L.D. Danny Harvey
Department of Geography, University of Toronto
100 St. George Street
Toronto M5S 1A1 Canada
Municipalities can play a number of important roles to complement national actions to limit greenhouse gas emissions: (i) by facilitating comprehensive, city-wide building retrofit activities; (ii) by facilitating the development and/or expansion of community integrated energy systems involving district heating, district cooling, and cogeneration of electricity; and (iii) by promoting urban intensification to reduce the need to use the private automobile. Innovative institutional and financial mechanisms are needed to overcome some of the persistent barriers to more efficient energy use in buildings and a number of concepts, which are currently being considered by the City of Toronto as part of its programme to reduce CO2 emissions by 20% from the 1988 level by 2005, are discussed here. These concepts involve using public securitization funds to leverage private sector funds for energy efficiency retrofits and a number of measures to reduce financing and retrofit transaction costs. Even where surplus electricity generating capacity exists at the regional scale, reduced electricity demand can still result in avoided utility system costs if transmission bottlenecks and future transmission and transformer upgrade costs are reduced. Finally, given the need to replace or modify many of the existing commercial chillers due to the phase out of CFC's, a window of opportunity exists during the next few years to provide alternative, chlorocarbon-free district cooling systems based on absorption chillers using waste heat from electricity generation, with significant (30-65%) CO2 emission savings.
The United Nations Framework Convention on Climate Change requires all signatory parties to, among other things, "Formulate, implement, publish and regularly update national and, where appropriate, regional programmes containing measures to mitigate climate change by addressing anthropogenic emissions by sources ...." (emphasis added). Most policy analysis has focused on national measures and international instruments to reduce greenhouse gas emissions, and existing macro-economic models have been used to assess the effectiveness and cost of carbon taxes as a means to achieve emission reduction. Comparatively little attention has been devoted to actions that can be taken by local governments to promote greenhouse gas emission reduction. However, most of the energy-related greenhouse gas emissions occur in the urban environment and can be influenced, to some degree, by local municipal governments (Harvey, 1992).
Municipalities generally have at least partial control over land use though zoning regulations and official plans; are responsible for issuing building permits and approving major developments; exercise control over parking supply and rates, roads, and public transit; often own or regulate municipal power and natural gas utilities and district heating systems; play a central role in waste management; can influence the market through their own purchasing decisions; and are well positioned to be able to deliver comprehensive, community-based building retrofit programmes. Many opportunities to reduce greenhouse gas emissions, and the associated costs and economic benefits, are highly site-specific. Municipal governments, because they are more directly involved in local activities and more aware of local conditions and opportunities, are therefore well positioned to be able to capitalize on emission reduction opportunities within their own jurisdiction.
National and regional level governments clearly have important roles to play in the reduction of greenhouse gas emissions. These roles include national standards for automobiles and trucks, appliances, and furnaces and boilers; research and development support for renewable energy and advanced energy saving technologies; removal of subsidies for fossil fuels (which average $92/tonne carbon outside OECD countries base on OECD and World Bank studies cited by Grubb et al. (1993), page 461); and support for urban rapid transit and regional rail systems, where lacking. However, realization of a large fraction of the cost-effective potential to reduce greenhouse gas emissions, and at minimal cost, will clearly require the active collaboration of national, regional, and municipal level governments.
This paper discusses the role that municipalities can play in national action plans to limit greenhouse gas emissions. The City of Toronto has an official target of reducing CO2 emissions associated with energy use in the city by 20% from the 1988 level by 2005, and is actively pursuing policies to achieve this target. Toronto is therefore used as a case study of the some of the roles that municipalities can play in CO2 emission reduction. An overview of Toronto's CO2 emission reduction strategies can be found in Harvey (1993).
Two major components of Toronto's programme to reduce CO2 emissions by 20% are the development of a comprehensive building retrofit programme, which is expected to target the maximum cost-effective energy and water savings potential in the entire building stock of the City, and the incremental expansion of the district heating system accompanied by the construction of satellite district cooling systems and the addition of cogeneration. The major features of these two programmes, and the barriers involved and their resolution, are discussed below. In the closing section of this paper, potential linkages to and implications for national-level policies are discussed.
Energy use in buildings accounts for about 70% of the total CO2 emissions associated with the use of energy in the City of Toronto. Studies commissioned by the City conservatively indicate that electricity use could be cost-effectively reduced by about 50% by 2005, compared to baseline frozen-efficiency projections, or by about 30% compared to the 1988 use. The cost effective savings potential for oil, natural gas, and steam use is also estimated to be 30% compared to current use. In spite of retrofit activities by private Energy Service Companies (ESCO's) and demand management programmes by the provincial power utility, relatively little of this potential is being realized.
An opportunity also exists for significant reductions in water use, again at a net economic savings. Total domestic water consumption could be reduced by about 33%, and hot water consumption reduced by least 20% through cost-effective water efficiency measures. Substantial amounts of energy are used in pumping water, manufacturing the chlorine used to treat it prior to use, and at sewage treatment plants subsequent to use. Failure to reduce existing water demand will result in a need for expensive (on the order of $1 billion) future water system infrastructure expenditures to handle new loads on the truck sewers and water treatment facilities. Hence, water conservation provides significant energy and economic savings. However, like energy, little of this cost-effective savings potential is being realized at present.
Reasons for the low uptake of cost-effective energy (and water) efficiency measures include (i) lack of coordination among the many players that would be involved in deep and widespread energy efficiency improvements; (ii) transactional costs associated with finding out about energy efficiency opportunities and deciding which measures to implement; (iii) lack of credibility concerning the performance of new technologies or the agencies promoting new technologies, and fears concerning the financial stability of the companies offering new products; and (iv) lack of attractive up-front financing for energy efficiency retrofits in many cases.
The City of Toronto, with the help of an international team of outside consultants, is in the process of designing a programme which will address these barriers. Although the eventual goal is to retrofit the entire building stock in the City (private and public) to the full cost-effective energy and water savings potential, it is intended to begin with a two-year pilot project which will test various organizational and programme delivery concepts, verify expected retrofit costs and energy savings, and determine participation rates. The two year pilot project is likely to target a cross section of building types representing about 2% of the total floor space in the city.
Below are outlined a set of concepts which are being considered, along with other concepts, for the pilot project energy efficiency initiative. The financial mechanism described below is similar to the financial mechanism proposed to the provincial government by a consortium of 11 municipalities in Ontario (Canada) as part of a collaborative effort to retrofit municipally-owned buildings throughout the 11 municipalities (Cummings, 1994).
Financial mechanisms. The upfront costs of energy efficiency retrofits are to be financed by the private sector, which is to be paid back by the beneficiaries of the retrofit programme (ie.: builder owners and/or occupants). To make the programme attractive to building owners, it is necessary, among other things, that financing costs be as low as possible. Furthermore, it is necessary that high risk players, which might not otherwise be eligible for loans from private institutions, be included in the retrofit programme. One possible mechanism to achieve these objectives is as follows:
Issue a request for proposals from financial institutions to be the designated financial institution (DFI) for the pilot project. The institution offering the most attractive financing terms would be selected.
The DFI provides upfront financing for the pilot retrofit project and assumes 100% of the risk for loans which would have met its normal lending criteria.
× For loans which do not meet the DFI's normal lending criteria but which meet the pilot project's criteria, funds provided by government (either municipal or regional/national, on behalf of the municipality) are placed in an interest-bearing deposit at the DFI to serve as insurance in the event of default by participants which did not meet the DFI's lending criteria.
Loans are paid back through an additional item on the participants' utility bill. The retrofit and financing costs must be such that loan payments are smaller than the expected energy and water savings by a suitable margin, so that the participant experiences a positive cash-flow from day one.
In the event of a default by participants which did not meet the DFI's lending criteria, the DFI draws upon the insurance fund to cover that portion of the loan-risk borne by government. In cases of default, the municipality in turn converts the outstanding loan to a lien on the property which is collected through increased property taxes (since the original loan financing costs would be designed to be less than the energy cost savings, the increase in property taxes will also be less than the energy cost savings, so the resale value of the property would not be adversely affected).
As loans are fully paid back to the DFI, any remaining insurance pool plus accumulated interest is returned to the appropriate level of government.
These arrangements are summarized in Figure 1.
Figure 1.Financial structure concept involving government securitization of private sector loans for energy efficiency retrofits.
The advantages of this financial mechanism are (i) the private sector rather than the public sector is used to provide up-front financing; (ii) by pooling many participants together, the DFI's loan transaction costs are reduced, and by providing loan insurance, the DFI's risks are reduced, both of which will allow the DFI to provide lower interest rate loans than would otherwise be the case, and thereby allow deeper retrofits and hence greater energy savings. A portion of the cost savings achieved through pooling, and in the interest rate reduction achieved through securitization, could be used to finance the activities of the two-tier organizational structure outlined below. Note that this scheme is quite different from subsidized government loans which have been used in some jurisdictions. In the scheme outlined above, government funds serve primarily to leverage a much larger pool of private capital and to reduce interest rates charged by private lenders, and will eventually be recovered.
Organizational structure. Buildings in a city such as Toronto fall into two separate market sectors, each with its own challenges and opportunities: large institutional, commercial, and industrial buildings (large ICI sector), which includes high rise multi-unit residential buildings; and single and small multi-unit residential and small retail buildings (Community sector). Financing is comparatively easy for the large ICI sector, and private Energy Service Companies (ESCO's) are already carrying out some retrofit activity in this sector. In other instances, design/build companies (DEBCO's) serve the ICI sector. The magnitude of energy savings which can be achieved makes transactional costs less important than in the Community sector. Nevertheless, lack of information, transactional costs, and financing are barriers to deeper and more widespread retrofit activity than occurs at present in this sector. ESCO's have generally avoided the Community sector due to the smaller absolute savings per client and the greater credit risk associated with many small businesses and low income households.
One mechanism to overcome these problems and facilitate the financial mechanism described above is a two-tier organizational structure, summarized in Figure 2. The upper tier consists of a city-wide Toronto Energy and Water Savings company which would (i) manage the financial mechanism outlined above; (ii) help establish Neighbourhood Energy and Water Savings Companies (NEWSCO's), which would be created to serve the Community Sector; (iii) provide technical support services to existing ESCO's and DEBCO's which serve the large ICI sector, and to NEWSCO's; (iv) provide training for NEWSCO staff; and (v) act on behalf of ESCO's and NEWSCO's to develop new partnerships and sources of revenue, to negotiate attractive prices for retrofit equipment and materials through bulk purchasing, and to work with various trade, professional, business, and community associations to promote retrofit activities. The lower tier would consist of Neighbourhood Energy and Water Savings Companies (NEWSCO's) which would facilitate retrofit activities in the Community sector by (i) providing intensive marketing and technical support for contractors; and (ii) providing audits, access to financing, referrals to contractors, and third party inspection and quality assurance for home owners and small businesses. It has been suggested that the NEWSCO's would be advised by local Community Advisory Committees, which would help to tailor the details of the programme to capitalize on local circumstances and opportunities (this is particularly important in diverse, multi-cultural, and multi-linguistic cities).
Figure 2.Possible organizational structure of a comprehensive, city-wide building energy and water savings retrofit programme.
One stop shopping. All energy forms and water use will be dealt with simultaneously in building audits and retrofits.
Community participation. It is expected that high participation rates (80-90%) can be achieved by working with the large number of trade, professional, business, and community associations which exist in a city such as Toronto.
At this stage no decisions have been made with regard to the financial mechanism and organizational structure. However, it is clear that a special delivery agency of some sort will be needed to address the barriers posed by the Community sector, as this sector is currently being avoided by private ESCO's.
A key feature of the retrofit programme being designed for the City of Toronto is its highly decentralized approach. The behavioral literature on energy efficiency stresses the importance of direct personal contact, interpersonal networks, and credibility of the delivery agency in achieving high rates of participation and enthusiasm for energy efficiency retrofits (Hirst, 1989; Robinson, 1991).
Cost reduction strategies involve (i) minimizing programme delivery costs; (ii) minimizing retrofit transaction, installation, and financing costs; and (iii) maximizing the avoidance of societal costs through energy and water conservation.
Programme delivery costs have been a significant cost in some utility-sponsored demand management programmes, in some cases exceeding the direct cost of energy conservation measures (Joskow and Marron, 1992). However, programme delivery costs per unit of saved energy can be kept low by (i) simultaneously considering energy and water conservation; (ii) simultaneously addressing electricity and oil or natural gas use in buildings; (iii) by targeting the maximum cost-effective energy and water savings potential; (iv) by using the existing billing system for collection of loan payments; and (v) by taking full advantage of community-based organizations to disseminate information about the programme, gain credibility, and achieve high participation rates. Other measures, such as combining the current separate billing for electricity, water and gas into a single billing system which includes loan repayment, will reduce current costs and thereby offset some of the incremental costs associated with the retrofit programme.
Overall costs can be kept low by securing lower interest rates, as described above, and through bulk purchasing. Initial transaction costs can be reduced by designing a pre-audit information package which consists of a basket of measures, screened to match each of several building categories, that will allow building owners or designers to quickly estimate the capital cost and anticipated savings prior to committing to a detailed audit or engineering study.
Societal costs which can be avoided through energy and water conservation measures include (i) costs of new or replacement electrical power plants; (ii) costs associated with power distribution and transformers; and (iii) costs associated with increasing the capacity of trunk sewers and water treatment facilities. Many power utilities, including that which serves Toronto, have surplus electricity supply at present, which discourages electricity conservation. However, in the case of Toronto, transmission and distribution of electricity is a bottleneck, and major expenditures in refurbishing transmission lines and transformers will be required during the next decade. Strategic electricity conservation, in which conservation efforts are focused geographically on local "hot spots" can either defer the need for transformer replacement, or can allow downsizing - with associated cost savings - when transformer replacement occurs. A detailed assessment of these avoided costs is currently underway. Preliminary findings indicate that, unless electricity demand is reduced, transmission and transformer upgrade expenditures in the City of Toronto will be on the order of several $100 million. Major capital expenditures - on the order of $1 billion - will also be required to expand the sewage treatment infrastructure (due to continuing urbanization on the urban periphery) unless water consumption can be reduced. A significant, but as yet uncertain, portion of these expenditures can be avoided through strategically phased energy and water conservation.
In the case of both electrical distribution systems and water treatment infrastructure, the avoided societal costs occur at the municipal scale and require municipal involvement to be identified. To ensure societally optimal levels of energy and water conservation, these avoided costs should be made available as incentives to partly offset the cost of energy and water conservation measures.
Community integrated energy systems involve district heating and cooling systems, coupled with cogeneration of electricity. State-of-the-art district heating systems can reduce CO2 emissions by 10% compared to on-site heating of individual buildings. Much larger savings are possible if district heating is combined with electricity cogeneration; if coal-based electricity is displaced (as in the case of Toronto) and natural gas is the fuel for cogeneration, CO2 emissions per unit of electricity generated are reduced by about a factor of four. The amount of electricity which can be cogenerated is limited by the minimum heat load (in summer) of the district heating system. However, steam or hot water can be used in absorption chillers to produce chilled water for cooling purposes without using CFC's or HCFC's. Although absorption chillers produce less cooling per unit of energy input than the electric chillers they would displace, overall CO2 emissions in providing cooling and non-cooling electric demands would be reduced by 30% (no fuel change) to 65% (if a concurrent switch from coal to natural gas occurs). The current HCFC candidates to replace CFC-11, used in commercial chillers, are HCFC-123 and HFC-134a. HCFC-123 has an ozone depleting potential about 20% that of CFC-11 on a 10 year time horizon (Solomon and Albritton, 1992), which is relevant to the peak stratospheric chlorine loading expected near the turn of the century and the possibility of an Arctic ozone hole, while HFC-134a has a global warming effect 25-30% that of CFC-11 (Fisher et al 1990). Current international agreements call for the phaseout of the HCFC's by 2020, although, like previous chlorocarbon phaseout targets, this one might also be moved forward. Thus, an HCFC-free cooling system has distinct environmental benefits and eliminates the risk of yet another retrofit of cooling equipment.
The phaseout of CFC production in 1996 provides an important window of opportunity. There are 85,000 electric chillers in North America, 65,000 of which were built before 1987 and are incompatible with the substitutes proposed for CFC-11. Retrofitting or replacing these chillers would be costly: for Toronto, the estimated cost is on the order of $100 million. One option, currently pursued in Toronto, is to create a series of satellite district cooling systems initially using existing chillers and CFC-11 salvaged from existing buildings, supplemented over time with an increasing number of absorption chillers driven by steam from electricity cogeneration. Significant cost savings are often possible through integration of heating, cooling, and electricity generation. Costs are highly site-specific, and realization of the potential savings to a large extent requires proceeding incrementally on an opportunistic basis. This in turn requires a detailed knowledge of local circumstance, as well as long term policies in support of integrated energy systems.
Municipal level governments can play an important role in facilitating, or blocking, the development of community integrated energy systems. Key issues involve, first, permits to install the required distribution infrastructure or, in the case of new developments or redevelopments, a requirement that heating and cooling distribution infrastructure be part of the development. Second, sites for the power plant (if centralized) or power plants (if decentralized) must be approved. Third, by granting franchise rights to potential private sector partners, upfront funding can be secured which might not otherwise be available.
Another key area where municipal level action will be needed in order to realize the full potential for greenhouse gas emission reduction is through (i) planning of new urban developments; and (ii) redevelopment and intensification of the existing urbanized area. In North America especially, land use planning has favoured low density development in which workplaces, residential areas, and social amenities are deliberately separated, creating strong automobile dependence and large transportation energy demand. The greatest long term impact on transportation energy use will likely result from a re-orientation of urban planning toward higher density development in which various land uses and services are located within a short distance of one another. More compact urban form also improves the economics of community integrated energy systems, as well as creating more "liveable" cities (Duarne and Plater-Zyberg, 1990).
To recapitulate, municipalities can play important roles in realizing significant CO2 emission reductions. The roles discussed here are:
1. Facilitating comprehensive, city-wide building retrofit activities through a decentralized approach involving the establishment of local energy savings companies which can fill the important roles of coordination, marketing, and cost reduction.
2. Using powers of property taxation to provide securitization of private sector loans, thereby obtaining a better interest rate for all participants and allowing small businesses and low income households, which normally present a greater credit risk, to participate.
3. Capitalizing on the opportunity for joint billing of all municipal scale utilities (water, electricity, gas) and of retrofit loan repayments to achieve cost reductions which will at least partly offset the extra costs associated with administering a retrofit programme.
4. Utilizing the extensive links with the numerous trade, professional, business, and community associations which exist in most large cities to promote retrofit activities and high efficiency designs in new buildings and developments.
5. Facilitating development and/or expansion of community integrated energy systems involving district heating, district cooling, and cogeneration of electricity.
6. Promoting urban intensification and land use planning which will minimize the generation of automobile trips and, for those trips generated, minimize the distances involved.
Many of these activities compliment the policies which can be implemented at the national level to induce reductions in greenhouse gas emissions. However, not all municipalities may be willing to cooperate with national level governments in achieving greenhouse gas emission reductions. Hence, a key component of national actions plans should be a set of incentives to encourage municipalities to undertake actions which will compliment national policies, on the grounds that the required complimentary programmes are best delivered at the local level. Examples of such incentives might include preferential funding transfer to cities which develop successful community-based retrofit programmes, which facilitate development of community integrated energy systems, or which implement measures for urban intensification.
National level governments could also serve as a source of funds for securitization of private sector loans, thereby leveraging 10 to 20 times as much funding for energy efficiency retrofits, which could be delivered through local governments. Furthermore, most or all of the securitization funds could be recovered with interest.
Finally, building retrofit activities should address water conservation as well as energy conservation. Two reasons for this have already been identified here: first, the embodied energy content of municipal water can be significant, and secondly, the cost savings associated with water conservation can be combined with energy cost savings to improve the economic attractiveness of a building retrofit programme. A third reason for addressing water conservation simultaneously with energy conservation is that water is already, or might become as a result of climate change, in short supply in many cities.
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