New York City, with its iconic skyline, is embarking on a transformative journey towards decarbonization, and the path to a greener future leads through its 2 million rental housing units. As the city grapples with the challenge of reducing emissions, especially in high-rise buildings, innovative solutions are emerging to address the classic split incentive problem. In a groundbreaking move, Logical Buildings, in collaboration with Keyframe Capital, has unveiled a $110 million financing initiative to install smart thermostats in thousands of rental units across New York and New Jersey. This bold plan aims to revolutionize energy efficiency and contribute to the city’s ambitious carbon-cutting targets.

The Challenge of Split Incentives in Apartment Buildings

New York City faces a dilemma known as the “classic split incentive.” Building owners shoulder the financial burden of efficiency investments, while tenants enjoy the benefits in the form of lower energy bills. The question arises: Why invest in making apartments more energy-efficient if the residents are the ones reaping the rewards? This challenge becomes even more pressing as the city enforces stringent carbon-cutting targets, potentially imposing fines on non-compliant building owners.

Smart Thermostats for Sustainable Living

On March 28, Logical Buildings and Keyframe Capital unveiled their ambitious plan to overcome the split incentive challenge. The $110 million financing vehicle aims to install and operate smart thermostats in thousands of rental units, with minimal upfront costs for building owners. These smart thermostats, integrated with Logical Buildings’ virtual power plant (VPP) platform, promise real-time temperature control to reduce electricity and heating energy demand. The transition from traditional to smart thermostats alone can lead to a remarkable 10 percent reduction in overall energy use.

Real-Time Control and Peak Load Reduction

The significance of real-time control becomes evident as Logical Buildings strategically targets peak energy demand periods. By adjusting temperature settings during critical times, such as hot summer evenings, the smart thermostats contribute to peak load reduction. Con Edison, the utility serving New York City, actively encourages residents to reduce power usage during heatwaves and offers generous payments for commitments to cutting power demand during peak hours.

Smart Meters and Climate Legislation

Two crucial paradigm shifts have paved the way for Logical Buildings’ and Keyframe Capital’s innovative business model. The deployment of smart electricity and gas meters by Con Edison over the past six years has enabled accurate measurement and rewarding of energy-use changes. The other shift stems from the city’s response to the climate crisis, notably the Climate Mobilization Act (Local Law 97), which mandates significant carbon emission reductions in buildings over 25,000 square feet, with penalties for non-compliance starting in 2024.

A Cost-Effective Path to Compliance

As the city grapples with the decarbonization targets set by Local Law 97, smart thermostats emerge as a cost-effective solution. While not a complete answer to the challenges posed by older buildings with fossil fuel heating systems, smart thermostats offer a more affordable alternative to whole-building efficiency upgrades or heating system retrofits. Additionally, they empower building owners to manage central heating costs, a utility expense typically borne by them rather than tenants.

Beyond Energy Efficiency

Smart thermostats extend their impact beyond energy efficiency by addressing the peak power supply, often derived from fossil-fueled peaker plants. By reducing air-conditioning loads during peak times, these thermostats become valuable tools for improving air quality. In a city where peak power supply is crucial, the potential environmental benefits are significant.

Keyframe Capital’s Investment in Sustainable Infrastructure

Keyframe Capital’s $110 million investment is not their first venture into electrification investments. With a focus on the underlying infrastructure, including smart thermostats and communication networks, this significant capital injection aims to create a steady stream of revenue. The economic viability of these projects is underlined by utility demand-response payments, reduced energy costs for tenants, and the potential for Logical Buildings and Keyframe Capital to recoup installation and maintenance costs.

Multifamily Buildings and the Future of Energy Efficiency

Multifamily buildings present a unique opportunity for scalability in energy infrastructure investments. Overcoming the historical challenge of customer acquisition, Logical Buildings can efficiently bring multiple buildings onto the platform in a single conversation, representing thousands of individual tenants. This scalability sets a new precedent for virtual power plant (VPP) models, historically constrained by difficulties in scaling.

Meeting the Capital Need for a Sustainable Future

As New York City and the state intensify efforts to enhance efficiency and reduce fossil fuel use in buildings, the demand for transformative technology is set to skyrocket. Urban Green Council estimates that Local Law 97 will drive a demand for $18.2 billion in efficiency retrofits from 2024–2030, indicating a pressing need for substantial capital. With energy efficiency being the most cost-effective strategy against climate change, private-sector investments like the $110 million initiative by Logical Buildings and Keyframe Capital become crucial for ushering in a sustainable future.

New York’s Tryst with Energy Efficiency

New York–based nonprofit group Urban Green Council estimates that Local Law 97 will drive demand for $18.2 billion in efficiency retrofits from 2024–2030, a staggering 13 times the current spending trends. This surge in demand reflects the urgency of addressing climate change and reducing the carbon footprint of buildings, especially residential properties. The study by consultancy ICF further underscores the need for significant changes, revealing that electrifying building heating and vehicles to meet New York City’s carbon-neutral-by-2050 target will nearly double current winter peaks in electricity demand.

A Screaming Investment Need

“It’s a screaming investment need,” says Alex Brown, a partner at Keyframe Capital. Despite being the most cost-effective way to combat climate change, the current spending on energy efficiency remains a fraction of the trillions of dollars of investment potential in U.S. buildings, according to Donnel Baird, CEO of BlocPower, another startup focusing on multifamily building efficiency and electrification in New York and other cities.

Brown emphasizes that the challenge lies not in the lack of capital but in channeling it effectively. The $110 million investment by Logical Buildings and Keyframe Capital serves as a testament to the untapped potential in energy efficiency projects. These projects, economically viable and scalable, offer a pathway for private-sector investment to align with societal and environmental needs.

A Greener Tomorrow Beckons

In conclusion, the $110 million plan to install smart thermostats in New York City’s apartments stands as a beacon of innovation and collaboration. As the city navigates its way through climate legislation, smart meters, and the urgent need for energy efficiency, this investment represents a significant step towards a greener tomorrow. The success of this initiative not only addresses the split incentive challenge but also sets the stage for future investments in multifamily buildings, creating a domino effect for sustainable practices. With a screaming investment need in the realm of energy efficiency, the question remains: How do we effectively funnel the capital to create a more sustainable and environmentally conscious future for the heart of the Big Apple? Logical Buildings and Keyframe Capital’s answer may just be the key to unlocking the doors to a greener, more energy-efficient New York City.