LEED, Efficiency Standards, and Risk Fa 08

Overview

What are green buildings?

Green building focuses on reducing and improving the efficiency with which buildings use resources such as energy, water, and virgin materials as compared to those built to conventional code. This building practice also reduces impacts on human health and the environment during the building's life cycle. The buildings are designed to reduce waste as well as pollution and environmental degradation. Ideally the buildings protect the occupant's health, improve occupant's productivity, and efficiently use resources. It achieves these goals through better siting, design, construction, operation, maintenance, and removal.

According to a report prepared in partnership with the US Green Building Council (USBC), buildings consume 70% of the nation’s electricity and a large part of the materials, water and waste used and generated in our economy. Because of the static nature of buildings, they comprise a relatively constant resource and technology consumption in our economy. Presently, there has been a widespread perception that green buildings are substantially more costly than conventional design and may not be justified from a cost benefits perspective. Despite their aesthetically pleasing construction and design, this perception creates an obstacle to the more widespread adoption of green design.

Leadership in Energy and Environmental Design Standard

LEED, or Leadership in Energy and Environmental Design, is one of the primary certification and ratings systems for sustainable buildings. It was developed by the United States Green Building Council (USGBC) to provide guidelines and ratings system for evaluating "Green" buildings.

The standards are defined such that a building may LEED Certified if the building scores at least 26 points from the following categories:

Categories Points Available

• 1. Sustainable Sites ..........................14
• 2. Water Efficiency ...........................5
• 3. Energy and Atmosphere.......................17
• 4. Materials and Resources.....................13
• 5. Indoor Environmental Quality................15
• 6. LEED Innovation Credits.....................5
• Total Points Available.......................69

A Building may be classified as falling under one of four certification categories:

• LEED Certified 26 - 32 points
• LEED Silver 33 - 38 points
• LEED Gold 39 - 51 points
• LEED Platinum 52+ points

Source

Background Information

Green Buildings Benefits

It is generally recognized that buildings consume a large portion of water, wood, energy, and other resources used in the economy. Therefore, if building green is cost effective, a change to green construction offers a savings in reduction of energy, water, and waste; as well as lower operations and maintenance costs; and enhanced occupant productivity and health. This section will analyze the reduction of resources used in green buildings and the benefits of green building.

Energy Use Reduction

Energy usage is the largest source of reduction a building can undertake because of the availability of energy efficient technologies. The savings primarily come from reduced electricity purchases and a reduction in peak energy demanded. This reduction can be seen in the lower costs of energy bills. The average cost of energy in buildings is $1.47/ft a year. Green buildings are seen to use 30% less energy than conventional buildings. Therefore if this reduction is spanned across a 100,000 ft2 state office building it would be worth $44,000 per year, with the 20-year present value of expected energy savings worth over half a million dollars. LEED rated buildings compared to conventional buildings are on average 25-30% more energy efficient, seen to have lower electricity peak consumption, likely to generate renewable energy on-site, and likely to purchase grid power generated from renewable energy sources. The financial benefits of 30% reduced consumption at an electricity price of $0.11/kWh (which was estimated to be the average cost of electricity in 2003) are about $0.44/ft/yr, with a 20-year present value of $5.48/ft2. The additional value of peak demand reduction from green buildings is estimated at $0.025/ft2/yr, with 20-year present value of $0.31/ft2. Combining the 20-year present value of peak demand reduction with the present value of reduced energy consumption, the financial energy benefits from a typical green building is $5.79/ft2. Thus, green buildings appears to be cost-effective. [1]

Water Conservation

Buildings use waters inside for occupants and outside for landscape. Taking a 30% reduction in the use of water indoors and 50% reduction in outdoors water usage can demonstrate a savings as well as an adequate method to dealing with drought like situations-as currently seen in California. That being said green building water conservation strategies typically fall into four categories:

• Efficiency of potable water use through better design/technology.
• Capture of gray water – non-fecal waste water from bathroom sinks, bathtubs, showers, washing machines, etc. – and use for irrigation.
• On-site storm water capture for use or groundwater recharge.
• Recycled/reclaimed water use

Yet a true cost of water is affected by various factors including: • Regional Differences- variations in cleaning, distributing, and establishing water resources from one area of a state to another. • Future Cost of Water- the cost of water in the future depends largely on demographic changes, weather patterns and public policy choices. • Perspective-who is calculating the value of water will vary from business owner to politician or lobbyist. • Hard-to-Quantify Environmental Costs • Unpredictable Political Landscape- different agendas being promoted by various politicians. All and all the conservation of water is important and green buildings are geared to conserve water. Taking the avoided cost of water to be only the average retail price paid by state agencies to local utilities, the literature suggests that there is considerable potential for cost-effective water conservation strategies in new and renovated building projects in many regions of the state. However, the actual value of water conservation to the state is not the avoided cost of retail water rates. Rather, it is the region-specific added cost of new marginal water supplies. The California Urban Water Agencies (CUWA) study cited above advances knowledge of the marginal costs of new water supplies. But it is clear that additional work needs to be done to determine more realistic numbers. More comprehensive assumptions will likely yield higher marginal costs, and thus higher potential savings. Nevertheless, the CUWA study is a good basis for determining average statewide costs, and can be adjusted upward to reflect actual recent water costs. The modified CUWA findings were applied to a hypothetical new state building project to determine potential savings and include this and a cost doubling to reflect the higher actual costs discussed above. This provides a 20-year PV of $0.51/ft2 for water savings from green buildings. These costs are very likely conservative (low) for reasons discussed above. Please see Appendix G for the detailed calculations. This investigation provides a conservative estimate for the value of water savings from green building, but also indicates that more research and analysis needs to be done.

Emissions Reductions

Most citizens are aware of the effects fossil fuel emissions cause on the environment. That being said a study done in California recognized that over 95% of electricity consumption comes from state government buildings. A simple reduction in emissions focusing on state government buildings will garnish unprecedented benefits. As stated previously, green buildings use on average 30% less energy than conventional buildings and reduce emissions by the same percentage. California particularly recorded 36% reduction in emissions compared to conventional buildings.

By reducing energy consumption a building is reducing the amount of fossil fuels burned and thus reducing emissions. Air pollutants that result from the burning of fossil fuels include:

• Oxides of Nitrogen (NOx) – a principal cause of smog.
• Particulates (including PM10) – a principal cause of respiratory illness (with associated health costs) and an important contributor to smog.
• Sulfur Dioxide (SO2 or SOx) – a principal cause of acid rain. (SOx and SO2 are functionally the same for the purposes of this report.)
• Carbon Dioxide (CO2) – the principal greenhouse gas and the principal product of combustion.[1]

Once analyzing how much of a reduction in the pollutant, the building can be weighed regarding its direct costs of pollution effects on property, health and environment as well as deciding the cost of avoiding or reducing these pollutants and using that value as a way to determine market value of pollutants.

Primarily, the large energy use of buildings (more than one third of energy used in the economy) has led ways in which to cut CO2 emissions. Legislation passed in 1997 in Oregon mandates that new power plants in the state offset a significant portion (roughly 17%) of their CO2 emissions either by avoiding, sequestering or displacing emissions or by funding projects that do the same. Many states are following this lead. The average California state building uses electricity at a rate of about 10 kWh/ft2/yr and converting it to GWh or gigawatt hour, then multiplying by the emissions factors for 2010 of carbon dioxide (roughly 308 short tons per GWh) and then multiplying again by the average prices-per-ton of carbon dioxide yields yearly emissions costs per square foot NEED figure V-5 AND v-6. Figure V-6 shows the 20-year PV of a 36% reduction in emissions of the four pollutants discussed above. As one can see the reduction in emissions is cost effective simply by calculating in a 36% average reduction as seen in LEED certified buildings in California. [1]

Overall Economic Costs and Financial Benefits of Building Green

Adrian

The Problems of Determining Cost

People in the real-estate business have been quite sketical regarding the cost of green-building. A half dozen California developers interviewed in 2001 estimated that green buildings cost 10% to 15% more than conventional buildings [4]. This idea has proven difficult to revert for several reasons, such as:

• Most developers keep their costs information private.
• Some green-building projects include expensive finishing upgrades that are not necessarily related to greenness, but that nontheless are included in the cost of the project.
• As every new branch of architecture, green buildings are subject to significant learning curve costs.
• The relative newness of green technologies may make designers be conservative when using them, oversizing green building systems and not fully integrating them into the building, reducing cost savings.
• Cost estimators may be inflated due to unfamiliar technologies. [4]

Most problems related to determinig costs arise from the fact that green building is a new branch of architecture. As time goes by, and more companies build environmentally-friendly buildings, the real costs (and most importantly, the relative cost against 'conventional' building) will be made clear to the public. Nevertheless, it is important to recall that LEED certified buildings overcompensate the higher costs by reductions in energy consumption. They might be somewhat more costly up-front, but their long-term costs are lower than the cost of 'conventional' buildings.

Cost Analysis of LEED Projects

How much more do green buildings cost?

Greg Kats, in "The Costs and Financial Benefits of Green Building. A Report to California’s Sustainable Building Task Force" lists premium costs for building 33 LEED certified projects, summarized in the following table:

It must be taken into consideration that no data was gathered to analyze what the cost of 'conventionally' building these 33 projects would have been, so we can only estimate the difference between green and 'conventional' costs in these cases.

From the table above we can appreciate that the average green cost premium for LEED Certified buildings is 0.66%; for LEED Silver, 2.11%; for LEED Gold, 1.82%; and for LEED Platinum, 6.5%. The average premium cost for the 33 buildings was 1.84%. This data is summarized in the following chart:

An evident anomaly from the data set is that LEED gold was achieved at a lower cost that LEED silver. This can be a consequence of the small sample size, but it provides evidence that Gold certification may be achieved will a little extra investment that Silver certification. This assumption suggests that LEED Gold may be the most cost effective design for buildings.

Lastly, it is important to clarify that LEED certified buildings are still a 'new' technology. Estimating costs is hard at its first stages of development, but we can expect more precise estimations -and lower costs as well- as time goes by.

Insurance Benefits of Green Building

Why Should the Risk Industry Care?

As standards and science progress and change over time, so does the impact of companies upon society. Consider asbestos, once thought to be safe during the early 1900s given the available knowledge, now recognized as a serious health and environmental risk. While the evidence of its risks mounted, it was more than 50 years before companies were held accountable for harms caused by their negligence. Many of the firms that did not anticipate the consequences of these liabilities in the context of the growing research that demonstrated asbestos’ risks were bankrupted when results came crashing down. The Harvard Business Review states: “No longer can companies be content to monitor only the obvious social impacts of today. Without a careful process for identifying evolving social effects of tomorrow, firms may risk their very survival.” That being said, LEED offers in of itself a unique opportunity for the Risk industry; a venerable crossroads of interests, one that combines the economic/financial interests of the company with the environmental interests of the global community.

Insurance and Risk Mitigation of LEED Certified Buildings

Many insurance companies have entered the market with sustainable building insurance products. For example, XL Capital has entered the field with a new Sustainable Property Endorsement: “XLI’s Sustainable Property Endorsement is designed to be attached to US property insurance policies and is also adaptable to other tailored or manuscript forms under certain conditions. The Endorsement is based on the Leadership in Energy and Environmental Design (LEED®) Green Building Rating System™ developed by the U.S. Green Building Council. It allows XLI’s customers to collect an amount greater than the value of the damaged property provided the damaged property is replaced with an environmentally acceptable substitute and, therefore, encouraging customers to upgrade their property at the time of loss.

There are, however, some risks that LEED actually increases. For instance, it was mentioned that there is a lower incidence of heat-related injuries due to increased vegetation around the building. However, this increases the fire hazard surrounding the building. In fact, Dr. Evan Mills evaluated 72 potential actions within the 6 Design Areas of LEED, measuring the impact of LEED criteria on 7 various categories of Risk; Property Loss, General Liability, Business Interruption, Vehicle (Property or Liability), Health & Workers Compensation, Life, and Environmental Liability. Out of 432 potential areas of Risk, LEED had an impact on 148. Of those 148: 121 were positive, risk-reducing impacts; 15 were neutral impacts that could prove beneficial or adverse dependent upon long-term outcomes; 12 were negative, risk-increasing impacts.

The correlation, therefore, is one that suggests that not only is LEED environmentally sensible, but from the viewpoint of the Insurance and Risk Management industry, it is the preferred risk profile. This is part of an ongoing paradigm shift within the Risk industry to encourage and move towards the establishment of a "green" market and/or targeting a "green" demographic. As one Insurance executive explained during Geneva Papers on Risk and Insurance in April 2002:

“Green” may be an important proxy data point in underwriting any number of risks. Early anecdotal evidence suggests that people who belong to or support a conservation NGO are more likely to drive a safe :automobile, use fewer pesticides and herbicides at home (reducing cancer risks), be healthier from the exercise that comes with hiking, biking, etc; they may make for a preferred personal lines/life and health :target. Similarly, if “green” means clean for the corporation, the risk profile suggested would also logically be viewed as “preferred”.

Economics of Risk Mitigation of LEED Certified Buildings

The economics of this are clear when examined side by side with the risk mitigation that LEED offers. According to Evan Mills, who has written extensively on the impact of “green products” on the insurance industry, LEED in fact reduces risk to the insurer due to the efficiency of the technology utilized. In almost every case, the more environmentally and/or economically efficient technology also proved to be safer. This is because of more stringent standards and design specifications as well as the subsequent reduction of related risks (lower interior temperatures improves roof lifetime, reduction of heat-related mortalities due to cooler temperatures as a result of increased vegetation around the building, etc).

Dickinson College

Dickinson's College Center for Sustainable Living, know as the 'Treehouse' received a Gold rating from the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) program. With this certification, Dickinson became the first College in Pennsylvania to receive a Gold rating for a student residence.

The success of the Treehouse arises from a combination of technological and architectural features, as well as from the commitment to sustainability of its inhabitants.

Among the most remarkable technological features, we can find:

• A high-performance building shell coupled with highly efficient heating and cooling systems, yielding energy saving of more than 17% over traditional buildings.
• Water savings from a dual flushing system, low-flow fixtures, and the capture of gray water for sewage conveyance, resulting in a 54% reduction of potable water use.
• Low usage of virgin raw materials for the construction of the building, by the usage of recycled materials.
• Usage of only energy star appliances which use less energy than conventional appliances.
• An energy monitoring office, where residents can monitor energy consumption in real time.

Besides these features, students are commited to:

• Taking 3-minute showers.
• Never using a clothes dryer.
• Using fans during summertime instead of air conditioners.
• Keeping heated spaces during winter at 62 degrees F.
• Reduction of waste production.

Each resident of the Treehouse has carbon-dioxide footprints that are half the size of the average Dickinson student, and they use an average of 8000 fewer gallons of water per academic year.

This past summer construction was completed on Dickinson's new Rector Science Complex. Dickinson has applied to have the building LEED certified at the silver level; certification is pending. Through use of multiple energy moniters, the Rector Science Complex limits it's energy usage from heating, air conditioning and lighting when not it use. This allows it to use roughly one third of the the energy than most buildings its size. Also, the plethora of south facing windows allow the buildings users to utilize the maximum amount of natural sun light.

Accolades and Criticisms

Aside from the obvious environmental benefits, and the previously discussed cost benefits, the LEED certification system has earned much praise from the media. In an article from the New York Times titled Green Plans in Blueprints of Retailers, Andrew Martin explains that due to unpredictability in the energy market, it is a safe choice to build green. [5]

The principle criticism of the green building program is the high premium costs. Although they may prove more cost effective in the long run, green buildings do cost more initially. This makes it difficult because the builder might not have the initial funds. As we saw in the cost analysis section if one compares estimates produced by building representatives and architects it is clear that the average premium is far less than previously thought. Kats attributes the modest cost increases of green building to the increased amount of time spent planning by the parties involved.

Another criticism of the LEED system is that it is voluntary. This leaves very little incentive to follow the guidelines. Also, because it is voluntary, the market for sustainable building remains rather small. If companies were required to build to a level of LEED certification, a market would be created to make green building as sustainable as possible. A final criticism of the LEED standard system is that it costs money for buildings to be certified. In fact, Martin explains in aforementioned article that one particular fast food store had to pay the same amount to be certified for a store five times as large. [5] Surely costs should be based on the square footage of the building. This also further decreases incentive for building green.

References

1. Kats, Greg. (2003, October). The Costs and Financial Benefits of Green Building. A Report to California’s Sustainable Building Task Force. pp 1-134.

2. Kats, Greg. (2003) Green Building Costs and Financial Benefits. A Report to Massachusetts Technology Collaborative. pp. 1-10.

3. 2008 U.S. Green Building Council: LEED rating systems. Retrieved November 21, 2008 from, http://www.usgbc.org/.

4. Berman, Adam. “Green Buildings: Sustainable Profits from Sustainable Development,” unpublished report, Tilden Consulting. July 30, 2001. Available from the author: adam@isabellafreedman.org.

5. 2008 New York Times. Retrieved November 24, 2008 from, http://www.nytimes.com/2008/11/08/business/08build.html?ref=earth.

Links of Interest

• XL Capital's Sustainable Property Endorsement
• Fireman's Fund Green Building Solutions