Tuesday, September 6, 2011

Moving Forward: Stimulating the economy through cost-neutral energy-efficient retrofits

by Jeffrey Lubell, Executive Director of the Center for Housing Policy

Here’s an idea for the President and Congress to consider for creating jobs without increasing federal expenditures: use a federal guarantee to catalyze large-scale energy-efficient retrofits that generate 1.3 to 3.7 million jobs and pay for themselves over time through utility savings. If a guarantee fee is charged to cover any anticipated losses, this program could be administered on a largely cost-neutral basis.

My suggestion builds on the relatively straightforward observation that weatherization (air sealing, insulation, duct sealing, etc.) and other low-cost approaches to improving the energy-efficiency of existing buildings (e.g., upgrading of an outdated furnace in a multifamily development) generate significant annual energy savings. These energy savings accumulate so that, over time, they more than pay for the initial costs of the energy-efficient retrofits.

The Department of Housing and Urban Development has a number of pilot initiatives underway to improve the energy efficiency of housing, including the Energy Innovation Fund, and the FHA PowerSaver Program. The 2009 stimulus bill also included major investments in weatherization grants to assist very low-income families and in improving the energy efficiency of affordable rental housing.

These efforts are all useful, but to really move the dial on jobs, we need to go to scale as quickly as possible. In short, we need an effort that markets energy-efficient retrofits to all U.S. households. We won’t reach everyone, of course, but if we reach even five percent of all U.S. households, we’d generate in the neighborhood of $50 billion in expenditures and 1.3 to 3.7 million jobs.

There are three reasons to care about substantially accelerating the energy retrofit process:

1. A dramatic escalation of energy-efficient retrofit activity would generate jobs and stimulate the economy. Estimates from the Department of Energy's Weatherization Program Technical Assistance Center suggest that weatherization activities create 52 direct jobs and 23 indirect jobs for every $1 million invested. So $50 billion in activity would generate 2.6 million direct jobs and 1.15 million indirect jobs. A lower estimate that relies of US Bureau of Economic Analysis modeling would place total job creation from $50 billion in activity at 1.3 million.
2. Energy-efficient retrofits save energy, improving the nation’s energy security and reducing emissions of greenhouse gases.

3. By reducing the amount of energy families consume, energy-efficient retrofits help reduce the scope of families’ exposure to rising energy prices, proving an important hedge against future economic distress.

There are many people and organizations that have far more expertise than me on this topic, including the Department of Energy, Efficiency First, Enterprise Community Partners, the Clinton Climate Initiative, and the Energy Programs Consortium. My goal in writing this column is to raise the visibility of this idea and suggest that it warrants a large-scale concerted effort to bring it to scale as quickly as possible.

There are a number of ways this could work. Here’s one idea:

1. Loan Guarantees. The first step would be for the federal government to provide loan guarantees for loans to property owners for energy-efficient retrofits. The guarantee would allow funds to be raised from the private sector to fund energy-efficient retrofits. The government would charge a guarantee fee to cover any projected losses, ensuring cost-neutrality.

New legislation would be desirable and provide maximum flexibility to tailor the program. But a version of this proposal could be implemented using the existing statutory authority of Title I and Section 241 of the National Housing Act. To use existing authority, modest regulatory changes would be needed, such as raising the cap for unsecured Title I loans from $7,500 to $12,000.

2. Large-scale Approach. I’d suggest we think big and aim for providing up to $50 billion in loan guarantees, which would fund energy-efficient retrofits for approximately 6 million housing units nationwide. This back-of-the-envelope estimate assumes that two-thirds of the units are in single-family structures, with an average per-unit cost of $10,000, and one-third of the units are in multifamily structures, with an average per-unit cost of $5,000.

3. Coordinated Delivery. The next step would be for each state to develop a delivery system designed to maximize participation and minimize challenges for consumers. One approach would be to use regional bodies, such as utility companies, to hire and supervise the necessary workforce. Property owners would be offered one-stop shopping, with a single entity doing the work and providing access to the federally-guaranteed financing.

4. On-Bill Financing. The financing would come in the form of a loan that would be repaid through utility surcharges that apply to both the current owner and any subsequent purchasers / renters of the property until the loan is repaid. The term of the loan would extend as long as 20 or 30 years to ensure that the monthly savings from lowered utility payments exceed the monthly costs of repaying the loan. To preserve cost-neutrality, the loans would include charges for interest and (ideally for) program administration.

Among other benefits, on-bill financing would address the split incentives problems that sometimes complicate efforts to improve energy-efficiency by ensuring that the loan payments are made by whomever is benefitting from the reductions in energy use and utility costs.

This approach builds on some existing examples, notably New York’s Green Jobs – Green New York program, which includes many of the features of the system described above, but lacks the federal guarantee needed to take it to scale.

There are of course significant obstacles that would need to be overcome to allow this program to work as desired to stimulate the economy. These include challenges associated with:
  • Authorizing loan repayments through utility bills (though some states have done this already) 
  • Motivating utility companies to act in this unfamiliar role
  • Training and scaling up the necessary workforce
  • Applying consistent, high standards, with appropriate quality control, to ensure that only the most cost-effective retrofit activities are performed and consumers are protected from overcharges
  • Reaching out to consumers and encouraging them to authorize the work
  • Coordinating with the federal weatherization program and energy-efficiency measures funded through ARRA
These are serious obstacles. But with concerted effort and single-mindedness of purpose, they ought to be capable of resolution.

If not now, when?

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Join the conversation by commenting on this post.

For information on state and local options for improving the energy-efficiency of existing housing, visit the HousingPolicy.org energy-efficiency toolbox.

To learn more about these and other ideas for improving energy-efficiency and sustainability, come to Solutions for Sustainable Communities: 2011 Learning Conference on State and Local Housing Policy, September 26-28, 2011 in Washington, D.C.


Tammy Mayer said...

Civic Works, a nonprofit in Baltimore started a program doing exactly this.

Rick Rybeck said...

Excellent article. Jeff talks about the mismatch between up-front costs (for weatherization and similar capital improvements)and long-term benefits (lower utility bills over many years). I would note that there are also long-term costs as well that are often ignored, but which also create a barrier to these types of energy improvements.

Making a building more energy efficient will lower its utility bills. When buyers are bidding on two seemingly identical buildings, they will bid more for the building that has lower energy costs. Thus, energy-saving capital improvements will boost the building's value -- and this will lead to higher property tax payments in the future.

Most property taxes are only 1% or 2% of value. But unlike a sales tax (which is paid once), a property tax will be paid year after year, as long as an improvement adds value to the building. Using a net present value calculation, the property tax on buildings has an economic impact equivalent to a sales tax of between 10% and 20%. This too creates a barrier to making energy-saving improvements.

This barrier can be overcome by shifting the property tax off of building values. Some jurisdictions have had success in this regard, reducing the property tax rate applied to building values and increasing the tax rate applied to land values. For more information, see http://www.justeconomicsllc.com