More Energy Solutions
Last week’s column
took a quick look at the science of climate change and how scientific hypotheses have shifted over time based on new evidence. In developing public policy, I believe we should start with a firm foundation of science—whether the issue is banning lead in gasoline, regulating the annual harvest of salmon, or adopting policies on energy efficiency. The better the science, the better the resulting policies or laws.
So, what about climate change? Today, the overwhelming consensus among scientists is that human activities are warming the earth’s climate and dramatic reductions in greenhouse gas emissions are needed to stave off potentially catastrophic consequences.
However, policymakers often don’t turn to scientists when they’re shaping public policy. And, given the shift in scientific consensus on climate change over the past four decades (see last week’s column), it is somewhat understandable why there is skepticism about the reality of global warming today–35 years ago, many scientists thought that global cooling was occurring and that we might enter a new ice age.
So, is it possible to find constructive common ground while we’re waiting for definitive “proof” of global warming that even today’s climate change skeptics will believe? I think it is.
What if we were to focus, initially, only on those measures to reduce greenhouse gas emissions that are worth doing even if global warming isn’t happening? Below are a few sample measures that should make sense no matter where you stand on climate change.
1. Reduce vulnerability to interruptions in heating fuel or power by dramatically boosting the energy performance of houses.
James Wolsey, a past director of the Central Intelligence Agency, argues that American citizens are highly vulnerable to terrorist actions that could target the supply or distribution of heating oil, natural gas, or electricity. If we insulate our houses really well and design them to keep unwanted heat out in the summer, they can keep us safe even if we lose heating fuel or electricity. We don’t need to wait for a tragedy to demonstrate this need for resiliency or “passive survivability.”
2. Reduce our dependence on oil that is imported from unstable regions by encouraging alternatives to automobiles.
Within a decade or two, the majority of our oil will likely be imported from Middle Eastern countries where the wellbeing of Americans is not always a high priority. Radical factions in countries like Saudi Arabia and Kuwait could topple U.S.-friendly governments or destroy major refineries. (Had a terrorist plot against the massive Abqaiq oil refinery in Saudi Arabia in February, 2006 succeeded, loss of the refinery’s 6.8 million barrels per day of production would have had a dramatic impact on gasoline and diesel fuel availability and prices in the U.S.) And had we not been worried about access to Middle Eastern oil, would we really have launched a trillion-dollar war in Iraq?
To reduce this dependence on foreign oil, which has been a priority of every U.S. president (Republican and Democrat) since Nixon, we should invest in public transit (including bus lines, bus rapid transit, light rail, and high-speed intercity rail), build bicycling and walking pathways, and create denser, more pedestrian-friendly communities where automobiles aren’t as necessary.
3. Put Americans back to work and strengthen the U.S. economy by investing in local energy conservation and forward-looking technologies that can compete worldwide in the 21st century. Insulating and weatherizing houses is one of the best ways to boost employment and keep money in the local economy–rather than sending that money far away to buy fossil fuels. Investments in renewable energy technologies like wind, solar, tidal, and geothermal, will enable the U.S. to regain world leadership in the 21st century green economy—rather than ceding that role to China, India, or Europe.
Each of these measures would dramatically reduce greenhouse gas emissions, yet each makes sense whether or not global warming is happening. There are many others like these. Even if we don’t all agree on climate change, can’t we agree that America would be better off without being at the mercy of Mideast governments? Wouldn’t we feel more secure if we knew we could remain safe in our homes if power or heating fuel were interrupted? Don’t we all want to boost employment and ensure that there will be a strong economy for our children and grandchildren? If we do these things, the dramatic reductions in greenhouse gas emissions will be a bonus–icing on the cake.
I invite you to share your comments on this blog.
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14 Comments
Good points, Alex
If we can live in greater comfort while using less fossil energy, what is the downside?
A private sector solution to climate change?
I have witnessed more than a few well intentioned government initiatives aimed at encouraging energy efficiency during my thirty-three years in this business. Jimmy Carters solar tax incentives led to fly-by-night solar crack-pots soldering up poorly designed hot water panels in their garages and selling them based primarily on the tax benefit with no consequences when they failed within two years. Grid tie PV initiatives were met by strong obstructionism from the utilities who were forced to accommodate them, when tax incentives “timed out” alternative energy companies went bankrupt, needs-based home weatherization efforts were crippled by paper work qualifying prospects' income level which inflated overhead costs and kept low performing middle class homes from being served.
Today’s initiatives fail to learn from those lessons and combine needs-based weatherization with the Carter-era style tax incentives that are very expensive for the tax payers but don’t provide the benefit of nurturing a strong and sustainable, self-supporting industry that can build momentum beyond government subsidies to continue the work into the future and over a wide and diverse market. Imagine what would happen to the PV industry if incentives were withdrawn tomorrow. If we can change the way weatherization is financed and provide strategic insurance and marketing support we can create a building weatherization industry that is profitable, sustainable, able to work on any low-performing building regardless of the income of its occupant and not dependent on government support for its existence.
Here is how it would work. Rather than giving away weatherization to low income home-owners we would work with State Energy Offices and State Utilities Rates Commissions on a micro-loan program that would provide up to $6,000 weatherization loans to home-owners and renters regardless of income level. (This is the cost of most home weatherization projects in New York State’s weatherization program.)
These loans would come from banks or investment funds, not the tax payers, they would be administered under supervision of the State Energy Offices, and the monthly payments would be added to the building’s power bill by the local utility and would not affect the home equity. If the payment was not made the power would be turned off, if the home were sold or rented the contract would transfer to the new customer.
The power companies would not sell or perform the work, licensed and insured insulation contractors would do that in a neighborhood by neighborhood effort similar to what has been happening in Florida. The power companies would only add the invoice to the power bill, enforce its payment, and pass it on to the lending agency same as currently happens with cable TV being billed through the phone company. This would mitigate the problem of requiring the power company to support reduction of the need for its product which hampered grid tie acceptance. The power companies would receive compensation for their book keeping work and the banks would charge market rate for the loans.
The weatherization contractors would contract with independent licensed home performance contractors to do the qualification and sales. The projects would be limited to buildings where the projected energy savings would be not less than 120% of the loan payment. My house would not qualify because it is too efficient already. But the 5,000 sq ft McMansion at the top of the hill probably would because fixing its leaky ductwork, upgrading the attic insulation and sealing the crawlspace would save enough to more than pay for the work. By separating the cost of weatherization from the owners equity the program would be more attractive to landlords and renters. A similar program would work for light commercial properties many of which have R-19 or less in their roofs and horrendous HVAC systems. It’s not just the poor and homeowners who live or work in under-performing buildings.
The licensed home performance contractors would be trained by our community colleges in programs patterned after the Building Performance Institute training which incorporates indoor air quality and combustion safety with energy training. Carbon monoxide can be concentrated by air tightening strategies and existing overloaded wiring can be insulated to the point that it becomes a fire hazard. The inspectors report would be itemized and prioritized to educate the occupants about the most high return repairs and could also point out future repair priorities and energy efficient habits and practices that would result in additional savings.
The performance contractors work would be licensed and reviewed by spot checking in the same way that pest control applicators work is subject to review and spot checking. The licensing fees would support this auditing.
A quality inspection performed at the completion of work would yield a report that could be used to certify the improved efficiency of the house when it is sold similar to the HERS reports Energy Star builders use to document the quality of our work.
According to NAHB there are 75 million homes that are badly in need of weatherization plus a large portion of our light commercial buildings. The government cannot and should not give this work away when it can be done on a self sustaining and self funding basis. By nurturing an industry we create jobs and we help insure our citizens against inevitable increases in fuel costs. By making it independent of tax subsidies we increase the sustainability of the industry, as the cost of energy increases more homes fall into the “energy savings not less than 120% of loan payment rule“ so we create a group of people who are less frightened of increasing energy costs and reduce the pressure on government to subsidize cheap coal and oil. By increasing our countries energy efficiency we become less dependent on foreign oil
(and might even help with Global Climate Change if you believe in that sort of thing…)
Home Star and PACE
There is strong momentum for both Home Star (which resembles what Michael describes)
http://www.efficiencyfirst.org/home-star/
and Property Assessed Clean Energy (PACE) Bond legislation
http://www.pacenow.org/
that we each need to understand support as they make their way in out states.
And as they say:
"What if climate change is all a big hoax and we make the planet better for nothing!"
interesting idea, but....
There is no weatherization program in the nation that does work that would pass your criteria. For example, a $3000 insulation and air sealing retrofit would need to produce annual savings of more than $600 and a simple payback of less than 5 years in order for the savings to be 120% of the loan costs. I'm assuming a 10 year term and I'm also assuming that market rate means a market rate unsecured loan to a creditworthy person (which many low income weatherization households are not). which is currently about 13% interest. The monthly payments would be $44.79.
Also, in many cases the measured savings are 40% or 50% less than the projections, which would put these lower income households in a negatiove cash flow position.
I don't see how anyone could advocate for getting rid of WAP...
Michael Blasnik is right
Michael Chandler,
We must be realistic about the likely savings that accrue from weatherization improvements. Although this retrofit work is far more cost-effective than the darling jobs of the green gizmo industry -- PV arrays and solar hot water systems -- the payback periods for air-sealing and insulation improvements are still longer than your math implies.
As a taxpayer, I'm delighted to subsidize weatherization work on the homes and rental units of low-income families. It's money well spent, and after 30 years of the program, we have trained a lot of skilled workers who know how to operate a blower door and install cellulose insulation. These benefits are real -- and they benefit all of us by strengthening our communities and helping our neighbors -- as well as by providing good jobs, lowering the energy bills of the most vulnerable Americans, and reducing (to at least a small degree) our dependence on imported oil and gas.
Oh, yes -- and lowering greenhouse gas emissions.
Thanks for the feedback
I guess I did my math wrong a long time ago and have been running with this idea ever since. I had the loan pay for a $6,000 loan at $60 per month and figured a lot of these drafty homes and strip malls would be able to see savings that would cover the costs at that rate. Thanks for checking my math and challenging my assumptions.
I wasn't advocating eliminating the low income weatherization, only expanding on the PACE program by linking it to monthly electric bills rather than property taxes so income and need would not be a factor so much as opportunity for fuel savings. What I'm advocating is pretty much equivalent to the PACE program. except the bills would come in smaller doses and it would be easier for landlords to get involved etc.
I do see that "projected savings" and real savings are often out of alignment and that was part of the emphasis on using BPI raters to qualify houses with in and out audits so that we would not get involved in replacing windows and such with insigniificant payback.
The main issue is that we have so many homes in need of upgrade in all income levels and Americans just don't want to tap their home equity line or Christmas bonus to do the work so I'm reaching for an alternative way to finance it that will allow us to be self-reliant and nurture an industry rather than one that relies on taxpayer hand-outs. Every time the solar tax credits come up for renewal the entire industry goes into major anxiety, to me this type of program is not strengthening the industry but enabling it.
I like the PACE program but it seems ungainly to me as it is a local government program that doesn't lend itself to the kind of marketing initiative that the program I was suggesting would.
I want to see us build a self reliant for profit market driven weatherization industry that would be able to serve owners and renters of all types of under-performing buildings, that would be a really big market, an industry that could serve it profitably could put a lot of people to work and save a lot of fuel and green house gasses.
PACE financing
I'm just digging into PACE financing models and hope to report on that in the next week or two. I agree that this is an important approach.
financing
I'm a big fan of giving people access to financing options for energy upgrades -- whether it is on-bill financing through a utility or property tax type financing. But we should be careful about promising people positive cash flow. Interest rates for unsecured loans are too high given retrofit payback times, and many costs of a home performance job may not even be done for energy savings but for health/safety, IAQ, moisture, comfort, etc. Weatherization spends a lot of money replacing faulty furnaces.
The problem with the shortfall between actual and projected savings isn't just due to things like window replacements, but it's due to virtually all measures. We need better models for estimating savings -- using certified auditors will not resolve this problem by itself. The last thing we should want to do is over-promise on the economics and then shut-off service to many lower and moderate income households.
I like the idea of using public financing mechanisms to lower interest rates like the Keystone HELP program which offers 4.99%-6.99% loans in Pennsylvania mostly based on treasury financing and some other modest subsidies. Although I'm still unclear on how financing will help with the landlord/tenant issue -- neither party has much motivation to invest.
Pay As You Save
Folks interested in financing mechanisms should check out the Pay As You Save system (http://www.paysamerica.org/).
In the system, payments are made on monthly utility bills, so anyone who has utility service (owner or tenant) can implement an energy efficiency improvement. The payment stays with the meter, not the customer. Future owners or tenants take over payments, but also benefit from the improvement measures. It's not a loan, so no credit is needed. You just need to be current on your utility bill. Non-payment results in disconnection, so there is a very strong incentive to pay, and hence, low risk for investors. Independent certification/oversight of improvement measures to verify payments do not exceed savings...usually with something like a 3/4, 3/4 rule, where they take the projected savings and reduce them by 25%, and also take the projected lifespan of an improvement measure and reduce it by 25%. If the measure (or package of measures) can still generate positive cashflow under this conservative estimate, then financing is granted.
Interest rates and loan application
Michael B.
I went back to my original calculations and my focus on alternative financing models and I want to further explain my rational here. Because yes, you are right that this doesn't work if you assume that "market rate" means 13% but let’s look deeper into this proposal because I think market rate in this case is 5.5% and that the application process is A simple contract virtually free of qualifying paper work. I'm not proposing that these loans be made one at a time to individuals, the only way to make this work is if we can “use a machete to cut through red tape”. Here’s my machete:
For this to work we need to get the interest rate down to 6% at which the monthly payment on a $6,000 loan on a 15 year term is $50.63 and, while we're at it, we need to completely eliminate the consumer credit check and personal financial statement. So we don't loan the money to the home owner, we write a contract rider on the electrical service agreement. The $6,000 weatherization would add $50.63 per month to the electrical bill for 15 years.
When energy prices increase that part of the bill stays the same and savings increase. I argue for qualifying homes that would not be cash positive until energy prices increase 20% because I want to allow those of us who are currently paying a “green power” surcharge on our power bills to pay it in this more immediate form where it also gives the bonus of improved comfort and indoor air quality. Many families might not choose to participate unless the cash payback was immediate but I think many would tolerate up to a 20% increase for the other intangible benefits so long as this was realistically calculated and disclosed before the contract was signed. If a $6,000 loan cost $607.56 / year, we would qualify people if the project would save $500 per year.
So how do we get the money to make these loans? I think it could work to give State Energy Offices the task of bundling weatherization contracts into $100,000 securities that could be sold to green investment funds (and even banks) as a very secure and socially progressive investment. The electric company is handling collections and those who don’t pay would suffer going without power so I think that this would be a very safe and thus low-interest investment. I may well be wrong, I’m not n investor, I’m a builder, (thank God.)
How would we get the money into the market? The Energy Offices would contract with licensed and insured insulation contractors in bulk. A single sum to contact, survey, qualify, sell, weatherize and test-out a large number of homes within a certain time frame with a specific payment schedule.
The energy offices would also supply the contract language to be used with the home-owners and negotiate a liability insurance package for all these programs that would cover incidental damage specifically related to this line of work such as filling closets with cellulose, breaking furniture, fire damage etc. I’ve been in construction for 33 years, I’m not sending a crew on a $6,000 remodel without solid risk management consisting of good contract language backed up by good insurance and good employee training.
There have been energy efficient mortgages and weatherization programs before but they required major initiative from the customer. In this proposal the weatherization contractors are motivated to go out and sign up whole neighborhoods. In Florida, Progress Energy sent ice cream trucks into neighborhoods and gave away free ice cream while salespeople at card tables signed up prospects for energy audits and explained the program. The Pays America program referred to by John S. is now past tense, I’d guess that they didn’t get the sales part right but would like to know more.
The actual deal closing would be done on-site by building performance inspectors because the contract has to be able to disclose the opportunity for savings as well as the cost in order to manage customer expectations. We will need to have a mechanism for handling oversold homes and dissatisfied customers and oversight for the inspectors. Spot checks and follow up inspections would be critical to keep motivated inspectors from over-promising to rack up sales and then skipping town. This is admittedly one of the more challenging aspects, but licensing, liability limiting language and bonding of the companies hiring the inspectors could mitigate the risk here.
I want to thank you all for helping me clarify my presentation, this is not a simple concept to explain but I think there is potential here and I appreciate you all challenging my thinking and helping to clarify the way I need to communicate it.
ROI on insulation
Michael C.
I think you are correct that targeted air- sealing and insulation would pay it's own way for a number of projects. There are many homes with portions of the building envelope with little or no insulation, exposed foundations are a good example. I have recently looked at homes built in the late 60's and early 70's where the attic insulation is even with the top of the ceiling joists, only 3 1/2" in some cases, in Minnesota!
good ideas but...
I think things are still not looking very good for this approach without subsidies. The 13% rate I cited is the market rate for small unsecured personal loans. Your idea to avoid applications and underwriting and making it a utility contract modification should save some costs and could bring the interest rates down. Let's say your 5.5% 15 year loan becomes reality, the $600 annual payments will still be a hurdle .
First, not many lower or middle income households are going to want to pay a 20% premium on a bill they already think is too high and many can't afford. How many households are volunteering to pay a premium for green power now? We need a mass market program, not a niche program for greenies, and so we need a design that at least has break even cash flow for most households.
Second, even the $500 annual bill savings will still be tough to achieve on a mass market level -- especially if you are talking about a single fuel. We need to realize that only a few measures provide paybacks of less than 5 years and many provide paybacks in the 10 years or more range. When you add in all the other costs of program delivery like audits and QC, it's not going to be a slam dunk proposition.
Experiences with subsidized utility and state programs throughout the country already show us that participation rates are fairly low even with the availability of subsidized financing, rebates and tax credits. Your proposed design has some novel features that may help, but the fairly modest net savings opportunity for homeowners will likely still lead to participation rates that are too low to really have an impact.
If you don't like the idea of subsidizing efficiency, then you should think about internalizing the external costs of energy. We need either higher energy prices or lower retrofit costs to make Home Performance retrofits compelling for large numbers of homeowners.
internalizing the external costs
Michael B.
I'm very much in favor of a minimum 50% increase in energy costs, honest taxation that recognizes life cycle costs of coal, nuclear and oil, as well as subsidies on a raw material level for weatherization supplies and the financing and insurance related to their installation. But I don't see a way to pitch this as a solution to the problems we are facing due to political reality issues.
I think the opportunity is larger than the government resources and I struggling to find a way to create a self-supporting for-profit industry around doing this work. I don't like deficit spending and I want to work out a way to fix our energy problems at least cost to the tax payers so the benefit can be spread wider and more energy saved.
I agree
I think we agree on the goals and you've got some good ideas about ways to try to make them happen. But I'm just a little more skeptical about how much success we can have relying on the free market for efficiency while subsidizing the use of energy supply and not including the costs of pollution, etc. Efficiency may be "low hanging fruit" but it isn't too cheap to meter ;)
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