Development Magazine Winter 2016/2017

Development - Ownership

Net Zero Districts: Finding the Quadruple Bottom Line

District-scale developments are uniquely positioned to be a major driver of the next generation of high-performance buildings and an intelligent electric grid.

ON A FORMER industrial site along a river in a midsize U.S. city, a 180-acre mixed-use development with more than 6 million square feet of floor area will soon set a new standard for next-generation sustainable development. The project is planned as the largest-ever net zero energy district. It is intended to attract world-class tenants and create a liveable, healthy, comfortable and resilient community.

But at what cost? There remains an industry-wide perception that net zero energy is too expensive and comes at a much higher incremental first cost than “business as usual.” That is not true, according to a new Rocky Mountain Institute (RMI) Insight Brief, “An Integrative Business Model for Net Zero Energy Districts,” which describes how pursuing net zero energy can be a significant value driver when approached from a whole system design perspective and how it can even create new income streams.

This innovative business model describes how net zero energy or ultralow energy districts can be developed in a way that:

1) Is attractive to the district developer, parcel developer and tenants.

2) Creates a profitable business for an integrated energy services provider.

3) Benefits the local electric grid and neighboring community.

While the model was developed specifically for the project mentioned above, it could be applied to other projects at a district, community or campus-wide level.

Finding the Quadruple Bottom Line

Districts are in a unique position to take advantage of efficiencies and new value and income streams presented by net zero energy that individual buildings are not. The business model relies on a series of steps and decisions that create new value streams for the developer and tenants, and uncover new investment opportunities associated with renewable energy production and energy efficiency.

1) Design for Net Zero Energy. Although designing for net zero energy — generating as much as you consume in any given year — seems simple, it is much more complex at a district level. Net zero energy can be achieved in three steps. First, maximize on-site renewable resources and thus set the district’s energy “budget.” Second, use the most efficient available technology for the thermal supply: in this case, a superefficient district geothermal heating and cooling plant. Third, set design standards to significantly drive down load.

2) Make Net Zero Energy Financially Attractive to Parcel Developers. RMI recommends doing this in three steps. First, utilize third-party development and ownership of on-site renewable sources, in this case solar photovoltaics (PV). Second, wherever possible, move the capital cost of heating and cooling equipment out of buildings and into a district heating/cooling system. Third, provide on-bill financing for the incremental cost of distributed energy efficiency beyond code. This enables the utility to incur the cost of the equipment, in this case the geothermal heating and cooling plant, which is then repaid on the utility bill. In areas where property assessed clean energy (PACE) financing is available for new construction, it can provide an equally attractive alternative. This approach can drive first costs for parcel developers below the cost of a business-as-usual (BAU) building.

3) Make Net Zero Energy Financially Attractive to Tenants. The traditional tenant energy bill is replaced by a net zero energy bill with three components: an electricity bill that includes the third party-owned PV costs, a thermal bill for district heating and cooling, and on-bill repayment of the energy efficiency financing. The sum of these three components is lower than a traditional energy bill, and the tenant benefits from a healthier and more comfortable building.

4) Make Net Zero Energy Financially Attractive Investment Opportunities. The large capital investments in solar PV, district heating and cooling, and energy efficiency are repaid over time on utility bills, generating a steady return that benefits from enhanced credit because of the utility-customer relationship.

The Integrated Energy Service Provider

Key to the success of this business model is a dedicated integrated energy services provider (IESP). This entity will manage multiple energy-related operations and act as a multipurpose developer, financier, operator and administrator of energy systems. It will also act as a regulator of building performance requirements. The IESP may be one organization or multiple organizations acting in cooperation. However it is structured, it must execute multiple functions in concert to achieve performance objectives in the most economical way.

financially attractive new investment opportunities chart

The developers of the planned 180-acre development plan to set up a neighborhood energy utility to provide thermal and electric energy, interface with the local utility and reduce utility costs over the long term. Specifically, this IESP will be the retail electricity provider to the district’s electricity customers, managing electricity supply and conducting customer billing.

It will function as an intermediary between the regional electric grid and the district’s microgrid, negotiating interconnection terms, ancillary services, demand charges, consumption charges and feed-in tariffs with the regional utility. This will enable it to capture the value of the unique load and generation characteristics of the ultralow energy development. The IESP is expected to generate and consume approximately 24 gigawatt hours per year. Tenants’ energy bills will be lower than those of tenants in typical buildings of similar sizes and uses located outside a net zero energy district.

The IESP’s annual income and expenses will vary greatly during the district’s development, and will settle to a more consistent return after approximately 15 years of phased development. The anticipated internal rate of return for this case, calculated over the first 50 years of development, from the start of construction, is approximately 5.2 percent, excluding revenue escalation, which would further benefit the IRR. This IRR incorporates the services that the IESP will provide for district heating and cooling, renewable electricity generation and building efficiency financing. The IRR for an IESP in another scenario could vary widely, based on the services it offers as well as on location-specific characteristics such as solar access, heating and cooling loads, local building codes, financial incentives and other factors.

Takeaways

District-scale developments are uniquely positioned to be a major driver of the next generation of high-performance buildings and an intelligent electric grid, and to benefit financially from such leadership. Not all of the value elements described here will pertain to every large-scale development, given variations in size, uses, regulatory environments, project goals, energy prices, access to capital and/or operator sophistication. But standalone components or hybrids of this model can still be valuable, especially under the guidance of an IESP that plays an integrative role in value capture and creative financing, making such developments attractive to investors, developers, and tenants alike.

For a copy of the RMI Insight Brief, go to rmi.org/pdf_NZE_Districts_Brief

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