8.1 The Costs of Retrofit

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Main contributors to Module 8

  • Dr. Steve Fawkes, Principal, EnergyPro Ltd, Senior Adviser to the Investor Confidence Project & Investment Committee Member, London Energy Efficiency Fund, http://www.onlyelevenpercent.com
  • Andrew Simmonds, Tim Martel (CLR modelling and analysis)
  • Kate De Selincourt and Tina Holt (editing)

The key objectives of Module 8 are:

to consider at the financial aspects of retrofit, including:

  • which costs are measured, which post-retrofit benefits are given a value and which currently are not
  • decision making from different financial viewpoints
  • looking at the financial performance of the CLR scenarios (the retrofits of the bungalow, town house and semi)
  • why assumptions are critical
  • financial examples, using different financial assessment methods, to illustrate the complexity – and over simplification – of economics and the pros and cons associated with each method
  • to consider some overall conclusions relating to retrofit generally
  • understanding how parts of the retrofit sector can improve its economic literacy and how the sector as a whole can adopt consistent methods and move towards better financial appraisal practice for building retrofit.

Module 8 consists of the following lessons:

  1. The costs of retrofit
  2. Different financial viewpoints and the decision-making process
  3. The financial impact of climate change
  4. Overview of the UK housing stock
  5. Financial concepts and appraisal methodologies (a)
  6. Financial concepts and appraisal methodologies (b)
  7. The Carbonlite Retrofit Model – assumptions
  8. The Carbonlite Retrofit Model – further information
  9. Investment appraisal in practice
  10. Conclusions

Before looking at financial appraisal methods and decision-making, or considering benefits for the individual householder or the nation, let’s start by looking at the possible costs of retrofit work in order to get a ‘gut feeling’ for the sort of figures a retrofitter or their client is likely to be looking at in the early stages of planning a retrofit.

By the end of this lesson you will have learned about:

  1. The capital costs of retrofit
  2. The CLR base case
  3. Light retrofit (Scenario A)
  4. Medium retrofit – with IWI (Scenario B)
  5. Medium retrofit – with EWI (Scenario C)
  6. Deep retrofit – with IWI (Scenario D, cost prioritised)
  7. Deeper retrofit – with IWI (Scenario D, carbon prioritised)
  8. Deep retrofit – with EWI (Scenario E, cost prioritised)
  9. Deeper retrofit – with EWI (Scenario E, carbon prioritised)
  10. The marginal costs of retrofit

1. The capital costs of retrofit

Retrofit projects come in all shapes and sizes, with varying degrees of ambition and cost.

Capital cost (put simply) = the total cost needed to bring a project to an operable status.

In the case of a retrofit carried out by a main contractor for a homeowner, this is the figure that may appear as the ‘contract sum’ (assuming no cost over runs!) – it won’t include the market value of the property as it is already owned. However if the homeowner is assessing whether to retrofit their existing home or to ‘downsize’ and retrofit an smaller house then the value of the property might be considered to be part of the capital cost. For a self-builder buying a property to retrofit, the capital cost of the project might include the cost of aquiring the property plus the retrofit work. In the latter case the self-builder might be comparing the financial performance of the retrofit project with that of building new on an empty building plot.

It is important when framing your financial appraisal or comparing yours with others’ to compare apples with apples, not oranges.

 

The capital cost is a major factor in any investment decision, and is factored in to assessments using a variety of different methods covered later in this module. The capital cost has to be paid for by the owner/investor – in some cases financed by borrowing, in others using savings. Using savings may incur a loss of interest (unless interest rates are close to zero): ‘locking up’ savings longterm in a property may be seen as safe (if they can be recouped during resale) or risky (if the current property market does not recognise the full value of deep retrofit).

In any financial appraisal, it is important to be clear about what the capital cost is. This raises two issues: how to ensure the accuracy of project costing (including allowing for realistic contingency sums ) and understanding how to minimise the marginal cost of energy efficiency measures (covered in section 10 below) when other work, e.g. repair, maintainance or improvement work is being planned.

1.1 Capital cost estimates

It is important that capital cost estimates used in financial appraisal be as accurate as possible. For an initial analysis, estimates may be acceptable, but for more reliable financial appraisal, particularly for large projects, actual quotations should be used, with sensible contingencies.

1.2 CLR examples: cost estimates

To give a sense of how typical costs may vary across different types of property and different levels of retrofit, the CLR examples that we looked at in Lessons 4.8 to 4.11 are considered again here.

The bungalow, town house and semi have been modelled for the different depths of retrofit detailed under each heading below, i.e. 7 retrofit scenarios and 1 ‘no retrofit’ scenario for each of the the three house types. Remember, the assumption underlying the examples used in this course is that our base cases houses are at a point in their lifecycle where a reasonable amount of repair and maintenance work needs to be done – i.e. it makes more economic sense to retrofit them compared to houses in a good state of repair. In Lesson 8.9 we consider the economic implications of retrofitting base cases where they are in a better condition (or more recently built).

Clearly, these are modelled examples rather than real building projects, but the cost estimates have been designed to make each scenario as realistic as possible.

If we consider a scenario where a property has been bought (the Base Case) and the owner decides, rather than neglect the property or defer the work, to carry out neccessary repair and maintenance straightaway, then the table below suggests realistic capital costs associated with improving the property. Remember this basic work to the Base Case does not include any energy efficiency work.

It obviously makes sense to make sure that any repair, maintenance or improvement work done does not increase the difficulty – or costs – of a later energy efficiency retrofit. One example is re-roofing and not incorporating a vapour open sarking membrane, another is rendering a wall in a property that is likely to have to be externally rather than internally insulated. There are many other examples. If property owners intelligently use opportunities offered by repair, maintenance and improvement work to invest in energy efficiency measures at the same time, then the cost of energy efficiency measures can be minimised.

This emphasises the critical importance of investing as soon as possible in a detailed whole house retrofit plan for the property – ideally developed by retrofit advisors with a sound understanding of the relationship between the existing building condition and the proposed energy efficiency measures: this minimises financial risk and saves money in the short and long term.

An example of possible capital costs for each scenario is given in the table below:

CLR scenarios total costs table
CLR scenarios total costs table

The TFA (units, square metres) after the retrofits are as follows:

retrofit-scen-tfa

As an example: for Deep IWI & EWI (D & E carbon) retrofits respectively the cost per square metre is as follows:

retrofit-scen-cost-per-sq-m

More detailed cost breakdowns for each scenario are given in the sections below.

These have been taken from a spreadsheet exported from the main CLR model providing some of the financial detail for each.

2. The CLR Base Case

To help give a feel for the repair & maintenance tasks assumed to be carried out on the base case houses in the scenario outlined in this lesson, this is work carried out all at once:

(However in the CLR model and the analysis in lesson 8.7 onwards, these are treated as tasks associated with work spread out over longer time periods, e.g. 20, 30 or 60 years.)

  • Wall-tie replacement in cavity walls
  • Repointing of brickwork
  • Other repair and maintenance work related to ‘weatherising’ external walls: replacing fascias, soffits, verge boards, repairing gutters, downpipes and gulleys, work around walls bases (e.g. adjacent ground/path areas)
  • Internal walls repaired and redecorated (where required)
  • Loft boarded for storage and loft hatch put in
  • Floor coverings and skirting boards replaced, with some redecoration of non-partition walls, and associated work on solid floor or suspended floor joists and void
  • Replacement of extract vents in kitchen and bathroom, trickle vents
  • New gas boiler (installed and commissioned)
  • Other costs associated with typical maintenance and repairs

The table below shows some indicative costs that might be associated with these repair works:

CLR base case costs table
CLR base case costs table

Below: a reminder of the approximate TFA for the base cases:

base-case-tfa-reminder-approx

Activity 1

Add up the repair and maintenance costs (from the table above) for each base case house and divide this by the base case floor area to give you a unit rate cost per square metre. Choose the house type closest to your own retrofit example (your own home or a client project that you are working on) and multiply the relevant unit rate cost by the floor area: what level of cost does this suggest if you were to carry out all of this work on your project? If the cost seems inappropriate think whether this is the case becuase your project is in a better condition than the base case condition assumed in CLR, or whether it would seem more appropriate if you (or future owners) carried out this work over 20, 30 or 60 years (divide the cost by 20, 30 and 60).

 

3. CLR light retrofit – Scenario A

Scenario A takes the bungalow, town house and semi and looks at the costs of a ‘light’ or ‘shallow’ retrofit based on a cavity wall insulation only approach. Note: CLR suggests avoiding shallow retrofits as explained elsewhere in the course: module 8 explores whether this advice also makes economic sense!

The assumptions used were as follows:

  • PU insulation was injected into the cavity, PU was used in this example to maximise thermal performance and to remove the need for the wall-tie replacement that was included as base case maintenance (PU can ‘glue’ the masonry skins together: specialist advice recommended!).
  • All other base case maintenance tasks were included, and mostly at an identical price.
  • Window reveals were insulated.
  • The loft was insulated, and associated tasks were carried out at the same time (e.g. dealing with pipes and cables, ensuring the necessary loft ventilation).
  • Some draught-proofing or airtightness work was carried out on each property (the full spreadsheet shows which areas were prioritised in each type of building).

The table below summarises costs associated with Scenario A:

CLR light retrofit (A) costs table
CLR light retrofit (A) costs table

4. CLR medium retrofit with IWI – Scenario B

Scenario B takes the bungalow, town house and semi and looks at the costs of a medium retrofit using internal wall insulation (IWI).

The retrofits modeled included the following:

  • The essential maintenance tasks were as in the base case list, and the costs were broadly similar.
  • Internal wall insulation was installed – and the following ‘consequential’ tasks were associated with this: brick cream to protect the external wall, parge render on the internal wall before IWI and plasterboard, skim and paint to complete the redecoration, insulation around window reveals and at dpc level there was sealing of membranes before the new skirting boards
  • The loft was insulated, and associated tasks were carried out at the same time (e.g. dealing with pipes and cables, ensuring the necessary loft ventilation)
  • No floor insulation was installed on the existing solid floor as part of this Medium IWI retrofit, but insulation was added around the perimeter of the bungalow at ground level
  • Mechanical ventilation (MEV) was added to all 3 properties, so the base case trickle vents were retained as air inlets
  • Windows were replaced with high quality double glazing or existing windows were refurbished.
  • Some airtightness work was carried out on each property (again the full spreadsheet shows which areas were prioritised in each type of building)
  • The boiler and other outstanding costs were almost the same as the base case.

The table below summarises the costs associated with Scenario B:

CLR medium IWI costs table
CLR medium IWI costs table

5. CLR medium retrofit with EWI – Scenario C

Scenario C takes the bungalow, town house and semi and looks at the costs of a medium retrofit using external wall insulation (EWI).

The retrofits modeled included the following:

  • PU insulation was injected into the cavity (following the same reasoning as explained previously).
  • External wall insulation was installed and window reveals insulated, including additional work such as extending the eaves, window and door sills, etc.
  • However the cost of repointing (a cost associated with the base case, light retrofit and medium IWI retrofit) was eliminated by installing EWI.
  • The essential maintenance tasks were largely the same as the base case list, and the costs were similar.
  • The loft was insulated, and associated tasks were carried out at the same time (e.g. dealing with pipes and cables, ensuring necessary loft ventilation).
  • No floor insulation was installed in the bungalow as part of the Medium EWI retrofit (or perimeter insulation as in the IWI retrofit). However, the town house and the semi had a membrane and insulation installed below the ground floor.
  • Mechanical ventilation (MEV) was added to all 3 properties, so the base case trickle vents were retained.
  • Windows were replaced with high quality double glazing or existing windows were refurbished.
  • Some airtightness work was carried out on each property (the full spreadsheet shows which areas were prioritised in each type of building)
  • The boiler and other outstanding costs were similar to the base case.
  • Scaffolding was required as for the base case.

The table below summarises the costs associated with Scenario C:

CLR medium EWI costs table
CLR medium EWI costs table

6. CLR deep retrofit with IWI – Scenario D, cost prioritised

Scenario D takes the bungalow, town house and semi and looks at the costs of a deep retrofit using internal wall insulation (IWI). This is split into “cost prioritised” and “CO2 prioritised” versions.

The retrofits modeled included the following:

  • Generally, the deep IWI retrofit (cost prioritised) is similar to the medium IWI retrofit, with the following additions:
  • The bungalow solid floor is dug up to be insulated, with accompanying replacement of non-structural, non-partition walls. This removes the need for some of the external work at/below ground level around the perimeter (i.e. the medium retrofit approach)
  • The town house and the semi are insulated at ground floor level (as with the medium EWI examples)
  • All other works are similar to the medium retrofit, with the exception of the boiler installation that costs less (the more efficient house needs less heating, so a smaller heating system)
  • The ventilation system is MEV
  • The main difference between the cost and CO2 prioritised examples is that the latter has slightly higher insulation and airtightness costs, and significantly higher ventilation (MVHR) and window (triple glazed) costs.

The table below summarises the costs associated with Scenario D (cost prioritised):

CLR deep IWI cost priority
CLR deep IWI cost priority

7. CLR deeper retrofit with IWI – Scenario D, CO2 prioritised

The table below summarises the costs associated with Scenario D (CO2 prioritised):

CLR deep IWI carbon priority table
CLR deep IWI carbon priority table

8. CLR deep retrofit with EWI – Scenario E, cost prioritised

Scenario E takes the bungalow, town house and semi and looks at the costs of a deep retrofit using external wall insulation (EWI). This is split into “cost prioritised” and the more costly “CO2 prioritised” versions.

The retrofits modeled included the following:

  • Overall, the “cost prioritised” deep EWI retrofit was very similar to the medium EWI retrofit – but with slightly thicker insulation and slightly increased costs in some other areas.
  • The ventilation system is MEV.
  • The “CO2 prioritised” deep EWI retrofit increases capital costs again, in part due to slightly greater thicknesses of insulation installed, but mostly due to increased ventilation costs (MVHR) and windows (triple glazed).

The table below summarises the costs associated with Scenario E (cost prioritised):

CLR deep EWI cost priority table
CLR deep EWI cost priority table

9. CLR deeper retrofit with EWI – Scenario E, CO2 prioritised

The table below summarises the costs associated with Scenario E (CO2 prioritised):

CLR deep EWI carbon priority table
CLR deep EWI carbon priority table

 

Activity 2

Using your retrofit example (your own home or a client project that you are working on), which CLR scenario (light, medium, deep, deeper) does it most closely resemble?

As with activity 1 you can use the unit rate retrofit cost for the different house types provided in the second table at the beginning of this lesson and multiply it by your own project’s total floor area. This is of course an extremely crude way to assess costs, but can get you in – or at least somewhere near – the right ‘ballpark’ figure for a given depth of retrofit.

Is this a scary number – or what you expected?!

10. Marginal Costs

When is a marginal cost not a marginal cost?

When it’s a capital cost:

As we suggested previously, some (perhaps many) energy efficiency retrofits will occur when the building is to be maintained, renovated or refurbished anyway, which may include:

  • change of owner
  • change of social norms or fashion
  • end of useful lifetime

In these cases a certain amount of capital will be spent anyway and the householder (or the owner making the investment decision) either may not make a financial investment appraisal but rather makes a high-level, subjective assessment of the effects of improvement on the property value: in these cases the additional, or marginal cost of including energy efficiency features can be treated as another capital cost (marginal capital cost) in the financial appraisal because the project is going to proceed anyway and the benefits of the energy efficiency measures are being treated as part and parcel of improving the property’s value along with all the other (non-efficiency related) improvements.

So the marginal capital costs should be evaluated against the associated savings. These ‘marginal costs’ represent the ’additional cost’ of a ‘deep retrofit’ over and above the cost of all work carried out.

When a marginal cost is treated as a marginal cost:

In order to be clear about what is and is not a marginal cost, consider the following ‘mini-scenario’ for a solid walled detached building requiring a remedial DPC, re-roofing, re-rendering and repairs to gutters:

  • Capital costs:

– injecting DPC and associated internal replastering and redecorating work
– re-roofing
– removal of failed render and new render
– replacing gutters

  • Marginal costs associated with EWI including the associated consequential costs:

– (potentially) extending the eaves, verges of roof to cover EWI (many projects may accommodate 100-150mm of EWI without requiring this)
– Excavation to wall bases to allow below DPC EWI
– moving rainwater gulleys
– moving incoming electricity, telephone cables and meter boxes
– insulation, adhesive and fixings
– removing and re-fixing downpipes to EWI

Remember, consequential work required specifically as the result of energy efficiency measures should be added to the marginal costs: in the above example too high a marginal cost for EWI may prompt a decision to consider cavity wall insulation or IWI as an alternative; in which case ‘consequential costs’, for example rain protection measures may have to be added to the alternative option’s total marginal cost.

The CLR model on which Lessons 8.7-8.9 are based has a built in feature to factor in a range of consequential costs related to different measures, thus aiding faster option appraisal by the CLR team.

Activity 3

Consider your own retrofit scenario: identify an energy efficiency measure. Identify the planned repair or maintenance work in the area related to the measure that would be required if you were not to install that measure. List the consequential costs associated with installing the measure. Estimate the marginal cost of the measure.

Example of marginal costs

A non-residential example of this on a big scale is the holistic retrofit of the Empire State Building*. The building was in need of updating and essentially was not fit for the 21st century. Indeed, if it had been any other building in any other city it probably would have been demolished but because of its iconic nature in New York, (and its cultural, historic significance especially post 9/11), demolition and replacement was never an option. The basic retrofit to bring it up to date cost $500 million.

Due to some clever integrated design a number of energy efficiency measures were included which in total, after additions and subtractions of capital costs, resulted in a marginal capital cost of $13.2 million. Importantly, even though the owner Tony Malkin is a committed environmentalist he is also a business man who insists on a three year payback. The estimated annual savings of the integrated measures was $4.4 million a year, resulting in an estimated three year payback or an IRR of 31% (assuming no other cash flows such as tax and a ten life).

* Empire State Building website.

https://www.esbnyc.com/esb-sustainability/project

 

Summary

This lesson has covered the calculation of a retrofit’s capital costs and marginal costs.

We have not factored in the concept of the ‘value of money in the future’ – this will be covered throughout the next few lessons.

 

Footnotes

  1. Energy Savings Trust. 2011. The Retrofit Challenge: Delivering Low Carbon Buildings
  2. RIBA. Climate Change Briefing
  3. The Green Book. Appraisal and Evaluation in Central Government. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/220541/green_book_complete.pdf
  4. Also known as ‘non-energy benefits’
  5. The subject of increased value of energy efficient buildings is controversial. In some jurisdictions evidence suggest that energy efficient buildings are more valuable but this has not been proven in all markets, including the UK.
Lesson tags: carbon mitigation cost, CarbonLite Retrofit, CLR modelling, financial appraisal methodologies, housing stock, investment appraisal, retrofit benefit, retrofit cost, retrofit decision-making
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