The single biggest reason why so many building retrofits fail is lack of discipline in analysis. The absolute first principle is that the building is a complex, organic system and must be looked at as a whole. It is a capital asset, regardless if it is a business or a residence. And the first rule is that:
Subsidized finance can only make a good project better, it can never make a bad project good, and if that's not clear, please go back and consult standard finance books, like Brealy and Myers' Principles of corporate finance. I discuss here some practical situations in retrofitting that make this clear.
Some of the common fallacies that will torpedo good decision-making are arbitrary limitations and incentives that are tied to specific technologies.
Financial decision-making guidelines as a stumbling block. Beware the CFO who says he only does projects with a 2-year payback. He will be sure to destroy your business, if we only do an analysis of one partial measure. Again, the property is an organic system, with interdependencies.
Example: various insulation, air-infiltration, thermal transfer, and radiant barriers can reduce the thermal load of buildings by 30-70%, with at least 50% commonly achievable. The payback of those measures analyzed in isolation, might be 3-7 years, but by not doing them because of the 2-year rule, is a mistake, the opportunity cost is that you get locked in to higher operating costs, and miss out on subsequent retrofit opportunities.
Only to a degree is the mistake on the CFO who made the rule, the mistake is also on the analyst if he buys the CFO's guideline and analyses this one measure in isolation and fails to point out that eventually there will come a time when we need to repair or replace the HVAC system, and if we have done the reduction in thermal load correctly, we will be able to maybe halve the size of the new HVAC system.
In other words, if you look at the systems level, you start seeing how there is compounding of the returns. In short, by taking the long-term view, say at least 10-15 years out, and for the total system, you then see a dramatic increase in the value of the property, which is what the CAPM, Capital Asset Pricing Model is all about.The fallacy of over-simplification. Resulting from the last point, we can see how it is deadly to use a short cut and analyze merely a single measure in isolation. In respect of energy retrofits, failing to plan is planning to fail, and the whole building has to be looked at, with at least a 10-15 time horizon. Doing it correctly will directly increase the value of the asset, even if you have to sell it at some point.
Incentives distort financial decisions. Used correctly, incentives can help, but the first run of financial analysis has to exclude the incentives, and use a uniform discount rate for the entire retrofit program in order to reveal the interdepencies that will determine the sequence in which specific retrofits are undertaken.
Example: Installing a 100,000 sqft solar roof, because of incentives, when your major demand is thermal, and a solar thermal installation would do much more for you. Or maybe you could do both. Solar thermal is 80% or more efficient, while Solar PV is only 20% efficient. So, first run the analysis to see the real benefits first, for they will outlast the length of the financial incentive. Once you have figured out the total result, then you can analyze the contribution of financial incentives on one or more components. In the vernacular: do not let the tail wag the dog.The spreadsheet trap. Spreadsheets can be bad for your financial health, for they make stupidity easy. It looks so professional so easily, but all the above mistakes can easily be made in a good looking spreadsheet analysis. It all starts with the mistake of asking the wrong question: "Show me the NPV of just this one retrofit measure." The failure is not to think about the whole system; you will destroy asset value.
