energy. That's a good security policy and economic policy."

The Empire State retrofit, part of a much larger overall restoration, is slated for completion in 2013. Half the savings in energy cost is slated to kick in at the end of this year when the building systems work is finished. Already, Malkin said, he's attracting larger tenants with better credit, firms with their own mandates for sustainability.

"The point is, we're taking things in a whole new direction from where they have been," Malkin said. "This is not theory. This isn't a neat slide show on the basis of what could be done. It's happening right now."