It's Electric: The Good, Bad And Painful Of Ditching Fossil Fuels In Buildings
A growing trend in the world of sustainability could have a major impact on how buildings are designed in the future: electrification.
The concept behind electrification is simple: Building owners replace fossil fuel combustion with electric technology. As the power grid becomes greener, those buildings will get their energy from renewable energy sources instead.
The practice has come under the spotlight in the past two years as cities and states have started implementing electrification mandates. Some in real estate support the measures — advocates say that eliminating fossil fuels from residential and commercial buildings could help governments and businesses hit their climate goals by reducing global emissions and can create positive health outcomes by improving air quality. The measures can also provide cost savings to landlords in the long run.
But if you’re not developing a building to be all-electric from the beginning, the economics of retrofitting are more challenging. And for some landlords, there are lingering concerns that all-electric buildings will be harder to lease in the multifamily and retail sectors.
Though most commercial and residential end uses are 100% electrified, there are some exceptions: space heating, water heating, clothes drying and cooking. Space heating uses the significant majority of non-electric energy in both residential and commercial buildings, U.S. Energy Information Administration surveys found.
Reducing fossil fuel use in the real estate sector could have a big impact on global emissions. Residential and commercial buildings account for about 40% of U.S. energy consumption, and fossil fuel combustion attributed to residential and commercial buildings accounts for about 29% of total U.S. greenhouse gas emissions, according to the EIA.
By replacing just the natural gas-burning heating systems in commercial buildings with electrified heat pumps, owners could reduce the greenhouse emissions of those buildings by 44%, according to a report released in October by the American Council for an Energy-Efficient Economy.
Electrification has other benefits. The technology swap could improve air quality and health outcomes for building occupants and the public, create jobs, reduce cost burdens on low-income communities and ultimately decrease operating costs for landlords, as electric technology can increase efficiency throughout the building.
Within the past two years, several U.S. cities have introduced legislation that requires all new construction to be electric. In July 2019, Berkeley, California, became the first city to ban natural gas connections in the majority of new buildings. Five other California municipalities have followed suit, including San Francisco, San Jose, Santa Cruz, Morgan Mill and Alameda.
But it isn’t just a California trend. Other states with cities that have adopted or are developing natural gas bans and electrification codes include Washington, New York, Massachusetts and Colorado.
Inevitably, there has also been pushback against the bans. Arizona, Tennessee, Oklahoma and Louisiana all passed laws in 2020 prohibiting local governments from adopting California-style building electrification measures. At least four other states introduced similar legislation, and a bill to prevent Texas cities from banning natural gas hookups has advanced to Texas Gov. Greg Abbott’s desk.
Right now, developers proactively choosing to build all-electric buildings without regulatory prodding are in the minority, but the push has begun to intensify. More companies are setting green corporate goals and looking ahead to the energy transition, while President Joe Biden’s aggressive stance on climate change, including rejoining the Paris Agreement, has also set the tone for the next four years.
“If real estate's paying attention, they know that this is coming, and they're starting to prepare thinking through their business case and timeline for transitioning to all-electric buildings,” Urban Land Institute Greenprint Center for Building Performance Senior Vice President Marta Schantz said.
Some real estate investors and developers are getting on board, voluntarily or not. Vornado Realty founder Steve Roth wrote in an investor letter in April that the company, a REIT with a 20M SF portfolio, primarily office and retail in Manhattan, is beginning to electrify its properties.
“Carbon emissions have a complex relationship with real estate. As property owners, we can control the emissions generated by our energy consumption, but we also must be aware of the resources expended to generate this energy,” he wrote.
He said following the mandates by New York state and California to achieve green grids by 2040 and 2045, respectively, Vornado is looking at ways to reach carbon neutrality. He said electrifying the company’s buildings is “a plausible path,” and he encouraged other real estate leaders to get involved at the legislative level on future sustainability measures.
“We have a seat at the table with climate policymakers at City, State, and Federal levels to advise not only on what role buildings must play in climate change mitigation, but also how it can be done,” Roth wrote.
The ability to fully electrify buildings has been around for a long time, but developers and building owners have been slow to fully embrace the electrification movement. The biggest barriers tend to be economic, not technical. Fuel prices and differences in the capital costs of equipment are the main factors influencing the economics of electric versus non-electric technologies, according to the Lawrence Berkeley National Laboratory.
If a building is designed to be all-electric from the very beginning, it’s usually no more expensive to build than a regular building with fossil-fuel technology, according to Kilroy Realty Corp. Senior Vice President of Sustainability Sara Neff. About 20% of the firm’s portfolio is fully electrified, including new developments underway.
Schantz said that one of the financial benefits of all-electric new construction is that developers don’t need to include natural gas lines in the building, which means instant cost savings.
“Already, we're seeing developers reporting that by planning to go all-electric from the start, they're not seeing extra costs. And they're also saving from having to retrofit for electrification later,” Schantz said.
Building Decarbonization Coalition Director Panama Bartholomy agrees there is a big reason to go electric, though it looks a little different for each building: “Math. The electric appliances cost the same or sometimes slightly cheaper or more expensive and then you are skipping a whole utility and so have savings from not installing pipe, and venting, not waiting for the gas company on approvals and trenching and the associated carrying cost.”
However, there are challenges related to the climate. Historically, electrification was difficult in cold climates because heat pumps couldn’t handle the extreme cold. That technology has been improving, making it less of an issue, but it can still be a factor in property owners’ decision-making.
The ACEEE noted in its report that introducing electrification first in certain geographic areas could produce better results, especially to help the movement gain momentum. Those areas include most of the southern U.S., the warmer areas of the Rocky Mountain region and the Pacific region, where space heating needs are modest.
Kilroy Realty Corp.’s portfolio is spread out across temperate West Coast cities, where the weather is less likely to pose a problem for all-electric technology, and electricity prices tend to be less volatile.
In Texas, a powerful winter storm that froze equipment, cut off energy supplies and forced the state's power grid operator to implement rolling outages served as a timely reminder of how extreme cold temperatures can affect electricity access. While Texas' storm was unusual, those kinds of temperatures are commonplace in the interior northern half of the country.
“I think for those folks, it might be more expensive, more money. But for us, again, baked in from the beginning, it's not necessarily more expensive,” Neff said.
The cost burden for retrofitting an existing building is higher. Replacing existing combustion systems with all-electric systems is rarely a straightforward swap, as some electric equipment can require a larger floor plate than what was previously being used. Converting fuel-based equipment to electric may also require an upgrade of the building’s electricity service feed to power the new equipment.
Schantz said that to make the financials work for an existing building retrofit, the best thing to do is wait until the building systems reach the end of their useful life. That way, owners can replace them with a low incremental cost compared to what would have been done anyway.
“By timing that just right, it makes it a much more efficient and cost-effective proposition,” Schantz said.
Kilroy isn’t looking at immediately retrofitting all the buildings it has already acquired, because right now the economics aren’t ideal, according to Neff. The ones with technology coming to the end of their life cycle may be the exception because of the cost.
However, Neff does see room for building owners to do partial electrification by replacing certain aspects of the technology in their buildings. That could be as simple as swapping in electric appliances, such as replacing gas stoves with induction stoves.
“I think we're going to see quite a bit of partial while we get more sophisticated in how to do a whole building, electric to gas retrofit in a responsible way,” Neff said.
Pushback from within the commercial real estate sector tends to come from multifamily and retail developers and owners. The objections are mostly related to cooking and fears that tenants in both types of assets will reject spaces that don’t have access to natural gas.
“Restaurants are proving to be a concern [for] developers who are worried that their restaurant spaces, if they're all-electric, will not get leased,” Schantz said. “They worry that the restaurant tenants in general will shy away from all-electric kitchens, because they're used to cooking on gas stovetops.”
Neff said that Kilroy Realty Corp. hasn’t seen pushback from tenants, investors or rating agencies in proposing all-electric office buildings, because access to natural gas for cooking isn’t really an issue. But like Schantz, she could see leasing teams for multifamily and retail assets pushing back against electrification.
As for the speed of adoption, it will come down to several things. The price of electricity is still likely to determine whether developers proactively build all-electric buildings. The introduction of more incentives at the local, state and federal levels will also have an impact on how fast developers embrace electrification.
“I think paying attention to economics is important, in terms of where we're going to see more rapid adoption,” Neff said. “There's going to be point-of-sale rebates and those kinds of things on the electrical equipment. All those things are going to spur adoption.”
The key is getting developers and building owners to think about the long-term benefits, rather than the short-term cost, according to Schantz.
“Short-term, it is harder to make the case for all-electric, when you're only looking at a couple of years out. But long-term, the case to go all-electric for a building is much more evident,” Schantz said.