Cost-Effectiveness: Getting the Most Out of Building Renovation
Lately, there’s been much talk of climate change and climate policy. Even though it’s been in the news and in our conversations since at least 1988, two events have arguably sparked more discussions than ever in the past months: the recent IPCC report (officially called the Sixth Assessment by the Intergovernmental Panel on Climate Change) and the European Union’s Recovery Plan.
The first is the output of all the work that the world’s leading climate scientists (under the umbrella of the United Nations) put into studying the current and future situations, and through it they have confirmed what many feared: we are far from the emissions reductions goals that are needed to avoid widespread disasters. The latter is the EU’s plan to restart the economy after the crisis induced by the pandemic and take it through a restorative path, assigning resources for decarbonisation measures in virtually every sector. Each EU country will take the funding and funnel it into their national budget. It represents the action we need to change the course of our carbon-based economy. As we discussed in our last article, Portugal is chipping in through the Plano de Recuperação e Resiliência.
Within these policies, there is a concept that is growing in importance in building renovation: cost-effectiveness. At a general level, it represents the relationship between how expensive a renovation measure is and how good it is at increasing energy efficiency. In other words: for every euro put into a renovation, how much energy saving will it provide. Think of it as return on investment (ROI) for a specific measure. Cost-optimality is achieved when the selected renovation measure maximises the ROI.
Through the Energy Performance of Buildings Directive (EPBD), the EU requires countries to not only take energy efficiency measures in their building stocks, but also:
“set cost-optimal minimum energy performance requirements for new buildings, for existing buildings undergoing major renovation, and for the replacement or retrofit of building elements like heating and cooling systems, roofs and walls”.
In short, it restricts the measures that may be taken to increase energy efficiency for a good cause. It ensures that the money and effort put into the national renovation plans is invested smartly. The methodology that must be used to reach this cost-optimal level is standardised and described in detail, but I’ll keep it a bit simpler in this article for the sake of being practical.
But enough with high-level policy stuff. What are the implications of all this in individual decision-making? When faced with the need to renovate, you will probably (definitely) want to get the most out of your money, even if you already know that the value of your property will certainly rise if it’s more energy-efficient. At Dosta Tec we have the expertise for providing alternatives for building renovation, and this is how it goes in terms of cost-effectiveness: we look at the performance of some possible (and reasonable) measures that can be taken, scattered across a “investment vs. energy cost” graph, and from it read the cost-effectiveness of each option. Note that the “return” part of our ROI represents the savings in energy use that we enjoy when increasing our house or building’s energy efficiency. The graph below shows an example of this, where we produced 216 alternatives for insulating a house in Lisbon, with different combinations of materials, thickness, and design. The point at the top-left is the “baseline” case in which no renovation is done.
If we look at two points with the same amount of investment, the point that is lower in the graph represents a more cost-effective solution, since we are getting a larger benefit with the same amount of money. But to avoid drowning in data, we can look at specific clusters of alternatives. For instance, we may want to only see how a specific material performs. The graph below shows Extruded Polystyrene foam (XPS) wall insulation, a popular wall-insulating material. And the graph after that one shows how organic hemp insulation performs under the same conditions.
The trendline and its formula are not just us being nerds, they are essential: the steeper the line, the more cost-effective a material is. See how the hemp curve is much steeper? This is because this material provides more savings for each euro spent. However, it also has only one graph point: sometimes there are not many available alternatives to choose from for a specific material. So, in this case, choosing hemp is more cost-effective, but XPS provides more options. Experience has shown us that this wiggle room is valuable, since this digital model represents a real-life renovation project, and in real life we can’t always optimise as we’d like to. It’s important for me to note here that we are now focusing on cost-effectiveness, but real renovation projects may bring things like the life-cycle environmental impact of materials into the decision-making. In this case, XPS has significant global warming potential, while hemp’s is negative (it’s regenerative!).
So which is the cost-optimal alternative? Here is where the EPBD adapts its methodology to the real world. EU member states submitted their detailed studies on cost-optimality for building performance measures in 2015 (both cost and energy use vary greatly across countries). They accepted that “many member states find a cost-optimal range of measures by combining the building envelope and the technical systems rather than an individual optimal point.” This was expected. A single, maximum, isolated point representing the best technology and materials sounds and looks great, but we don’t need a team of engineers to tell us that it might not be always feasible. Cost-optimality is something to strive for, but rarely achieved. This is not negative — on the contrary, it’s a great way of guiding our choices.
Cost-optimality is also strongly affected by tax policy, which as in any area of the economy, affects costs and thus cash flows and payback times. For example, all insulation materials have the same VAT value in Portugal, but this could change in the near future. Looking at all the activities around the New European Bauhaus we can observe a significant interest in biomaterials.
Decision-making in building performance is a complex process as there are multiple variables to optimise for. Cost-efficiency, indoor thermal comfort, environmental impact — they all play a role in the trade-off game that is a renovation project. We all want to invest smartly, have a positive impact on the environment, and live well. The more we understand each concept, the easier it becomes to make the right decisions and join the path towards regenerating the environment.