Electrification of Heating: greater value than gas and district steam

2021-12-22

Electrification of Heating: greater value than gas and district steam

Uncertainty. It is one of the most challenging aspects of managing buildings in NYC. With Local Law 97 and the Climate Mobilization Act, it has never been more complicated to operate your building effectively and plan for asset renewal and modernization intelligently. But there are new, proven technologies that can respond to current – and future – market conditions.

The “electrification of heating” is a blanket term for using heat pumps and electric boilers to meet heating needs, replacing gas boilers and steam heat. Heat pumps work the same as window AC units, making the interior space warmer by cooling the outdoor air, while electric boilers are similar to an electric tea kettle, only much larger. While relatively new to the US and NYC, heating electrification is a time-tested solution that could provide better value in three ways:

  • financial bottom line
  • occupant experience
  • operation and maintenance (O&M).

This paper will detail how best to implement heating electrification and modernize your building while increasing your profitability and cap rate and achieving compliance with new regulations.

Changing Energy Market Conditions in NYC and NYS

In investing, past success does not guarantee future performance; similarly, the past successes of gas and steam for heating in NYC and NYS are far from guaranteed in the evolving energy market landscape. First, new regulations are having a major effect. In 2019, New York City passed Local Law 97 (LL97), while New York State passed The Climate Leadership and Community Protection Act (CLCPA). The city-wide law is a carbon emissions directive to reduce carbon in buildings by 80% by 2050. While fines are accrued for non-compliance, buildings will likely be able to earn carbon credits in the future if emissions are under mandated limits, providing a revenue source. The state law (CLCPA) requires NYS to have a zero-carbon electrical grid by 2040 while reducing net GHG emissions by 85% of their 1990 limits by 2050. Both new laws are unprecedented in their scope although admittedly somewhat vague in their management still. One thing is sure, though: they will directly impact commercial, industrial, and institutional building and business owners over the coming decades.

In addition to the new energy laws, the Housing Stability and Tenant Protection Act (S.6458) also passed in mid-2019, placing financial constraints on building owners looking to improve their rental units. While the Act was intended to protect tenants and retain rent-regulated units, it has placed an increased financial burden on owners, limiting their ability to functionally and aesthetically improve housing stock. In the immediate aftermath of the passage of the law, there was a near halt on repair to the WWII-era infrastructure at the core of NYC’s rent-regulated housing stock.

These new laws are no doubt challenging to building owners in NYC. But instead being a purely negative change, they can be an impetus to future-proof buildings, improving heating, cooling, and electrical infrastructure that increases resiliency, tenant comfort, and property value.

Electrification – The Best Financial Decision

Let’s take a typical building, which can be heated three ways:

  • District steam
  • Natural gas
  • Heat pumps (i.e. electrification) with natural gas backup

According to the legislation, the cost of every delivered thermal MMBtu will increase by 2050 because of the carbon emission fine. However, this fine is not equal across energy sources and relative LL97 compliance. Below is a chart that demonstrates a simple scenario of heating costs as it changes over time.

Assumptions: Boiler Efficiency 80%, Internal Steam Distribution Efficiency 95%, Heat Pump Annual COP 4, No commodity price escalation. Full Compliance: No Fine, Partial Compliance: 108$/ton Fine, No Compliance: 215$/ton Fine (This compensates for the 20% of current emissions allowed). Source: Ecosystem

In 2020, when no fines are levied (Full Compliance), natural gas heating is still the most economical at $10/MMBtu. Electrical heating with heat pumps is 60% more expensive, while district steam is a nearly three times more expensive – given that financial case, it is surprising that it is still in use.

In 2030, when the first round of fines set for carbon emissions, electricity via heat pumps becomes the lowest-cost heating source. This is primarily due to the lower fine paid by electricity emissions vs. gas or steam per MMBtu of generated heat.

The cost gap becomes even larger as the fines increase over time while electricity carbon emissions fall to zero by 2050.

By that point, natural gas and district steam will be 65% and 160% more expensive than heat pumps, respectively.

Electrification – A Better Occupant Experience

Steam heating can be supplied by district steam or natural gas boilers. However, heating electrification is not compatible with steam – it may be necessary to convert the steam heating system to another fluid, such as hot water. While this has a cost, it also brings great potential value.

Steam heating systems notoriously tend to cause overheating and discomfort for occupants. Switching to hot water can solve that problem. Hydronic (water-based) systems are often easier to control, giving occupants a measure of control over their space. And because hot water systems operate at a lower temperature than steam, they are safer for both occupants and staff, reducing the risk of injury.

Electrification – Facilitated Operation and Maintenance

Just as a steam to hot water conversion – driven by electrification of heating – can enhance the occupant experience, this can also be an opportunity to reduce the operation and maintenance burden on your staff. Steam systems require on-site surveillance of high-pressure equipment and a more intensive maintenance (replacing steam traps at regular intervals, more chemicals for steam boiler, many more components with deaerator and condensate pumping stations, etc.).

Switching to electrified heating can be a chance to get rid of steam and facilitate the operation and maintenance of heating system, while cutting costs substantially.

Solving for the Future

Heating electrification is more valuable financially for your facility, helps you provide a better occupant experience, and reduces the operation and maintenance burden – all while reducing your carbon footprint. So how can you plan for its implementation?

  • Timing is everything. To help reduce the net capital cost of a project, timing the switch with the replacement of end-of-life heating (boilers), cooling (chillers), or heating distribution equipment can make a huge difference.
  • Use a life-cycle-cost analysis approach. First, evaluate your status quo scenario (business as usual, replacing equipment like for like) and a scenario that includes electrification of heating. Natural gas can be transitioned to a backup fuel for peak heating and emergency events.

Electrification of heating is one part of a holistic solution to prepare your buildings for the future. Coupled with a government-mandated carbon free electricity grid by 2040, it is a surefire path to comply with LL97, effectively reducing your building’s operational cost and boosting its CAP rate.

Electrification of Heating – In Detail

Heating electrification, using today’s highly efficient heat pump technology, is the ability to transform surrounding “free” energy into usable heat for your building, with the input of a small amount of electricity. While gas boilers operate in the range of 75% to 90% efficiency, heat pumps are way above 100% and sometimes up to 600% efficient.

The first source of free heat is the heat in your building – heat recovery heat pumps. Other common applications include ground-source heat pumps and air-source heat pumps, with which heat is extracted from the outside air, pumped inside by a compressor, and then transferred to your in-building heating system and to the air. The compressor consumes electricity to operate, which is the “electrification” of heat.

As the grid decarbonizes, the heating and cooling of a building with heat pumps will also reduce its emissions. Burning fuel and consuming steam, on the other hand, will always have a large carbon footprint. Installing heat pumps as a primary heating source is actually a three-for-one deal that reduces overall asset renewal costs. Heat pumps can provide:

  • Winter heating
  • Summer cooling
  • Year-round domestic hot water

Heat pump integration can occur either at the central boiler room or within individual rooms/office spaces. Conventional heating sources, such as district steam and gas, can serve as a backup and can help handle peak loads during the coldest winter days. This hybrid approach allows the heat pumps to operate at their most efficient points throughout the year, only emitting extra carbon during the coldest weather while avoiding peak electricity charges.

Heat pumps work best with either lower-temperature hydronic (water) or heated air distribution systems. Hydronic systems require the water to be heated between 120o-180oF, possible with the newer technology. Heated air distribution requires even lower temperatures, below 100oF, allowing the heat pump to operate more efficiently. In the summer, they can operate in a dual mode, generating chilled water for air conditioning and heat for domestic hot water.