The debate over decarbonizing Maryland buildings is about to enter a new round and that could present opportunities to commercial real estate owners.
Shortly before the 2024 General Assembly session ended, legislators amended the state budget to prevent the Department of the Environment (MDE) from spending any funds on “adopting, establishing or enforcing” Energy Use Intensity (EUI) standards – a key component of Maryland’s proposed Building Energy Performance Standards (BEPS).
EUI standards would, over time, require buildings to limit their energy use to a maximum number of British Thermal Units (BTUs) per square foot. Those maximums would vary depending on building type.
The draft regulations, however, sparked opposition from multiple groups, including CRE and condominium owners.
In their budget amendment, legislators required MDE to complete further EUI studies, including using energy benchmarking data from property owners to reassess energy use limits and reevaluating the total cost of renovating buildings to meet the proposed energy standards.
Consequently, legislative experts expect a new round of public input to happen when MDE and legislators revisit the topic of BEPS in the 2025 session.
“The delay may allow building owners to demonstrate the difficulty of meeting the draft EUI standards and possibly obtain more reasonable provisions,” said Michael Powell, a member of the Energy and Environmental Practice Group at Gordon Feinblatt LLC. “The energy efficiency numbers are so tight that we feel many buildings will not meet them and the cost of trying to upgrade buildings will be enormously expensive.”
The proposed EUI limits are 55 BTU/sf for office buildings, 48 BTU/sf for retail stores and 30 BTU/sf for warehouses. Estimates of the total cost of renovating Maryland buildings to meet the draft BEPS range from $15 billion to $25 billion. To date, no incentives have been approved to help building owners complete renovations.
MDE’s assessment concludes that as many as one-quarter of all buildings would not recoup those renovation costs through energy savings by 2050. MDE has also proposed penalties for properties that fail to meet EUI standards.Those penalties could run as high as $25,000 a day.
CRE owners, Powell said, need to prepare for the impending debate over EUI and BEPS.
“I suggest that owners start getting a handle now on energy benchmarking numbers for their buildings and how those numbers compare to proposed regulations so they can start planning for the future,” he said.
The 2022 Climate Solutions Now Act requires commercial buildings over 35,000 square feet to begin energy benchmarking in January 2025.
Property owners, Powell said, also need to contract consultants to determine what renovations would be needed to bring their buildings’ energy use in line with proposed EUI limits and how much those renovations would cost.
Owners and investors, he added, also need to be aware that the cost of complying with energy regulations could also impact property values.
Equipped with that information, CRE professionals would then be able to show MDE, legislators and the governor the economic impact of the proposed regulations and lobby for reasonable alternatives and exemptions, he said.
“It is important that the General Assembly and the governor’s office knows what they are imposing on the commercial real estate sector, which is already under water,” Powell said.
The industry should also become informed about a separate challenge to EUI standards, said Stuart Kaplow, a Sustainability and Green Real Estate attorney.
“The BEPS program, as it was proposed, is wrongheaded and stands no chance of prevailing in court,” Kaplow said.
The Federal Energy Policy Act blocks state or local governments from enacting energy-use policy, Kaplow said. EUI regulations are “nothing more than government rationing electricity” – an activity that is, arguably, prohibited by federal law.
When the city government in Berkley, California banned the installation of gas lines to new buildings, the law was overturned in federal court, Kaplow said.
“Right now, there is another challenge pending in federal court to BEPS statutes by the state of Colorado and the city of Denver,” he said. Legal commentators believe those statutes which are more moderate than Maryland’s, will be overturned and found to be pre-empted by federal law.”
Ahead of the 2025 General Assembly session, CRE professionals should also prepare to address several other issues around building decarbonization, Kaplow said.
An executive order issued by Governor Wes Moore in June directed state agencies to complete several actions to implement MDE’s Climate Pollution Reduction Plan.
Those include adopting a zero-emissions heating equipment standard which would essentially ban the sale of fossil fuel powered furnaces and water heating appliances.
They also include creating a framework to achieve 100 percent clean energy on Maryland’s electric grid by 2035.
Preliminary estimates suggest 100 percent adoption of clean energy could cost the state $118 billion.