July 10, 2021

Devil is in the Details: Electrification Considerations for Decarbonization of Commercial Buildings

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The growing trend to reduce carbon dioxide emissions (referred to as decarbonization) often driven by corporate policy or greenhouse gas emission legislation is accelerating in the commercial real estate industry. In response, owners of existing buildings are exploring ways to reduce reliance on fossil fuels, including converting to renewable energy or totally electrifying their property. Electrification is increasingly being considered as an option for existing building owners to assess. Unfortunately, all too often the unintended consequences associated with electrification are not well understood.

Driving Force

The building electrification process involves replacing existing technologies that use fossil fuels such as space heating systems with new technologies such as heat pumps that use electricity as both their heating and cooling energy source. The goal of these conversions is that electricity generated by renewable energy such as wind and solar will achieve decarbonization and help mitigate the impacts of global climate change. As such, policymakers are seeking to decarbonize various sectors of the economy by passing legislation. Since the commercial real estate industry is a significant source of greenhouse gas (GHG) emissions¹, the sector is beginning to receive considerable policymaker attention. As a result, more and more owners of buildings using fossil fuels are being driven by legislation or policy mandates to electrification.

More than five years ago, several major U.S. cities, including Seattle, Portland, San Francisco, Boulder, Minneapolis, the District of Columbia, and New York City joined the Carbon Neutral Cities Alliance (CNCA). The goal of the CNCA is to cut greenhouse gas emissions by 80% or more by 2050 or sooner. For its part, New York City in 2019 passed the Climate Mobilization Act of which Local Law 97 was its cornerstone. Local Law 97 requires buildings larger than 25,000 square feet to meet strict greenhouse gas emission limits starting in 2024. Buildings that do not comply will face fines set at $268 per metric ton of carbon dioxide equivalent (CO₂e) emissions in excess of the individual building’s yearly cap.

Several states have their own CO₂e emissions reduction targets, with California at the forefront of the action. California’s Energy Efficiency Strategic Plan calls for retrofitting 50% of the existing commercial building stock to net-zero energy by 2030. Thirty-one other states have plans to address climate change and are considering binding restrictions on CO₂e emissions. Reducing CO₂e emissions from buildings is a key strategy for cities and states to meet ambitious climate change goals and carbon neutrality by 2050.

CO₂e legislation is a major driving force behind the move by building owners to decarbonization by electrification. For buildings not relying on renewable energy such as solar to generate electricity on-site, electrification will transfer CO₂e emissions to the utility power plant generating the electricity. While most utility power plants today rely on fossil fuels, this is changing as plants are increasingly converting to greater reliance on renewable energy driven principally by existing Renewable Portfolio Standards.

There are four key considerations for electrifying an existing building using fossil fuels on-site:

• Building considerations
• Energy cost
• Replacement equipment energy efficiency and savings
• Replacement equipment installed cost.

Building Considerations

In addition to geographic location, there are several factors in building design and operation that will need to be evaluated in an electrification project. These include:

• Identification of existing equipment relying on fossil fuels – this may include gas-fired or oil-fired boilers or furnaces, water heaters, packaged air conditioning equipment equipped with gas burners, cooking appliances, and backup (stand-by) generators. If fossil fuel use at the building is to be eliminated, all equipment relying on fossil fuels will need to be evaluated in any electrification project.
• Age of the building and existing mechanical equipment – this will include an assessment of the remaining useful life of fossil-fuel powered equipment. Buildings with equipment that is near, at or beyond its useful life would be timely and ideal candidates for electrification, as are buildings undergoing substantial renovation.
• Building energy performance – Prior to considering an electrification project, baseline building energy performance should be evaluated. Preferably this evaluation will be part of an overall building energy efficiency improvement project. Energy efficiency improvement should be a prerequisite for electrification.
• Electrical capacity – The building’s electrical infrastructure should be evaluated to determine the available capacity to convert systems from fossil fuel to all-electric sources; at a minimum, modifications to existing electrical panels may be required.
• Physical space availability – The space available for electrification modifications, particularly on crowded roof-tops and interior mechanical rooms, should be included in any evaluation, along with the implications of delivering replacement equipment to a particular location within the building.

Energy Cost

As they are essential in any project economic analysis, the building’s rate schedule for electricity and natural gas (or the cost of oil) should be considered. Also, the building’s new electrical demand resulting from electrification may grow substantially. As such, the maximum capacity of the existing service agreement with the utility may require revision. Moreover, post-conversion the existing electric service rate may no longer be the best choice, and it may be appropriate to select a different utility rate schedule.

In a building currently using natural gas in a boiler providing space heating, for example, a conversion to a heat pump for electric heating may have a considerable impact on electric demand charges during the heating season. Such a conversion will result in:

Cost Savings

• Elimination of natural gas use.
• Elimination of any natural gas demand charges since there will no longer be any peak gas use.

Cost Increases

• Electricity demand (kW) charges will increase during the winter months when heating by electricity (rather than gas). However, offsetting this increase are potential electricity (kWh) cost savings that flow from replacement with new high efficiency equipment.

Replacement Equipment Energy Efficiency and Savings

Comparison of alternative system scenarios that substitute electricity for fossil fuels would typically be a key component of any building electrification analysis undertaken.

Common replacements for gas-fired or oil-fired boilers or furnaces, or packaged air conditioning units with gas burners used for space heating might include:

• High efficiency conventional heat pumps (packaged, split, ductless).
• High efficiency variable refrigerant (VRF) flow heat pumps (with heat recovery).
• High efficiency water source heat pumps relying on a water loop.

Common replacements for gas-fired hot water heaters might include:

• Electric water heaters with storage.
• Tankless (instantaneous) water heaters.
• Heat pump water heaters.

It should be noted that penalties imposed by cities (such as New York’s Local Law 97) for CO₂e emissions exceeding allowable levels can be avoided by electrification. As such, these fines for non-compliance can effectively be viewed as another “cost savings” in the electrification project financial impact analysis.

Replacement Equipment Installed Cost

Both the energy efficiency of alternative equipment replacement scenarios and the installed cost will be key considerations. Owners will typically view the installed cost as the capital cost and the savings captured by energy efficiency improvements as an operating cost savings. Any savings in maintenance cost will also be considered an operating cost savings. Since there typically is a cost premium for high efficiency equipment, both the capital cost and the lifetime operating costs need to be considered. The best way to do this is with a uniform annual cost comparison.

For example, the installed cost of an air source heat pump with variable air volume (VAV) may be considerably less than a VRF heat pump with heat recovery (simultaneous heating and cooling); however, the VRF system will be considerably more energy efficient. A uniform annual cost comparison (taking both capital cost and operating cost savings into consideration) will provide building owners with the information they need to confidently compare these alternative equipment investment scenarios.  

Conclusion

Cities and states increasingly adopting greenhouse gas emission legislation and corporations increasing their commitment to environmental, social, and governance (ESG) policies has driven building electrification and decarbonization to the forefront in the commercial real estate industry. Building owners considering electrification of their properties will be well served to carefully evaluate equipment options and the key financial impacts associated with building electrification scenarios.

SRS’s EPIC^TM Solution

SRS’s EPIC^TM software tool is designed to enable building energy efficiency professionals (HVAC equipment manufacturers, distributors, contractors, and project developers) in evaluating electrification scenarios for a building. For example, EPIC^TM can in real time with minimal data input evaluate replacing existing systems relying on fossil-fuel with high efficiency air source, water source or VRF heat pumps. EPIC^TM can estimate energy consumption and cost savings, provide an estimate of the installation costs for these all-electric systems, and prepare a cash flow analysis. Financial projections using different financing options such as a traditional loan or financing through C-PACE can also be provided which will help a building owner better understand the impacts of financing alternatives. The bottom line is that EPIC^TM can empower users to time and cost effectively analyze alternative approaches to electrification which enables the building owner to make a more informed investment decision. To learn more about how SRS’s Energy Performance Improvement Calculator (EPIC^TM) can assist in a building electrification evaluation, visit SRSworx.com.

¹ U.S. commercial buildings consume 35% of all electricity consumed in the U.S. and generate 16% of all U.S. CO₂ emissions, Energy Information Administration, 2020.