Final report from the Advisory Council on Climate Action: section 3

Context

Canada’s building stock is diverse; there is no one-size-fits-all approach to reducing emissions from single family homes, multi-unit residential buildings, and commercial and institutional buildings that have been built to evolving standards over the course of many decades and are adapted to different climate and weather conditions across the country.

One of the best long-term solutions to creating a low-carbon building sector is to ensure new construction is built to high standards. Ambitious building codes are the main policy tool to achieve this. As committed under the Pan-Canadian Framework on Clean Growth and Climate Change, the federal government is developing a series of new model building codes, with the goal that a “net-zero energy ready”^{Footnote 3}  model building code will be ready for provinces and territories to adopt by 2030. While the federal government can provide information, tools, and support (for instance, model building codes and funding for research and development), it falls under provincial and territorial jurisdiction to adapt and adopt building codes as they see fit. Recent analysis by the Canada Green Building Council shows that it is feasible and economical to build zero carbon buildings now, based on a 25-year lifecycle. There is a strong case for ensuring that new buildings are consistent with Canada’s long-term climate change targets, in order to avoid costly retrofits in the future.

Buildings already standing today will account for about 75% of Canada’s building stock in 2030. This means that retrofitting existing buildings to make them more efficient and resilient must be a major focus of any strategy to transition to a low-carbon building sector. Less than 10% of Canada’s buildings are under renovation in any given year, and retrofits that achieve significant energy savings are only happening in about 1% of floor space across Canadian buildings per year. A recent study by the International Energy Agency (IEA) found that buildings have the most untapped potential for further GHG reductions beyond what is already being pursued – greater than any other sector in Canada including transportation and industry. Building retrofits create clear economic as well as environmental benefits, since they contribute to job creation and save on energy costs. A study by Dunsky Energy Consulting for Clean Energy Canada found that implementing all of the energy efficiency actions in the Pan-Canadian Framework would add 118,000 jobs and increase GDP by 1%, largely driven by household and business savings on their energy bills.

If there are clear benefits to energy efficiency retrofits, why is the rate of uptake so low? Our recommendations in the sections that follow focus on how to build a more mature building retrofit market, through better information and targeted supports. In some cases, particularly in the residential sector, certain technologies and building techniques still require upfront investments that have longer timelines to pay back through energy savings than are desirable to most building owners. However, there are many opportunities, especially in larger buildings, where investments in energy efficiency could be recovered within a few years and generate ongoing savings over the life of the building.

One key way to unlock energy efficiency savings involves getting the right information to the right people. For example, lenders and financial institutions need to have confidence in information on expected energy savings in order to understand the opportunity and structure financial products appropriately. Similarly, building owners need to know how investments in energy efficiency will perform in order to assess them relative to other possible investments, and to have assurance that their investments will generate returns within the expected timelines. Better information is also a first step to finding solutions to structural barriers in the building sector, like split incentives – for example, when a tenant pays utility costs but the property owner is responsible for the capital investments that affect those costs.

Providing information and tools are primary levers at the federal government’s disposal in the built environment sector. There is a clear imperative for the federal government to expand on its current commitments to lead by example, including through retrofits of buildings that it owns or leases. In some areas, financial supports and investments by the federal government may also be needed to encourage market development and reduce risk, though these should be carefully targeted to ensure that they encourage rather than discourage investment by the private sector.

Information

Clear, credible information is the foundation on which to build the case for investments in energy efficiency. Understanding how much energy a building uses and why is a necessary first step to designing effective measures to reduce energy use, and to track the effectiveness of those measures over time. Operational costs, including energy use, are also relevant considerations in sales and leasing decisions.

Providing information to building owners, tenants, and the public is a proven and effective tool that can help to reduce energy use, inform real estate transactions, and contribute to the development of well-designed policies and supports.

In late 2016, signatories to the Pan-Canadian Framework on Clean Growth and Climate Change committed that federal, provincial, and territorial governments will work together with the aim of requiring labelling of building energy use by as early as 2019. Natural Resources Canada has been working in collaboration with provinces and territories to develop operational energy rating and public reporting mechanism for Canadian buildings, which will be made accessible through a national public database.

An evaluation of the European Union’s experience with building labelling pointed to the lack of consistency in methodologies and in the presentation of information as a shortcoming of this policy, which makes it difficult to compare building performance across countries. This underscores the importance of federal investments in tools that provinces and territories can adapt easily and cost-effectively, in order to support consistent national information on building performance.

More generally, limiting administrative burden is an important consideration in designing building labelling policies. Standardized methodologies are one form of support towards this end, which could be complemented by enhanced efforts to work with utilities on data provision. The most recent update to the Energy Performance of Buildings Directive in the European Union also recognized the growing potential of building automation and electronic monitoring of technical building systems to effectively replace inspections in verifying and monitoring building performance.

While most direct requirements for building labelling fall outside of federal jurisdiction, the Government of Canada could show leadership by committing to publicly disclose ratings for buildings that it owns or leases. Building labelling could complement other initiatives for transparency on the environmental impact of government operations, including reporting on the Government of Canada’s GHG inventory.

Recommendations:

Demonstration

While providing public information on how energy-efficient the buildings that the federal government owns or occupies would be a good first step, the Government of Canada could contribute more concretely to building market demand for retrofits through demonstration projects in its assets. The federal government has set a target to reduce GHG emissions from its facilities and fleets by 40% by 2030 (or earlier) and 80% by 2050 relative to 2005 levels. While the federal government is making progress towards these targets, there is potential to accelerate action and enhance the demonstration effects of these activities.

Retrofits of government assets have significant potential to build a market demonstration effect given their size and diversity. The Government of Canada has a large real property portfolio that ranges from office buildings and warehouses, to laboratories, to correctional institutions, to aircraft hangars on military bases. Just the Department of National Defence’s property in Canada includes approximately 2.2 million hectares of land and 20,000 buildings. The portfolio of commercial, institutional and residential buildings all across Canada that are federally owned or occupied provides ample opportunity to demonstrate the effectiveness of different types of retrofit projects under various conditions. The Government of Canada should seek out partners to complete these projects, both to demonstrate new models for delivering and financing deep retrofits and to ensure that results are replicable in the market.

Washington State is one example of a jurisdiction with leading policies to translate information collected through benchmarking to government leadership and demonstration. In 2012, Washington State enacted Executive Order 12-06, which introduced benchmarking requirements to state agency buildings to identify which buildings had greater than average energy use. These buildings would then be subject to an audit and improvement protocol. These measures were subsequently strengthened with additional requirements for a group of state government departments to evaluate progress and develop recommendations for improving the efficiency of public buildings, using benchmarking to determine which buildings were inefficient. The Government of Canada could draw on these best practices to identify and commit to prioritizing improvements in buildings that it owns or occupies with below average performance.

Transparency and effective communication of results should be key priorities to maximize the demonstration effects of investments in retrofits of federal assets. In alignment with its more general commitment to open and transparent data, the Government of Canada could provide open-source, project-level information to share experience with retrofits of its assets. This database could be developed in consultation with financial institutions and other stakeholders in order to ensure that it includes the data most relevant to their interests and needs. This would provide additional information to the market and lenders, particularly as the performance of these retrofits is monitored and validated over time. While the standard for federal retrofits should be set high, it should also be accessible and replicable by other building owners. For instance, the Government of Canada could commit to achieving net zero energy or zero carbon performance in its retrofit projects and document lifecycle savings. Careful tracking and active efforts to communicate successes and lessons learned would help to ensure these projects are replicable and provide valuable information to broader market participants.

Incremental resources will be required to retrofit buildings owned by the federal government, and to leverage efficiency improvements in spaces leased by the federal government if needed. The allocation of this budget should take into account both the direct energy savings to government and the market demonstration benefits more broadly.

Recommendation:

Standardization and aggregation

The Government of Canada could also play a role in creating and disseminating tools that standardize best practices for building retrofits, and in aggregating smaller projects for investment at scale.

For example, the Investor Confidence Project provides a global standard that incorporates best practices and independent verification to build confidence in the reliability of energy savings, reduce transaction costs, and mitigate investor risk.

The Government of Canada could adopt this standard, or a similar protocol, for retrofit activities within its own operations, and work with other stakeholders to more actively encourage a consistent approach to standardization. The Canada Infrastructure Bank (CIB) could, for instance, work with financial institutions to establish an accepted underwriting standard and certification for developing and measuring energy efficiency and carbon reduction in retrofits. The uptake of this standard could be encouraged through financial mechanisms at the disposal of the CIB and other federal institutions, for example by enabling projects that meet this standard preferred access to credit enhancement tools or lower cost capital.

There may also be a role for the federal government to provide standardized tools for measurement and verification, such as modelling of carbon reduction outcomes of retrofit projects. In particular for smaller projects, some proponents lack the capacity to reliably and consistently measure expected and actual performance outcomes. This lack of consistency limits comparability of projects, which presents a barrier to quantification and evaluation of project outcomes and to aggregation of projects for investment at scale.

Projects that follow standardized approaches and best practices generate more reliable outcomes that build investor confidence. This also enables smaller projects to be packaged together to generate investment opportunities that are sufficiently large to attract institutional investors. The Government of Canada, through the Canada Infrastructure Bank or other institution could play a role in aggregating smaller projects, and act as an intermediary to provide a level of validation and assurance that projects will generate the expected level of savings. Local project pipelines could be generated through utilities or other entities (for example, The Atmospheric Fund has a project portfolio with a value of approximately $12 million).

There is currently a window of opportunity as the Canada Infrastructure Bank is operationalized to ensure that this new institution is fully engaged in the building retrofit market. We encourage the Government of Canada to ensure that the Canada Infrastructure Bank has the necessary tools, mandate and direction to serve as a project aggregator and a center of expertise.

Recommendation:

Targeted incentives

Government spending power should be used judiciously, but may be warranted to catalyze certain segments of the retrofit market. There should be a clear linkage between any incentives provided and over-arching market development objectives. Supports should be proportionate to need.

Some incentive programs to date have focused on relatively low-effort and low-cost retrofit measures that generate energy savings quickly (e.g., installing more efficient lighting). Deeper retrofits that generate higher energy saving are typically a more complex package of measures, some of which take longer to recover the upfront investment than others. If the lower-cost, quick payback measures have already been targeted by incentives, owners may be reluctant to invest in comprehensive retrofits that generate deeper energy savings over longer time horizons. This can unintentionally push owners towards shallow, lower-cost retrofits that generate lower energy savings.

In the residential sector, upfront costs remain a barrier to energy efficiency improvements. While the Government of Canada has made investments residential energy efficiency, most recently through funding to the Federation of Canadian Municipalities in Budget 2019, further efforts may be required. For instance, there could be scope for the Canadian Mortgage and Housing Corporation to develop tools such as an underwriting framework for retrofit loans or loan guarantees for local programs that enable homeowners to repay upfront costs of energy improvements over time through energy savings.

In Class A commercial buildings – newer and well-located buildings that are professionally managed and command the highest rents – information tools may be sufficient to accelerate retrofit rates. If stronger signals are required, these owners are also generally well-positioned to comply with more stringent regulations. While access to capital is not usually a primary barrier in Class A buildings, it may be a challenge in Class B or Class C buildings, which tend to be older, not professionally managed and located outside of prime real estate areas. An understanding of specific circumstances and local needs should be central to financial supports by the federal government.

The federal government should also consider how targeted supports can be used to promote broader objectives of building market confidence through transparent, high-quality data. For example, financial incentives could be tied to verifiable performance outcomes. Under an accelerated capital cost allowance policy in place for over a decade in the United States, performance-based outcomes from energy savings had to be achieved in order to be eligible for tax benefits. This measure would be most effective if put in place for a consistent period of several years, in order to ensure sufficient time to plan, execute, and measure project results. Capacity-building measures, such as support to hire energy managers or conduct energy audits, could also help to promote energy literacy and build the business case for investments in retrofits.

Finally, there are areas where investment in further research, development, and demonstration have more impact than direct incentives. This is particularly true when research investments can be coherently translated to demonstration projects that provide a rationale for raising the level of ambition of regulatory standards.

Recommendation: