Evaluating California's Pursuit of Zero Net Energy State Buildings

Evaluating California’s Pursuit of Zero Net Energy State Buildings MAC TAYLOR LEGISLATIVE ANALYST NOVEMBER 2017 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Administration Set Zero Net Energy (ZNE) Goals for State Buildings. In 2012, Governor Brown issued Executive Order B-18-12, which directed state agencies to take various steps primarily designed to achieve the environmental goal of reducing greenhouse gas (GHG) emissions in the state. One of the directions included in the executive order was to increase the number of state-owned buildings that are ZNE—that is, they generate as much energy onsite through renewable sources as they consume over a one-year period. Specifically, the executive order requires state agencies to take measures toward achieving ZNE for 50 percent of all square footage of state-owned buildings by 2025. It further requires that 50 percent of new state-owned buildings beginning design after 2020 and all new state-owned buildings and major renovations beginning design after 2025 be constructed as ZNE. The Legislature has not adopted policies related to ZNE for state buildings. Since the Governor signed the executive order, the administration has been moving forward with its implementation. Notably, in October 2017, the administration issued guidance to state departments on how to implement the executive order. While departments have completed a relatively small number of ZNE buildings thus far, several have plans to build many more ZNE buildings over the next few years. Accordingly, we anticipate that the Legislature will be asked to make decisions about whether to fund a growing number of ZNE buildings in the future. Administration’s Approach Raises Some Specific Concerns. We find that a mandate for state buildings to be ZNE is not a necessary or cost-effective way for the state to achieve its GHG reduction goals. This is largely because the state has already adopted a cap-and-trade program that limits total emissions from large emitters, such as electricity generators. So, a ZNE mandate will not necessarily reduce emissions more than would otherwise occur. Additionally, a ZNE mandate can potentially increase state costs and present other trade-offs through its emphasis on on-site renewable energy. Accordingly, we find that it is more important that the state assess whether achieving ZNE for each proposed building project would be cost-effective by performing cost-benefit analyses. These analyses would ensure that the state’s tax and fee dollars are used efficiently to reduce long-term costs. Moreover, analyses that prevent the state from undertaking ZNE projects that are not cost-effective would save state funds that could be used in other ways, whether that is to achieve GHG emission reductions from other projects or other state purposes. Despite their critical value, to date, departments have generally not conducted these analyses of their projects. Recommend Legislature Adopt Its Own ZNE Policies for State Buildings That Emphasize Cost Effectiveness. Based on our assessment, we recommend that the Legislature establish its own policies related to ZNE for state buildings that reflect its priorities. At a minimum, we recommend that these policies direct the administration to conduct cost-benefit analyses with certain information on all ZNE projects proposed to the Legislature in the future. We further recommend that these policies require the administration to emphasize pursuing ZNE projects that are shown to be cost-effective. We believe that these recommendations would help ensure that the state makes better use of its funds without compromising the state’s GHG reduction goals. Furthermore, if the state achieves ZNE cost-effectively for a variety of projects, it will serve as a valuable model for other entities, whether public or private, that are considering whether to implement ZNE projects. www.lao.ca.gov 1 analysis full gutter AN LAO REPORT 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION In 2012, Governor Brown issued Executive In this report, we provide background information on Order B-18-12, which directed state agencies to ZNE buildings as well as the administration’s approach take various steps primarily designed to achieve to meeting the executive order’s goals for state-owned the environmental goal of reducing greenhouse gas ZNE buildings. Then, we assess the administration’s (GHG) emissions in the state. One of the directions approach to these buildings. Finally, we recommend that included in the executive order was to increase the the Legislature adopt its own policies related to ZNE number of state-owned buildings that are “zero net for state buildings and take steps to ensure that it has energy” (ZNE)—that is, they generate as much energy adequate information to evaluate future administration onsite through renewable sources as they consume proposals for state-owned ZNE buildings. over a one-year period. Specifically, the executive In preparing this report, we spoke with staff order requires state agencies to take measures toward involved in implementing ZNE buildings at a variety achieving ZNE for 50 percent of all square footage of of state departments. These staff provided us with state-owned buildings by 2025. It further requires that an understanding of the administration’s approach to 50 percent of new state-owned buildings beginning pursuing the executive order’s goals related to ZNE design after 2020 and all new state-owned buildings buildings. We also spoke with outside experts working and major renovations beginning design after 2025 be on ZNE, such as those from the federal government constructed as ZNE. The Legislature has not adopted and utilities. Additionally, we visited buildings that have policies related to ZNE for state buildings. pursued ZNE and reviewed various ZNE-related reports and studies. OVERVIEW OF ZNE Achieving ZNE these three approaches to some extent, the specific mix of these approaches varies across buildings. ZNE Buildings Use Multiple Approaches to Common Energy Efficiency Measures. Energy Generate as Much Energy as They Consume. The efficiency measures are typically a key component of concept of a ZNE building is simple. A ZNE building ZNE buildings—often reducing a building’s energy use generates at least as much energy onsite as it substantially. The specific energy efficiency measures consumes—typically from both electricity and natural that are used vary by project, but generally fit within the gas—over a one-year period. (As we discuss in the box following four main categories: on page 4 and 5, ZNE can be defined in different ways based on how energy generation and consumption are • Building Designs. ZNE buildings are designed measured.) Typically, the first step to designing a new to minimize the need for energy use by taking (or making an existing) building as ZNE is to reduce advantage of natural lighting and ventilation. For its energy use through a variety of energy efficiency example, a building may be oriented in a specific measures. The second step is to pair these efficiency direction and may incorporate certain window measures with efforts to operate the building in ways treatments to maximize sunlight and reduce the that use less energy than would typically be required for need for artificial light. a similar building. Finally, after the building’s energy use • Building Systems. Buildings include energy is reduced through efficiency and building operations, efficient building systems, such as for lighting and the third step is to add on-site renewable energy for heating and cooling. For example, a building generation to offset the remaining level of anticipated may include light-emitting diode (commonly energy use. While a ZNE building typically includes referred to as LED) lights or radiant heating and cooling systems. www.lao.ca.gov 3 analysis full gutter AN LAO REPORT • Appliances. These buildings can incorporate For reference, in 2012, the federal government energy efficient appliances—such as computers conducted a study of energy use in commercial and refrigerators—to reduce the amount of buildings. The study found that, on average, the largest energy consumed through electrical plugs. contributor to building energy use is space heating and • Other Technology. ZNE buildings frequently cooling, as shown in Figure 1 (see page 6). (We note include technology that reduces or eliminates that energy efficient buildings typically have somewhat unnecessary energy use. For example, they different main uses of energy than other buildings.) include building management systems that Measures Related to Building Operations. allow building operators to monitor and centrally Another key aspect of ZNE buildings is controlling how control energy use from lighting systems and from the buildings are operated. This is important because heating and cooling systems. They also often a building’s energy use is not only affected by its include various sensors that automatically turn off design, but also by how it is used by its occupants. these systems when buildings are not in use. For example, the energy efficiency of a building may be Defining Zero Net Energy (ZNE) Definitions of ZNE Vary Based on How Energy Is Measured. There are different ways to define ZNE. Under all of these definitions, the amount of energy used at the site must not exceed the amount of energy generated at the site over a one-year period. However, these definitions vary based on the specifics of how a building’s energy use and renewable energy generation are measured. There are three main ways ZNE is defined: • Site Definition Involves Direct Measurement at Utility Meters. Under the site definition, the amount of energy used at the site must not exceed the amount of energy generated at the site over a one-year period when measured onsite. This definition can be measured by directly reviewing energy use and renewable energy generation information at utility meters. • Source Definition Accounts for Energy Losses. Under the source definition, the amount of energy used at the site must not exceed the amount of energy generated at the site over a one-year period when measured at the source of the energy. Specifically, the source definition takes into account that it takes more energy to produce and transport some forms of energy from their sources to the locations where they are used than other forms of energy. Accordingly, under the source definition, the quantity of each type of energy used (and generated) as measured onsite is adjusted by a factor reflecting the amount of raw fuel that was consumed to produce and transport it from its source to the site. • Time‑Dependent Valuation (TDV) Definition Accounts for Variation in Value of Energy Over Time. Under the TDV definition, the estimated societal value of the energy used at the site must not exceed the value of the energy generated at the site over a one-year period. This definition takes into account that energy is more valuable—both in terms of cost and greenhouse gas emissions— during certain hours of the year. Specifically, energy is more valuable when energy supply is low relative to demand than during hours when there is ample supply to meet demand. Notably, TDV is calculated by applying different multipliers to the amount of energy use and on-site generation based on their timing. State Uses Different Definitions for Various Purposes. The administration has chosen different definitions of ZNE for various purposes. These choices are largely driven by the administration’s assessment of the strengths and weaknesses of the different definitions. Notably, while the TDV definition 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT compromised if occupants override sensor systems or PV is generally the most widely available source of plug in personal appliances (such as space heaters and on-site renewable energy—a source that is not as coffee makers). There are various types of measures heavily dependent on site conditions as other forms of that can be taken to adjust building operations to renewable energy, such as wind or geothermal. It is also reduce energy use, such as implementing policies that typically the lowest cost source of on-site renewable prohibit the use of personal appliances. energy available to ZNE projects. Renewable Energy Measures Typically Include Ownership of solar PV systems—and the electricity Solar. A variety of renewable energy sources—such generated—can be structured in various ways. as wind, solar, or geothermal—can be used to offset Specifically, the system can be owned by the building a building’s energy use and enable it to achieve ZNE. owner or by a third party, such as a private company. However, in practice, ZNE buildings typically include In the cases where the solar PV system is owned by a on-site solar photovoltaic (PV) rather than other third party, the building owner typically enters into an renewable energy sources. This is because solar agreement with the third party called a power purchase has the benefit of better capturing the full costs of energy than the other definitions, TDV is more complex to calculate because it requires daily data on the timing of the use and generation of on-site renewable energy. Accordingly, the administration has elected to use the source definition for assessing ZNE goals related to existing and new state-owned buildings. However, it uses the TDV definition in the development of new building standards that apply to the construction of new residential buildings. ZNE Can Be Considered at Different Scales. Typically, ZNE is assessed for a specific building. However, ZNE can be considered at other scales. For example, a ZNE campus is typically defined as a group of adjacent buildings that together as a campus—such as at a university or medical complex— generate at least as much renewable energy as they use within the campus boundary. Similarly, a ZNE community is typically defined as a larger geographic community that generates at least as much renewable energy as it uses within its boundaries. For example, the city of Lancaster set a goal of becoming the first ZNE city. Definitions Can Affect Energy Generation Needed for Project to Be ZNE. In some cases, the definition of ZNE that is applied and scale at which ZNE is considered can make a very large difference in the feasibility of ZNE. For example, the site definition for ZNE generally requires significantly more renewable energy to be generated to offset a ZNE building’s energy use than the source definition. Specifically, under the site definition, one unit of renewable energy generated by a ZNE building offsets one unit of energy used by the building regardless of the type of energy, such as electricity or natural gas. In contrast, the source definition takes into account that, on average, it takes significantly more energy to produce and transmit a unit of electricity than a unit of natural gas to the building. Accordingly, under the source definition, one unit of electricity generated by a ZNE building offsets more units of natural gas used by a building. Notably, in the case of state buildings, the Department of General Services has estimated that its choice to use the source definition of ZNE will result in the state being required to secure about 40 percent less renewable energy than would otherwise be the case if it used the site definition. In addition, there may be some projects that might not readily achieve ZNE at the building level, but might be able to do so in combination with other buildings at a campus or community scale. For example, one building might not have sufficient space onsite to accommodate solar photovoltaics to offset its energy use, but another adjacent building might have enough space onsite to more than offset its energy use. In this case, together as a campus, both of these buildings could potentially achieve ZNE, while only one of them would achieve ZNE as an individual building. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT one-third of the total—were in Figure 1 California. These totals represent Energy Use in U.S. Commercial Buildings roughly a doubling of the number 2012 of verified ZNE buildings in Water operation in 2011. Nonetheless, Heating ZNE buildings still represent less Cooking than one-hundredth of 1 percent of the overall estimated number of non-residential buildings in Computers and Office Equipment operation. In addition, the non-residential Space Heating And Cooling ZNE buildings that are in operation are not representative of the Refrigeration overall building market. Instead, they tend to be certain types of buildings. For example, most of these ZNE buildings are relatively Lighting small buildings—roughly nine out of ten are less than 25,000 square Other feet. Additionally, most were undertaken by public agencies and Source: U.S. Energy Information Administration, 2012 Commercial Buildings Energy Consumption Survey. organizations that prioritize achieving environmental goals. Thus, while various examples of ZNE buildings exist, ZNE is still far from reaching agreement. Under such an agreement, the third widespread adoption in the building industry as a party not only owns the solar PV system, but is also whole. typically responsible for installing and maintaining it. Costs of ZNE Vary Significantly Across Projects. The third party is compensated by selling the electricity Studies suggest that the incremental construction cost generated from the system back to the building owner. of making a building ZNE varies significantly across Additionally, the third party typically keeps any available projects. In some cases, these studies have found federal, state, or local tax incentives associated with that it is possible to construct ZNE buildings at little the system. Notably, on-site solar PV is governed by a or no additional cost. However, in other cases, costs set of electricity billing rules known as “net metering.” associated with ZNE appear to be significant—in the Under California’s net metering policies, the electricity range of about 20 percent higher than comparable generated beyond the amount used at the site in a non-ZNE buildings. We note that, while these studies year—often referred to as “overgeneration”—is typically provide useful information, they rely on limited data. credited at a wholesale rate rather than the much higher This is in part because there are a relatively small retail electricity rate. number of completed ZNE projects. Additionally, many Examples of ZNE Buildings of the entities that have undertaken early ZNE buildings have focused on proving the technical feasibility of ZNE Small but Growing Number of ZNE Buildings. rather than documenting its costs. Accordingly, these There are a relatively small number of ZNE buildings entities have not always estimated the incremental currently in operation nationally. According to New costs associated with ZNE, making reliable data difficult Buildings Institute—an organization that tracks ZNE to secure. projects—there were 52 non-residential (commercial Despite the limitations of the existing studies on and government) ZNE buildings verified in the U.S. as ZNE costs, there is widespread agreement that a of 2016. Of these 52 buildings, 18 buildings—about 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT major reason for the variation in costs of ZNE buildings for on-site solar PV. Additionally, it is typically easier to is that some projects lend themselves to ZNE more construct new buildings as ZNE than to retrofit existing than others. For example, it is typically easier to make buildings as ZNE. This is because existing buildings buildings that are relatively low energy users—such generally have architectural features and building as warehouses—ZNE than those that are relatively systems in place that can be difficult to modify. Finally, high-energy users—such as health-related buildings. projects in some geographic locations are more likely It is also generally more difficult to make high-rise to lend themselves to ZNE because they receive ample buildings ZNE than low-rise buildings. This is because sunlight and have temperate climates that require less high-rise buildings have less rooftop area compared heating and cooling. to total building square footage and, thus, less area ZNE IN STATE‑OWNED BUILDINGS ZNE Goals for State‑Owned Buildings 8,000 buildings totaling about 110 million square feet of space, spread across roughly 1,500 properties. Administration Has Set ZNE Goals for State The executive order covers various types of buildings, Buildings by Executive Order. In 2012, the such as prisons, office buildings, warehouses, and administration established ambitious ZNE goals for health facilities. As shown in Figure 2 (see next page), state-owned buildings through the Governor’s Executive these buildings are managed by a wide range of state Order B-18-12. Under this executive order, state departments with most of the square footage of these agencies must take measures toward achieving ZNE buildings concentrated among a few departments, for 50 percent of the square footage of state-owned including the California Department of Corrections buildings by 2025. Additionally, the executive order and Rehabilitation, Department of General Services calls for all new state buildings and major renovations (DGS), and California Department of Transportation. beginning design after 2025 to be constructed as ZNE Notably, while the executive order covers most types (with an interim target that 50 percent of new facilities of state buildings, it excludes certain categories of beginning design after 2020 achieve ZNE). state buildings, such as those owned and operated by The executive order also establishes various other courts and universities. In some cases, those entities energy efficiency and sustainability goals for state have their own ZNE goals and efforts. For example, the buildings. For example, it requires larger new or University of California, Merced has established a goal renovated buildings to achieve Leadership in Energy of becoming a ZNE campus by 2020. and Environmental Design (LEED) Silver certification and Executive Order Primarily to Reduce Carbon also requires them to pursue on-site renewable energy Emissions and Costs. The executive order identifies generation if economically feasible. (LEED is a building several rationales for the goals established. The main rating system created by a private organization called purposes of the executive order are to reduce GHG the U.S. Green Building Council.) The executive order emissions and to save the state money by reducing also requires all new state buildings to use 15 percent utility costs. The executive order also suggests that less energy than would otherwise be required under its policies should help boost the state’s economy the state’s environmental building standards, known through creating “green” jobs. Finally, in addition to as Title 24. (As discussed in the box on page 9, there these goals, which are explicitly laid out in the executive are also various state, federal, and local ZNE goals that order, Governor Brown has indicated that another goal apply to both private and public buildings.) of the executive order is to have the state serve as an Executive Order Applies to Most Categories of environmental leader. State‑Owned Buildings. The executive order applies Legislature Has Not Adopted Any ZNE Policies to the state-owned buildings under the control of the for State Buildings. While the administration has executive branch. Accordingly, it applies to more than established ZNE goals for state-owned buildings www.lao.ca.gov 7 analysis full gutter AN LAO REPORT renovation project proposed for Figure 2 funding by the administration. State-Owned Building Space Concentrated Among a Few Departmentsa State’s Progress Towards 2015, Square Footage Meeting ZNE Goals and Future Plans Total: 107 million square feet Few State ZNE Projects Other Completed to Date. Since the adoption of the executive order, only nine state ZNE buildings have been completed, as shown Figure 3. (As of when this report was completed, Parks and Corrections only two of these buildings had Recreation been verified as ZNE based on a year of energy generation and State use data.) Furthermore, the state Hospitals has made limited use of on-site renewable energy at this point. Transportation As of 2016, on-site renewable energy provided roughly 4 percent General Services of the state’s building energy use. Accordingly, meeting the Governor’s a Does not include court and higher education buildings. executive order goal to achieve 50 percent of existing space to be administratively, the Legislature to date has not adopted ZNE by 2025 would require a large any specific policies related to ZNE. Accordingly, the increase in the amount of renewable energy generation Legislature currently makes its decisions regarding at existing state buildings. whether and how to pursue ZNE when it decides ZNE Buildings and Plans in Progress. While whether to fund each individual new construction or departments have completed a relatively small number Figure 3 California’s Completed State‑Owned ZNE Buildings New Square Year Construction or Project Department Location Footage Completed Renovation Fresno Field Office Replacement Motor Vehicles Fresno 20,000 2014 New Santa Fe Springs District Office Lottery Santa Fe Springs 12,800 2015 Renovated Richmond Campus, Building P Public Health Richmond 205,000 2016 Renovated California State Prison, Los Angeles County Complex Primary Care Clinic CDCR Lancaster 5,500 2016 New Healthcare Administration and Records Building CDCR Lancaster 5,700 2016 New Complex Primary Care Clinic CDCR Lancaster 5,500 2016 New ASU Primary Care Clinic CDCR Lancaster 2,600 2016 New Southern Distribution Center Lottery Rancho Cucamonga 60,600 2016 New Fresno District Office Lottery Fresno 11,500 2017 Renovated ZNE = zero net energy; CDCR = California Department of Corrections and Rehabilitation; and ASU = Administrative Segregation Unit. 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT of ZNE buildings thus far, several have plans to build departments expect to take, such as which buildings significantly more ZNE buildings. Specifically, we have will be constructed or renovated as ZNE. Similar identified 22 additional ZNE buildings planned by plans have been completed in the past, but have not the administration, as shown in Figure 4 (see next generally been made publicly available. page). (We note that the state has plans for a number Recent Administration Direction on of other new buildings or major renovations that are Implementation of ZNE Goals. In October 2017, not currently expected to be ZNE.) Additionally, some the administration issued a management memo—and departments—including DGS, California State Lottery an associated revision to the State Administrative Commission (Lottery), and Department of Motor Manual—that provides state departments with specific Vehicles (DMV)—indicated an intent to build all new guidance regarding how to implement the Governor’s facilities in the future as ZNE. executive order ZNE goals. The memo directs In addition to the buildings that are currently departments pursuing ZNE to focus first on a building’s identified as pursuing ZNE, the administration has also energy efficiency and then to add renewable energy directed departments to create publicly available plans generation, as necessary, to offset its energy use. With for how they will meet the Governor’s executive order regard to energy efficiency, the memo sets energy goals for ZNE buildings—along with the Governor’s use targets for all existing buildings pursuing ZNE and other sustainability goals—by late 2017. These plans reiterates the Governor’s executive order requirement are anticipated to identify the specific steps that that all new buildings be constructed to use at least Other Zero Net Energy (ZNE) Goals Established for Private and Public Buildings In addition to the state’s ZNE goals for the buildings it owns, there are various other state, federal, and local goals in place for ZNE buildings. Administration Has Set ZNE Goals for Private and Public Buildings. The administration’s Long-Term Energy Efficiency Strategic Plan—which was developed in 2008 and updated in 2011— adopts two main ZNE goals for new private and public residential and commercial buildings. Specifically, it states that (1) all new residential construction in California be ZNE by 2020 and (2) all new commercial buildings in California be constructed as ZNE by 2030. The California Energy Commission and California Public Utilities Commission have developed action plans for the residential and commercial building sectors that identify some specific activities—such as changes to building codes—to move the state towards achieving these goals. Federal Government and Other Entities Have Also Established ZNE Goals. California is not the only public entity in the United States that has adopted ZNE goals. In 2007, Congress passed the Energy Independence and Security Act. The act set three goals related to ZNE nationwide: (1) all new commercial buildings built after 2030 achieve ZNE, (2) 50 percent of all buildings be ZNE by 2040, and (3) all pre-2030 buildings be retrofitted to ZNE by 2050. The federal government supports these objectives principally through funding for research and development of energy efficient building technologies, as well as various tax incentives to incentivize the adoption of energy efficiency and renewable energy technologies. President Obama also issued Executive Orders 13514 (2009) and 13693 (2015), which established ZNE goals for federal buildings. Specifically, President Obama’s executive orders require that all new federal buildings greater than 5,000 gross square feet that begin design in federal fiscal year 2019-20 or later be designed to achieve ZNE. Additionally, some other states and local governments have explored ZNE-related goals and requirements. For example, Washington State has a goal of building more zero-emission homes and buildings by the year 2031, and the City of Santa Monica requires all new single-family construction in the city to be ZNE. www.lao.ca.gov 9 analysis full gutter AN LAO REPORT 15 percent less energy than would otherwise be Other State Policies to Reduce required under Title 24. With regard to renewable GHG Emissions energy generation, the memo provides alternatives The Legislature has established ambitious targets to generating renewable energy on a building’s site, for reducing GHG emissions within the state. including through the purchase of off-site renewable Specifically, state law established the goals of limiting energy from a local utility if on-site renewable energy statewide GHG emissions to (1) 1990 levels by generation is not feasible. We note that this approach is 2020 and (2) at least 40 percent below 1990 levels by not consistent with the typical definition of ZNE, which 2030. requires on-site renewable energy generation. Figure 4 California’s In‑Progress State‑Owned Zero Net Energy Buildings Estimated Square Estimated New or Project Department Location Footage Completion Renovation California State Prison, Solano, Complex CDCR Vacaville 13,700 Late 2017 New Facility Clinic SFOBB Maintenance Complex Warehouse Transportation Oakland 32,000 Late 2017 New Grass Valley Field Office Replacement Motor Vehicles Grass Valley 7,600 Late 2017 New CMC East Facility Primary Care Clinic and CDCR San Luis Obispo 13,000 Early 2018 New Health Administration Building CMC ASU‑EOP Mental Health Clinic CDCR San Luis Obispo 11,000 Mid 2018 New San Diego District Office Lottery San Diego 14,600 Late 2018 Renovated Chatsworth District Office Lottery Chatsworth 13,400 Late 2018 Renovated Rancho Cucamonga District Office Lottery Rancho Cucamonga 13,300 Late 2018 Renovated CVSP Healthcare Administration and CDCR Blythe 2,900 Early 2019 New Records Building Costa Mesa District Office Lottery Costa Mesa 17,200 Early 2019 Renovated Milpitas District Office Lottery Milpitas 10,100 Early 2019 New North Bay District Office Lottery North Bay TBD Mid 2019 TBD Inglewood Field Office Replacement Motor Vehicles Inglewood 15,600 Late 2019 New Consolidated Headquarters Complex Military Sacramento 285,600 Late 2019 New Delano Field Office Replacement Motor Vehicles Delano 10,700 Early 2020 New Santa Maria Field Office Replacement Motor Vehicles Santa Maria 13,300 Early 2020 New San Diego Field Office Replacement Motor Vehicles San Diego 18,500 Mid 2020 New Southern California Consolidation Project Air Resources Board Riverside 380,000 Late 2020 New O Street Office Building General Services Sacramento 339,000 Early 2021 New New Natural Resources Agency Office General Services Sacramento 800,000 Late 2021 New Building Reedley Field Office Replacement Motor Vehicles Reedley 13,700 Mid 2022 New Ironwood State Prison Facilities A and B CDCR Blythe 8,500 TBD Renovated CDCR = California Department of Corrections and Rehabilitation; SFOBB = San Francisco‑Oakland Bay Bridge; CMC = California Men’s Colony; ASU = Administrative Segregation Unit; EOP = Enhanced Outpatient Program; CVSP = Chuckawalla Valley State Prison; and TBD = to be determined. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT In order to meet the state’s GHG reduction goals, program effectively creates a price for GHG emissions, the Legislature and administration have adopted various which provides a financial incentive for households policies. Notably, the Legislature has authorized the and businesses to implement the least costly GHG administration to implement a cap-and-trade system reduction activities. (We provide more detail on the through 2030. The state’s cap-and-trade system is a state’s cap-and-trade system in the box on page 12.) In market-based mechanism that sets a limit on GHG addition to cap-and-trade, the Legislature has also emissions in the state from large emitters, such as adopted various other policies aimed at reducing GHG electricity generators. Under the system, the state emissions, such as setting requirements that the state issues a limited number of permits (referred to as double statewide energy efficiency savings in electricity “allowances”) to emit GHGs. Emitters must obtain and natural gas and procure 50 percent of its electricity a sufficient number of allowances—either through from renewable sources by 2030. We note that, while a state-run auction or on the private market—to the Legislature has adopted these varied policies aimed cover their emissions. As a result, the overall level of at reducing GHG emissions, it has not adopted any emissions cannot exceed the cap. In addition, the policies directed at ZNE specifically. LAO ASSESSMENT We find that a mandate for state buildings to be could be some exceptions to this, such as if the state ZNE is not a necessary or cost-effective way for the was already emitting fewer emissions than required by state to achieve its GHG reduction goals. This is largely the cap or if the cap-and-trade system is not renewed because the state has already adopted a cap-and-trade beyond 2030.) program that limits total emissions from large emitters, Cap‑and‑Trade Likely to Encourage Less Energy such as electricity generators. So, a ZNE mandate will Use Even Without ZNE Mandate. Cap-and-trade not necessarily reduce emissions more than would will make the implementation of energy efficiency and otherwise occur. Accordingly, we find that it is more renewable energy measures more cost effective. This important that the state assess whether achieving ZNE is because under the cap-and-trade system, as the for each building project would be cost effective. state’s emissions targets tighten, the state will gradually reduce the number of allowances available. When this Challenges With Using ZNE Mandate to happens, the cost of allowances and associated energy Achieve GHG Reduction Goals prices will tend to rise. Notably, by making energy prices higher, cap-and-trade will encourage the state ZNE Mandates Not Necessary to Meet GHG and other building owners to undertake projects that Reduction Targets. A mandate for state-owned include more energy efficiency and renewable energy buildings to be ZNE is not necessary to meet the measures without the need for mandates. Some of state’s GHG reduction goals. This is because the cap these resulting projects could be ZNE, while others established under the cap-and-trade program sets might simply be low net energy use. Regardless of a limit on the amount of GHG emitted in the state. whether these buildings are ZNE or low net energy use, As such, the cap serves as a backstop to ensure by taking into account a higher cost of GHG emissions, that emission goals are met, regardless of the state’s they will likely result in fewer emissions than traditional approach to greening its buildings. Specifically, if in buildings. the future the state purchases less energy from utilities because it constructs ZNE buildings, the utilities will ZNE Mandate More Costly Way to Achieve GHG have to purchase fewer allowances. This will leave Reductions. A mandate for state buildings to be ZNE more allowances available, and other emitters will is likely to be a less cost-effective approach to reducing purchase these allowances instead of reducing their GHG emission reductions than what would otherwise emissions. The net result is a change in the type of be encouraged through the cap-and-trade system emission reductions, but no change in the overall level alone. This is because the cap-and-trade system of GHG reductions in California. (We note that there provides an economic incentive for households and www.lao.ca.gov 11 analysis full gutter AN LAO REPORT businesses that can reduce their emissions at relatively specific market failure that its ZNE policy is attempting low cost to do so, resulting in the implementation of to address. the most cost effective approaches to achieving GHG ZNE Mandates Could Also Result in Some reductions. Therefore, GHG reductions achieved only Additional Trade‑Offs. The requirement that state because of additional mandates likely would be more buildings achieve ZNE could also present some costly than those that would be achieved through the additional trade-offs that are important to consider, cap-and-trade system alone. We note there sometimes particularly related to use of significant amounts of are “market failures”—where decision makers do not on-site solar PV. On the one hand, on-site solar PV can have the appropriate incentives or information. In these provide a source of renewable energy that can replace cases, specific mandates could be helpful in achieving other forms of electricity generation that rely on fossil cost-efficient emission reductions. To date, the fuels and produce various types of localized air pollution administration has not provided evidence that there is a (in addition to GHG emissions). On the other hand, on-site solar PV systems typically require significant Cap‑and‑Trade Uses Market to Ensure State Meets GHG Reduction Targets Purpose of Market‑Based Mechanisms. Cap-and-trade is a market-based approach to reducing greenhouse gas (GHG) emissions. Cap-and-trade differs from other regulatory approaches, such as traditional command-and-control regulations, where the government requires business to install a certain type of emission reduction technology or meet a certain minimum emissions standard. In contrast, a market-based approach like cap-and-trade (a carbon tax is another such approach) adds a financial cost to producing GHGs, which provides a financial incentive for private businesses and consumers to reduce emissions, and the private sector has flexibility to determine which emission reduction activities are least costly. Description of Cap‑and‑Trade. The cap-and-trade regulation places a “cap” on aggregate GHG emissions from large GHG emitters, such as large industrial facilities, electricity producers, and transportation fuel suppliers. To implement the cap, the Air Resources Board (ARB) issues a limited number of “allowances” (essentially, emission permits) equal to the cap with each allowance permitting the emission of one ton of carbon dioxide equivalent. Emitters can purchase allowances at a state-run auction or “trade” (buy and sell) them on the private market. (ARB also gives some allowances away for free.) Some entities will end up reducing their emissions if the total number of allowances available is less than the number of emissions that would otherwise occur. Cap Intended to Provide Emissions Certainty. The cap generally ensures that total GHGs from major sources of emissions do not exceed the limit established by the state. As long as GHG emissions are accurately measured and the regulation is adequately enforced, the number of emissions cannot exceed the cap. Allowance Price Provides Incentive for Cost‑Effective Emissions Reductions. From an economic perspective, the primary advantage of a cap-and-trade program is that it creates a financial incentive to identify the least costly emission reduction activities. The supply and demand of allowances in a trading market generally determine the price of an allowance. Some emitters will reduce emissions because doing so is less costly than purchasing an allowance. Remaining emitters will purchase allowances and continue to emit because allowances are cheaper than their costs to reduce emissions. In theory, the level of overall emission reductions is achieved at the lowest cost possible because the allowance price provides an economic incentive to find the mix of emission reductions and allowance purchases that minimize costs. (For more information on the cap-and-trade program, see our February 2017 report The 2017‑18 Budget: Cap‑and‑Trade.) 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT physical space to generate sufficient energy to offset can also be affected by a project’s choice of renewable a building’s energy use. Thus, some researchers have energy sources—such as building-owned or third noted that ZNE’s push towards on-site renewable party-owned solar PV. Consequently, some ZNE energy tends to encourage the construction of less projects could result in energy savings that greatly dense buildings and campuses that are more spread outweigh the additional costs, while other ZNE projects out—with more rooftop and parking space relative might not prove to be cost-effective. to building square footage—than might otherwise We note that the variation in the estimated costs of be the case. This type of less dense development is achieving ZNE can be seen in the ZNE projects that inconsistent with other state goals, which emphasize the administration has proposed thus far. For example, land use policies intended to support greater density, the Lottery estimated that adding ZNE to its completed discourage driving, and encourage more use of Santa Fe Springs District Office added 17 percent alternative forms of transportation, such as walking to the cost of constructing the project. Additionally, and public transit. In addition, solar panels are more the DMV estimated that the cost of adding ZNE to effective in areas that are not shaded by nearby trees, its planned Reedley Field Office facility is expected to and thus on-site solar can require the removal of add 29 percent to the building’s construction costs. existing trees or prevent the planting of new trees. We further note that the benefits of making buildings For example, the ZNE project implemented by the ZNE are also likely to vary by project depending on the Department of Public Health required the removal of energy rates that the state pays at the facility. roughly 700 trees. Trees, however, have other offsetting ZNE Costs and Benefits Likely Vary Over environmental benefits, such as sequestering carbon, Time. We also expect that the costs and benefits of shading buildings, and reducing the “urban heat island” constructing a building as ZNE will vary over time as effect (the tendency of urban areas to become hotter the costs and benefits of adding solar PV and energy than they would be otherwise). efficiency to projects change. This would result in the cost-benefit calculation for ZNE projects being different ZNE Not Always Cost‑Effective in the future than today. First, if federal, state, or local Importance of Cost‑Benefit Analyses for ZNE tax incentives for solar PV change, it could affect the Projects. Since mandating ZNE at state buildings is cost of implementing these systems through power not necessary for reaching statewide GHG goals, it purchase agreements at state facilities. is more important for state departments to determine Second, the cost of these systems could be affected whether the benefits of utility savings from a ZNE by overall changes in the solar PV market. Notably, project outweigh the costs of installing and maintaining solar PV prices have fallen in recent years, and some the on-site renewable energy generation system and observers believe they might continue to fall in the the energy efficient building components. Cost-benefit future. If PV prices continue to fall, that could reduce assessments would ensure that the state’s tax and the cost of offsetting the energy necessary to make fee dollars are used efficiently to reduce long-term a building ZNE and thus make ZNE projects more costs. Moreover, analyses that prevent the state from cost-effective. undertaking ZNE projects that are not cost effective Third, assuming that Title 24 building efficiency would save state funds that could be used in other codes continue to become stricter, buildings built ways, whether that is to achieve GHG emission to code will be closer to the energy efficiency reductions from other projects or other state purposes. necessary for ZNE. This will reduce the additional ZNE Costs and Benefits Likely Vary Across cost associated with implementing the incremental State‑Owned Buildings. It is important to conduct energy efficiency measures required to make the cost-benefit analyses on individual ZNE projects building ZNE. However, for many projects, it will also because the costs and benefits of ZNE vary across mean that those incremental measures will produce projects. As described previously, the costs can vary fewer energy savings. Overall, to the extent that the significantly across projects depending on various stricter Title 24 standards incorporate a greater share factors such as the energy intensity of the building, of cost-effective energy efficiency measures, it might whether it is new or existing, and its location. Costs www.lao.ca.gov 13 analysis full gutter AN LAO REPORT become more difficult to achieve cost-effective energy Despite Value, Departments Have Not Been efficiency measures that go beyond the code. Doing Cost‑Benefit Analyses. Given the value of Fourth, if utility rate structures change, it will also cost-benefit analyses, we would expect departments affect the cost effectiveness of ZNE. For example, if to routinely conduct them. However, we are not aware electricity rates increase, it will tend to make ZNE more of any state project, with the exception of the CMD cost effective because there will be greater savings from project described above, that completed a cost-benefit not having to purchase the increasingly expensive utility analysis prior to design or construction. Notably, for power. the proposed ZNE projects that we reviewed, six project proposals included estimates of the incremental An Example Where Cost‑Benefit Analysis costs of adding ZNE, and a handful of other projects Provided Valuable Information. In early 2017, the estimated the cost of adding solar PV alone. However, California Military Department (CMD) proposed to apart from the CMD project, none of the proposed construct its new headquarters building as ZNE at an ZNE projects we reviewed have accompanied those estimated additional cost of about $18 million. The cost estimates with estimates of the benefits from initial project proposal did not include a cost-benefit reduced energy costs associated with implementing analysis of adding ZNE to the project. However, ZNE. It is important for the Legislature to have access upon our office’s request, the department conducted to this information to determine whether investing in such an analysis. After completing the analysis, CMD ZNE makes sense from a financial perspective. We determined that a major component of its project—a note that the October 2017 management memo thermal storage unit—was not cost effective. includes some direction to pursue the administration’s Accordingly, the administration subsequently proposed goals cost-effectively. However, the memo includes modifying the project to remove the thermal storage minimal detail. For example, it does not define unit, thereby reducing the project costs by about cost-effectiveness or describe how to calculate it. $5 million. The resulting ZNE components of the project Accordingly, it is not clear how departments will had an estimated discounted payback period of about implement this direction. 40 years, which the department estimated was in line with their expected useful life. LAO RECOMMENDATIONS Based on our assessment, pursuing state buildings effective. We discuss our recommendations in more as ZNE is not necessary for the state to achieve its detail below. GHG reduction goals and could potentially increase Establish Legislative Policy Priorities for state costs and present other trade-offs. Accordingly, we recommend that the Legislature establish its own ZNE State Buildings policies related to ZNE for state buildings that reflect its The administration is moving forward with priorities. implementing the ZNE goals for state buildings outlined At a minimum, we recommend that these policies in the Governor’s executive order. However, thus far, direct the administration to conduct cost-benefit the Legislature has not established its own policies analyses with certain information on all ZNE projects related to ZNE for state buildings. To ensure that proposed to the Legislature in the future—as well the administration implements ZNE in a way that is as for state projects that propose going beyond consistent with legislative priorities, we recommend Title 24 energy efficiency codes or installing renewable that the Legislature pass legislation that outlines its energy systems. We further recommend that these policies for ZNE for state buildings. At a minimum, we policies require the administration to emphasize recommend that the Legislature prioritize those projects pursuing ZNE projects that are shown to be cost that are shown to be cost effective. In order to help achieve this goal, we recommend that the Legislature 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT (1) direct the administration to provide key information evaluating the costs and benefits of these projects, to the Legislature on the cost-effectiveness of proposed as described in the box below. Regardless of the ZNE projects and (2) focus on pursuing projects that method, providing these cost-benefit analyses will can clearly demonstrate they are cost effective. ensure that the Legislature has sufficient information to determine whether the proposed projects are worth the Require Cost‑Benefit Analyses of estimated costs to implement or whether they should Projects be modified. These analyses are important to do for every project seeking legislative approval because, as Provides Legislature With Valuable Information. described previously, the costs and benefits of ZNE are We recommend that the Legislature require the likely to vary by type of project and change over time. administration—through the ZNE legislation it adopts— However, we note that it is particularly important to do to provide cost-benefit analyses of all proposed ZNE these cost-benefit analyses for larger projects because projects and other projects that include renewables adding ZNE to large construction projects could add or go beyond required efficiency requirements in tens of millions of dollars in costs. Title 24. We note that there are various methods for Methods to Conduct Cost‑Benefit Analyses Different Types of Cost‑Benefit Analyses. A cost-benefit analysis is a systematic approach to comparing the strengths and weaknesses of various alternatives under consideration. There are a few common ways of conducting a cost-benefit analysis. They are all similar in that they compare the cost of a project to its benefits, but differ in the specific ways they are calculated and interpreted. As a result, in some cases one approach might be more intuitive to understand than another. The various approaches include: • Benefit Cost Ratio (BCR) and Net Present Value (NPV). Under these two approaches, the total discounted benefits of a project over time are compared to the total discounted costs of the project over time. Specifically, under the BCR approach, the total discounted benefits of a project over time are divided by the total discounted costs of the project over time. Projects with a resulting ratio— the BCR—greater than one signify that the benefits outweigh the costs. Under the NPV approach, the total discounted costs of the project over time are subtracted from the total discounted benefits of a project over time. Projects where the difference—the NPV—is positive would be ones with greater savings than costs. When comparing alternative options, it is generally recommended that the one with the greatest BCR or NPV be adopted. • Discounted Payback Period. Under this approach, the discounted costs and benefits are estimated for each year. The discounted payback period is the number of years at which the total discounted benefits of a project surpass the total discounted costs. Generally, it is recommended that projects should proceed only if the discounted payback period is shorter than the useful life of the investment. Cost‑Benefit Analyses Can Be Performed From Various Perspectives. Entities can conduct cost-benefit analyses in different ways. In the case of state buildings, for example, the analyses can be conducted from the perspective of the state as a building owner—taking into account the costs and benefits that accrue to the state department undertaking the project. Alternatively, they can be conducted to take into account the costs and benefits to society more broadly, taking into account, for instance, the taxpayer cost of government incentives for solar photovoltaic. While this approach provides a broader perspective, it is more complex because there can be a wide range of costs and benefits, and they can be difficult to identify and quantify. www.lao.ca.gov 15 analysis full gutter AN LAO REPORT Cost‑Benefit Analyses Should Be Completed at such as estimated future energy savings and Key Legislative Decision Points. The administration operating costs associated with the various should provide cost-benefit analyses when proposed building components, such as maintaining solar projects reach key legislative decision points. PV systems. Specifically, the administration is generally required to • Take Into Account Time Value of Money. The seek legislative approval for funding for new or major analyses should apply a reasonable discount rate rehabilitation projects. This occurs at various stages of that takes into account that dollars in the future these projects—starting at the initial planning phases are worth less than those today. (usually the preliminary plans phase) and proceeding • Evaluate Key Alternatives. The analyses through the project’s construction funding request. should compare a reasonable set of alternatives. These project approvals serve as key decision points, Recognizing that it is not feasible to look at every during which time the Legislature can determine if it possible mix of alternative energy efficiency wants to implement the Governor’s policy direction and renewable energy measures, at minimum, related to ZNE buildings or take a different approach. alternatives that should be evaluated include: Accordingly, the recommended cost-benefit analyses (1) the cost and savings of the proposed energy should be provided at the initial planning phases and efficiency measures compared to the cost updated for subsequent project funding phases, and savings for a facility with energy efficiency including if projects undergo significant cost or scope components consistent with Title 24 and (2) the changes that affect the renewable or energy efficiency cost and savings of renewable energy generation components of the project. options. With regard to renewables, the analysis Cost‑Benefit Analyses Should Include Various should compare solar PV (both state-owned and Components. We recommend that the Legislature third party-owned) with options for purchasing require that the cost-benefit analyses include certain utility-provided renewable and conventional information as identified below. These analyses electricity. should also include separate evaluations of the costs • Identify Major Assumptions. The analyses and benefits of (1) energy efficiency measures and should clearly specify key assumptions—such as (2) renewable energy components of the projects. In the assumed inflation rate of energy prices and some cases, it might be difficult to estimate precise discount rates—so the Legislature can evaluate cost and savings estimates—particularly of energy whether they are reasonable. This is important efficiency measures that are integrated into the building because the results of cost-benefit analyses design—but the administration should provide a rough can be highly dependent on the assumptions estimate at a minimum. used since the benefits of ZNE projects—and We note that, ideally, cost-benefit analyses would to a lesser degree the costs—are likely to be consider each individual component of projects— generated over a period of many years. such as more energy efficient windows or cooling • Include Sensitivity Calculations. The analyses systems—separately. However, we do not recommend should be based on a reasonable range of key that the Legislature require this higher level of detail assumptions in cases where there is significant because, in some cases, it might not make sense to uncertainty, such as future energy costs. do a component-by-component analysis. For example, certain energy efficiency components might cost more Pursue Efficiency and Renewable individually, but may allow for smaller heating and Energy Only if Savings Outweigh Costs cooling systems. In our view, the required cost-benefit analyses Would Not Hurt GHG Reduction Goals. We should, at minimum: recommend that the Legislature’s policies direct the administration to focus on cost-effective projects. • Evaluate Life Cycle Costs. The analyses should Specifically, we recommend that the state only take into account not only up-front costs and implement building projects with renewable energy benefits, but also those that occur over time, and energy efficient building components that have net 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT savings to the state compared to the main alternatives. relevant cost and savings estimates. This information is Moreover, we recommend that the Legislature modify necessary to allow the Legislature to evaluate the merits those projects that are shown to have net costs to the of the proposed project, as well as weigh those merits state. Taking our recommended approach might mean against various competing budget priorities, whether not achieving ZNE on some projects. However, this will those are state building projects, sustainability efforts, not hurt the state’s efforts to meet its GHG reduction or other state programs. goals from large emitters because the state’s existing State Achieving ZNE Cost‑Effectively Could cap-and-trade system generally ensures these goals Provide Valuable Example. If the state can show will be met. Furthermore, this approach will ensure that ZNE can be achieved cost-effectively for a variety that the state uses its limited funds on cost-effective of building projects, it will provide an important model projects, thereby reducing net state costs. for other public and private sector entities considering We note that there could be some exceptions ZNE projects. The small but growing number of ZNE that would justify doing a project that is not projects in operation nationally have shown that cost-effective based on the information included in achieving ZNE for state and non-state buildings is a typical cost-benefit analysis. For example, it might technologically feasible. However, ZNE has not yet make sense to fund a demonstration project that is gained broad adoption, likely in part because there designed to evaluate whether a new technology works is limited information demonstrating that it can be effectively. Even if the technology does not appear done cost-effectively. Accordingly, if the state can to be cost effective, the project might provide other demonstrate that it can build different types of state benefits that are not fully captured in a cost-benefit facilities—office buildings, labs, and correctional analysis—such as providing valuable information to the facilities, for example—in various locations as ZNE building industry on the feasibility of implementing the cost-effectively, it could help fill an existing gap in technology. However, the cost-benefit analyses should information on the incremental costs and benefits of still be done in order to provide the Legislature with the ZNE. CONCLUSION Mandating that state buildings be ZNE is not a project funding proposals from the administration, we necessary or cost-effective approach to meeting the recommend that the Legislature focus on pursuing state’s goals for reducing GHG emissions. However, those projects that save the state money over time. the administration is mandating that departments take By pursuing energy efficiency and renewable energy various actions to implement ZNE consistent with projects if they are cost-effective, the state will make the Governor’s executive order. We recommend that better use of its funds. Furthermore, if the state the Legislature adopt its own policies related to ZNE achieves ZNE cost-effectively for a variety of projects, it at state buildings to ensure that the administration’s will serve as a valuable model for other entities, whether actions are consistent with legislative priorities. As public or private, that are considering whether to it formulates these policies and reviews specific implement ZNE projects. www.lao.ca.gov 17 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Helen Kerstein and reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 18 LEGISLATIVE ANALYST’S OFFICE