I have been following a bevy of strands that are grappling with energy efficiency in the United States. From the U.S Department of Energy (DOE) and the National Renewable Energy Lab (NREL) to Efficiency Maine here in my own rural area of the country, there are a lot of governmental and quasi-governmental organizations trying to whip the butt of energy waste. A major focus of the local effort deals with energy efficiency and poverty. There are a lot of impoverished families here in Eastern Maine. It does not take a lot of effort to run into a story about a family or person who has to choose between heating their home and buying medicine, or milk. When there are historically high energy costs and technologically easy paths to energy efficiency, why are the impoverished spending money by the bucket on fuels when they do not have to?
To paraphrase Tolstoy, what must be done about poor people living in leaky buildings?
Moving people out of poverty so they can afford well-built, energy efficient homes is a strategy, whether the tactic is direct wealth distribution or increased opportunity through better education. Transfer payments to subsidize housing is a great short-term tactic. Long-term, whether we like it or not, transfer payments can make problems worse, on the consumer side as well as the supplier side. Providing people real opportunity to make more money through better education will help many in the long term. The question remains, how do we take care of the bootstrapping process: giving people the ability to take advantage of educational and employment opportunities? It is hard to imagine everybody bootstrapping themselves off a treadmill on their own. Are there more direct ways to address the energy inefficiency of low income houses, and therefore provide some of the space necessary to take those next steps?
Two solutions may work. The first addresses the issue of substandard homes that are currently owned: using private capital to make energy efficiency improvements. The second addresses the issue of substandard homes currently for sale: providing energy efficiency information as part of the real estate disclosure. This essay addresses the first issue: using private capital to make energy efficiency improvements.
Using Private Capital to Fix Homes
If an investment can provide a return, an investor can be found to provide the capital. Spending money on energy is a great example of a recurring cost that can be reduced through capital investment. Why then, are there not more investors seeking to capitalize on single family dwelling energy efficiency?
Let us look at this more carefully. If I own a home, and I use 150 kBTU’s (1,500,000 BTUs) of energy per year per square foot of my home, then by definition my energy use intensity (EUI) is 150 (kBTUs/square foot/year). This is pretty high. For a 2,000-square foot home with an EUI of 150, the annual energy use is 300,000 kBTUs, or 300 million BTUs. A gallon of #2 fuel oil has about 140,000 BTUs of energy. This home would use about 2,142 gallons of oil each year. At $3.00 per gallon, the annual fuel bill is $6,428.
What if, through energy efficiency measures, the EUI could be reduced to 50? The home would use two thirds less energy, and save about $4,285 per year. That is a lot of money. More to the point, a mortgage of $4,285 per year is $357 per month. At 2.63% interest, one would break even with a $55,000 loan for energy efficiency improvements. If fuel oil were $4 per gallon, the break-even point comes with a $70,000 loan.
Spending $70,000 on a 2,000-square foot home is spending 35 per square foot on the home. If an average home costs $175 per square foot to build, spending $70,000 means spending about 20 percent of the home’s replacement cost on energy efficiency measures.
How much does it cost to improve a building’s envelope and install a high-efficiency heating system? A 2,000-square foot home might have 2,500 square feet of envelope, and 1,000 square feet of attic.
- Attic insulation: $3/square foot *1000 square feet=$3,000
- Wall insulation: 2,500 square feet *$10/square foot=$25,000
- New air-source heat pump: $7,000
- New windows: 20 windows *12 square feet/window * $50/installed square foot=$12,000
- Total cost: $74,000.
What this suggests is that a good energy retrofit project on a typical home in my climate is about break-even. If, over the next 15 years, fuel costs remain steady, and interest rates remain steady, and there are no game-changing technological breakthroughs in energy efficiency, then taking out a loan to do energy efficiency improvements barely makes sense. The market seems to realize this. Homeowners are not scrambling to take on their own energy retrofit projects because the payback is only marginally present.
Furthermore there will be some homes where a very small capital investment in energy efficiency can bring significant gains, but there will be other homes where the opposite is true. What is needed is a program where the average house, or the average of an aggregate of houses, can be made energy efficient in a cost effective manner. Aggregating energy efficiency projects might attract larger investors, but the return has to be there. The money saved through decreased energy consumption alone does not makes energy efficiency investments worthwhile.
Those other Benefits
Now, there are other benefits that accrue with energy efficiency projects. First, energy efficient homes are more comfortable, and they are healthier. Second, an energy efficient house has a smaller carbon footprint. Third, an energy efficient house will stay warmer longer if the power goes out. This factor can be significant in my climate. Fourth, an energy efficient house in my climate will stay cool in the summer. Those few hot days in August will be much more bearable. Fifth, an energy efficient house will tax its mechanical system less, meaning the system may last longer. Sixth, an energy efficient house relies less on fuel extraction from unstable countries. This has environmental and national security benefits.
All these benefits are somewhat convertible into dollars, but they are also more qualitatively compelling than quantitatively so, particularly the carbon footprint, environmental, and security factors. These three are public goods. As public goods, they concern the government. We might add that the beneficial health effect of an energy efficient home is also interesting as a public good.
It is thus in the government’s interest to tip the scales on the willingness of homeowners to undertake energy efficiency projects that are marginally cost-effective. Sure, energy efficiency measures can bring economic benefit to individual homeowners, but as the above discussion concluded, homeowners may find the benefits not worth the effort. What is it worth to a government to encourage homeowners in the name of less global warming, better environmental protection, better health and increased national security? This question may well hinge on calculations based on current dollars spent in these three areas, and the cost effectiveness in diverting some of those dollars to single family dwelling energy efficiency. In other words, could money currently spent on traditional defense projects be equally effective in providing for the national security if they were spent on energy efficient homes?
Would private entities thus step in and use government incentives to make energy efficiency projects profitable? I think the answer is yes. A partnership between private investors and government can bring the necessary capital, expertise, and policy goals together to bring energy efficiency to the impoverished. The technical details of such a public-private partnership will need careful attention. The major contours nevertheless seem promising. The impoverished live better and healthier lives, while gaining some breathing space to pursue education and employment opportunities currently out of their reach. The public benefits from diminished climate change risk, a cleaner environment, and improved national security.