Colorado's new environmental rule could cost building owners, tenants more than $3 billion

Feb. 13—About 8,000 large building owners statewide face spending more than $3.1 billion by 2050 to comply with a proposed rule that seeks to reduce energy consumption now under consideration by state air pollution authorities.

That estimate is based on a state economic impact analysis of the proposed rule that is part of Gov. Jared Polis' Greenhouse Gas Reduction Roadmap, an ambitious plan that seeks to transition the state away from fossil fuels. The plan is mandated by the General Assembly via House Bill 21-1286, which imposes reductions in energy use of 7% by 2026 and 20% by 2030 below 2021 levels.

The proposed rule would apply to nearly every building in the state with more than 50,000 square feet of floor space, including parking areas. Some buildings — including agricultural, manufacturing, industrial, storage facilities, and unheated stand-alone parking garages, or hangars — would be exempt from the rule.

So are public buildings, unless at least 25% of the building is being renovated and the cost is at least $500,000.

The economic analysis puts the energy savings and total benefits from greenhouse gas reductions at nearly $11 billion, with a predicted CO2 emissions reduction of 25.8 million pounds of carbon-equivalent.

To get there, however, the analysis predicts it would cost $3.1 billion in building upgrades and associated costs over the next 27 years:

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$2.63 billion in capital retrofitting outlay

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$405 million for operation and management

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$61 million for filing fees and labor for completing the required reports

The cost to taxpayers for the state to administer the program is estimated at $15.6 million.

Deadline dispute

The governor's office insists the deadlines set by the statutes apply to tracking emission benchmarks, not to when the buildings must be retrofitted to meet the energy reduction standards.

"Deadlines are for the state to track how we are reducing emissions — not for when building owners need to have upgrades in place," said Conor Cahill, a spokesperson for Polis. "To meet the proposed standards, any necessary changes could be spread out over four to seven years."

"Some buildings may already be achieving the proposed standards and would not need upgrades, and some building owners may elect to implement energy efficiency measures, such as installing lower energy-use lighting to reduce a building's overall energy consumption," Cahill added. "However they can reduce demand, which will help decrease prices for the rest of us."

But that's not exactly what the law passed by the General Assembly says. While energy efficiency measures can be used and exceptions and extensions can be applied for, the law requires the commission to set standards that achieve a minimum 7% reduction by 2026 and a 20% reduction by 2030 based on 2021 benchmark data for all covered buildings, which contradicts Cahill's claim that some buildings would not need upgrades.

Instead, the rule creates more than 85 categories for buildings and applies a different "energy use intensity" metric that each building type must meet based on total annual energy use divided by total floor area.

The law also imposes a $500-to-$2,000 fine per month for failing to submit an annual benchmark report and $2,000-to-$5,000 civil penalty for failing meet standards.

Unprecedented speed and dubious legality

Environmental and natural resources lawyer Paul Seby said the Polis administration is metaphorically grabbing the rule by the collar and giving it a "classic bum's rush" through the regulatory doorway. He said that, in the more than 20 times he's been involved with the commission, he's never seen a rule being "rammed through" the process this quickly.

The enabling bill was signed into law by Polis in June 2021 and the commission announced the proposed rule on Jan. 20, 2023.

Applications to be a party to the proceeding must be submitted by Tuesday, Feb. 13, while the hearing for the proposed rule is set for May 16 — 19. The notice of proposed rulemaking states that the commission "intends to deliberate and take final action on the proposed changes to these regulations at the conclusion of the testimony."

"The public and stakeholders are able to provide comments on the proposed rules until May 7th and can listen to the hearing live on May 17th," Cahill said. "The final Building Performance Standards rules will not be adopted until June 1, 2023, and if takes longer to get them right then the governor encourages the (AQCC) to do so."

In Seby's opinion, the proposed rule is illegal in part because it could violate the state administrative procedures act and because the commission's mandate is to protect air quality, not advance climate change objectives.

"The problem with it legally is that the legislature gave away its law-making function and that violates the separation of powers in our state and national constitutions," Seby said. "The laws are supposed to be made by the legislature. Here they adopted goals and said that converting goals into legal requirements is being left to the Air Quality Control Commission. That delegation is a blank check to the commission to adopt rules for building emission reductions. And that's the missing link in the statute."

Electrification is neither cheap nor easy

Builders anticipate that the transition would be costly — both to developers and tenants.

Tim Walsh, CEO of Confluence Companies, which builds and manages multi-family housing up and down the Front Range of Colorado, said electrification of older apartment buildings that use gas-fired appliances and central hot water heating could cost as much as $80,000 per apartment.

"When we're talking about an apartment building, switching from a natural gas boiler that both heats the units and heats hot water ... to an electric boiler is going to require a massive amount of electrical power," Walsh told The Denver Gazette. "Which would mean we'd have to upgrade our electrical system in the building and then the transformer outside the building, then Xcel would have to upgrade all of their distribution capacity."

Walsh said he doesn't think Xcel, which serves customers in metro Denver, has either the generating or distribution capacity to meet the massive new demand that would be required if significant numbers of building owners choose electrification.

"So, we're pushing for electrification before we even have a solution in place on how we're going to produce the power or distribute it to the buildings," Walsh said. "I think that's the biggest issue that nobody wants to talk about or tackle. It's the cart leading the horse or the egg before the chicken."

For many building owners, electrification may be the only path to compliance particularly with multi-family housing due to the design of apartment buildings, Walsh said. The reality is that about the only avenue for mechanically reducing energy use in an apartment building is the single exterior wall and the options are largely limited to replacing single-pane glass with multi-pane glass, he said. There's no effective way to add insulation to an apartment that's surrounded on five sides by other apartments, Walsh said.

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More modern buildings that have individual gas-fired water heaters, furnaces and stoves are somewhat easier to electrify, provided that wall wiring circuits are capable handling the load.

Installing new high-amperage circuits — such as are needed for electric stoves — can be very expensive, Walsh said.

The Colorado Energy Office looks forward 27 years, to 2050, in estimating the costs and benefits of the proposed rule.

The economic analysis suggests that building owners could pass on some or all of the cost of implementation to tenants, which "may lead to higher rents."

"The net cost to the public, which is the difference between the higher rent and the lower power bill, will depend on such considerations as how much of the cost the building owners pass on to the tenants and if the power bill was already built into the rent. These details are not yet known," the analysis said.

Electrification reduces energy bills and carbon emissions

Proponents of electrification argue it's the best route to securing cleaner air and avoiding the spikes in the prices of fossil fuel.

Cahill said electrification is not required, but he suggested it's the best option.

"An individual building owner has the option of electrification, which is the best way to avoid being vulnerable to costly spikes in natural gas, either by itself or as part of a portfolio of measures, but no owner is required to electrify," Cahill said. "Building owners will also be able to apply for adjustments, in case they cannot meet their set target or need more time to replace equipment."

Ari Rosenblum, spokesperson for the Colorado Energy Office, said the building performance standards will help reduce energy consumption, "which will lower bills."

"Through the improved efficiency measures, customers will use less electricity and natural gas and so they will pay less for electricity and natural gas," Rosenblum said.

"We estimate that their electricity bill will come down by $8,331,892,958. We also expect bills for natural gas will come down by $753,237,579. Their total energy savings is expected to be worth $9,085,130,536," he said.

The economic analysis concludes that "the energy savings and GHG reduction from implementing the rule are expected to result in a total benefit worth $10,843,398,013." The extra $1.8 billion is attributed to the social cost of carbon, something the federal government says is a per-ton dollar value for avoided carbon emissions.

Unrealistic expectations for electrification

But Walsh said that doesn't address the fact that upgrades have to be paid for, most likely by borrowing money, which imposes interest costs at a time when the Federal Reserve is increasing interest rates to try and control inflation.

Apartment dwellers will end up paying for those upgrades — from windows or insulation to central boiler hot water heating electrification to swapping gas appliances for electric — one way or another, he said. The bulk of the costs of compliance will hit building owners, and not just apartment building owners, by 2030 — the deadline for a 20% reduction in energy use.

"We're going to be disproportionately hurting the hardest working Coloradans and the lowest wage earners by implementing this rule," Walsh said. "Everybody wants to talk about affordable housing. And affordable housing is also about affordable utility bills in your home as well, not just the cost of rent."

He said ordering the necessary equipment alone could take 18 months for production lead time. Another major obstacle to electrification is the need for utility companies to increase the capacity of their distribution infrastructure, which can take years. Capacity upgrades also require analysis of the capacity of every power line and how they all interact with the utility's generating capacity, he said.

"Can you imagine the equipment doesn't exist in the marketplace to do that?" Walsh said. "I mean you'd have to upgrade electrical panels, upgrade transformers, and then just purchasing the actual heat pump or electric hot water heater or electrical equipment. Some items are 18-month lead items right now. So, I mean, the industry wouldn't be able to respond to that requirement."

The three billion dollar question

"Who's paying the cost? A lot of landlords are mom and pops who own it as part of their retirement and they don't have the extra cash, especially coming out of Covid," Walsh said. "If it's an office building, their vacancies may be high right now and they're scraping by to make the mortgage payment. So, I just don't even see where the money is going to come from to implement this. And it's going to be an incredible hardship on most building owners."

Rosenblum said the state is taking advantage of "all available opportunities to maximize the savings from the BPS for owners of multifamily housing buildings in low-income communities."

"Some of the cost will be covered by applicable programs that building owners/managers apply to," Rosenblum said. "Not all of the cost will be passed onto tenants. Even then, in terms of overall spending, the benefits of implementing this rule are far greater than the cost."

"That's a great question because ultimately, assuming that the building owner can come up with the cash or get a loan or something to cover the cost of replacing the boiler with an electric boiler or installing a heat pump system, they still need to heat hot water for domestic water use," Walsh said. "But assuming they come up with the cash, all that extra cost is going to get passed on to the tenants through increased rent. So, again, you're just making it less affordable for people to live in Colorado."

Cahill said the governor is focused on saving people money and would "obviously oppose anything that raised costs for low-income Coloradans or seniors."

Demand-side management may harm disadvantaged tenants

Seby, the environmental and natural resources lawyer, said one of his concerns is how landlords in older multi-family housing might try to meet the energy efficiency requirements without spending much money.

One work-around that worries Seby is if a building owner, in order to cut energy to meet the standards, reduces the temperature of hot water in the boilers enough to bring annual energy consumption down 20% in older buildings, such as those occupied by low-income and senior citizens, by 2030.

The rule anticipates this kind of demand-side energy management in its definition of "demand flexibility," which means automatic control of energy systems "to reshape a customer's demand profile continuously in ways that either are invisible to or minimally affect the customer."

Colorado's warranty of habitability law requires landlords to provide "reasonable amounts of hot water at all times," and "functioning heating facilities," but it doesn't specify minimum allowable temperatures and says nothing about the comfort of tenants. Instead, it requires "compliance with all applicable building, housing, and health codes, the violation of which would constitute a condition that materially interferes with the life, health, or safety of the tenant."

Walsh said accommodations ought to be made to protect vulnerable individuals.

"I believe older buildings ought to just be grandfathered in," he said. "If the average utility consumption is spread over the whole spectrum of older and newer residential units, I think you'll find apartment living is probably one of the lowest impacts on the environment."

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