The Growing Complexity and Cost of Energy Benchmarking

Introduction

This year New Jersey State and the city of Miami Florida join the existing 54 cities and 6 states that already report on energy benchmarking. They will be joined in the future by other jurisdictions that are currently in the planning stages.

Laws in Denver, New York, Washington D.C., Boston and St. Louis impose penalties based on energy usage or GHG (Green House Gas) emissions targets. Atlanta, San Francisco, Chicago, Los Angeles, Miami, and Houston are not far behind.

The Importance of Environmental Compliance for Building Owners and Portfolio Managers

There is a growing awareness of the impact that buildings have on the environment. According to the EPA, commercial buildings account for 16% of US greenhouse gas emissions and spend more than $190 billion per year on energy. In dense cities, up to 70% of total emissions can come from commercial buildings.

Energy Star certified buildings, however, use an average of 35% less energy than their uncertified counterparts. Given this impact, cities and states will continue to enforce stricter requirements on commercial real estate as they look towards their goals of GHG reduction and net zero targets.

By taking a proactive approach to environmental issues, owners and managers can identify and address potential risks before they become a problem. This can include risks related to regulatory compliance, such as the aforementioned fines or penalties, as well as risks related to reputation, stakeholder relations, and building operations.

Finally, there is a growing recognition that environmental issues are financially material for building owners and portfolio managers. Beyond the obvious cost reduction achieved by operating a building more efficiently, buildings that fail to address environmental risks may also face lower re-sale values, face higher financing costs, and be less desirable for tenants.

Benchmarking Your Building’s Environmental Performance versus Peers

As the importance of environmental compliance has grown, so too have the requirements and penalties for non-compliance. Regulators are increasingly demanding building owners and portfolio managers take action to address environmental issues and are willing to impose penalties on those that fail to comply. Also, other stakeholders such as investors and bankers are imposing their own versions of penalties for environmental non-compliance.

Determining which buildings should be subject to penalties requires benchmarking a building's environmental performance to that of its peers or industry standards. This can help building owners and portfolio managers identify areas where they need to improve, as well as demonstrate their commitment to environmental issues to stakeholders.

Example of building performance penalties for Local Law 97 if there are no emission reductions after 2029

However, benchmarking can also be a double-edged sword. As environmental performance becomes more important, buildings that lag behind their peers may face increased scrutiny and penalties. Investors may be more likely to divest from buildings with poor environmental performance, or regulators may impose fines or other penalties for non-compliance.

Example: Local Law 97 in New York and Its Implications for Building Owners and Portfolio Managers

One example of a regulatory framework that emphasizes benchmarking is Local Law 97 in New York City. Local Law 97’s requirements entail that building owners report their energy use intensity (EUI) to the city, which is used to determine their emissions limits. This creates a benchmarking system that allows building owners to compare their environmental performance to that of their peers, and to identify areas where they need to improve. Compliance with Local Law 97 will require building owners and managers to invest in sustainable practices and technologies to reduce their environmental impact.

This law, passed in 2019, requires existing buildings over 25,000 square feet reduce their GHG emissions by 40% by 2030 and 80% by 2050. Buildings that fail to achieve these reductions will be subject to penalties. The planned penalties are significant.

For example, 200,000 square feet building that exceeds the 2030 limits could experience annual penalties of as high as $262,000.   Additionally, without improvement in emissions, these penalties would jump 21% in 2025, an additional 18% in 2040, and an additional 8% in 2050.

Summary

Environmental compliance is becoming increasingly important for building owners and portfolio managers, given the tremendous impact that buildings have on the environment and the financial implications of environmental risks. Benchmarking is an important tool for building owners and managers to track their environmental performance and compare it to their peers, but it also creates a risk of penalties for those that fail to comply with environmental regulations.

Building owners and portfolio managers must take a proactive approach to environmental compliance, invest in sustainable practices and technologies, and be prepared to adapt to evolving regulatory requirements to remain competitive and sustainable in the long term.

Tracking these ever-changing requirements can be a daunting task for an owner with buildings nationwide. However, with Backpack, owners can ensure they know what compliance requirements apply to all their buildings in their portfolio, and automatically submit them to regulators. With a click of a button, an owner can see the status of their whole portfolio, always up to date with the latest regulations, upcoming submission dates, and the current compliance status of every building. Backpack worries about compliance, so owners don't have to.

FEATURE HIGHLIGHT

Automated, audit-ready Energy Star and compliance reporting

• Visibility of compliance requirements mapped to your portfolio
• All required compliance data stored, managed, and submitted
• Automated Energy Star portfolio account management and compliance submissions