In Retrofits for All, I described an ingenious plan for extending retrofits to whole neighborhoods of energy-wasting buildings. Today, I want to take another look at one piece of that puzzle: financing.
Energy conservation loans sound eminently reasonable: the loans pay for energy upgrades and, as long as the energy savings are bigger than the loan payments, property owners come out ahead (as do the climate and the local job market). In principle, this model could invest federal, state, or local stimulus dollars well; generate green-collar jobs in the construction trades; trim energy bills for property owners and renters; buttress sagging real-estate values; slash greenhouse gas emissions; and unlock a critical door to economic recovery.
But the challenges to successful conservation loans are daunting.
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Yes, potential energy savings in buildings are enormous, but so are the obstacles to seizing them. For starters, lack of upfront capital is only one of several barriers to action: building owners also lack knowledge of efficiency potential and techniques. They don’t know how big the savings will be, so there’s investment risk. They can’t predict future energy prices (auctioned cap and trade with a reserve price would help). To some owners, the savings in absolute dollar terms may not be worth the effort and risk, even if they’re large in percentage terms. In many buildings, owners must pay for building upgrades, while tenants pay energy bills, which erases the incentive for efficiency retrofits.
Still, access to upfront capital is a substantial barrier. Removing it alone would accelerate efficiency. Unfortunately, private sector financing for energy-efficiency investments in buildings is hard to get. Most banks lack the expertise even in good times to predict energy savings. In the midst of the worst credit crunch since 1929—a crunch triggered by the excesses of creative real estate financing—the chances of a revolution of free-enterprise retrofits sweeping the continent are about as good as, well, the chances of Dow 36,000.
What about utilities and the public sector? A recent study scoured the continent for conservation loan programs run by such institutions. It makes sobering reading.
More than 150 public and utility-sponsored residential conservation loan programs operate in the United States, but they serve a relative handful of households. Overall, they reach fewer than 0.1 percent of their potential market each year. In Cascadia, the two largest and most successful such programs—run by electric utility BC Hydro and the Oregon natural gas company NW Natural—no longer operate. Their sponsors cancelled them early this decade, in BC Hydro’s case, because other efficiency programs were more cost effective. What’s more, no retrofit loan programs anywhere pay for themselves fully; all require subsidy.
A new generation of such programs may address some of these challenges, but certain older approaches hold equal promise. In this and my next post, I explore these models.
A Seattle-based nonprofit bank has devised a lending model—originally for replacement of leaking septic systems along Hood Canal, of all things—that could finance retrofits for all.
An affiliate of the Chicago institution ShoreBank, ShoreBank Enterprise Cascadia is legally a community development financial institution—a sort of not-for-profit bank. Eighteen months ago, it began making loans to property owners around Hood Canal to repair or replace faulty septic systems, which are one cause of the canal’s periodic oxygen starvation. Capitalized with $3.5 million from the Bill & Melinda Gates Foundation and $3.5 million from the state of Washington, the septic loan program has now written more than 100 loans.
The loans amount to 15-year second or third mortgages, and Shorebank Entperprise Cascadia writes the loans on favorable terms to all borrowers. It subsidizes them for low-income families. Because it’s not a bank, it can waive some normal restrictions: for example, if a homeowner’s first mortgage is for 80 percent of the home’s value, and her second mortgage is worth another 10 percent of the house’s value, the septic loan program can still finance a septic replacement. In fact, homeowners can sometimes take septic loans that bring their total debt up to 120 percent of their home’s appraised value.
The version for the lowest income households carries an interest rate of just 2 percent. What’s more, this interest accrues indefinitely. It only has to be paid when the house is refinanced or sold. For families less strapped for cash, there is a 4 percent interest rate, with 2 percent of the interest deferred until sale or refinance; a straight 4 percent rate; and a straight 6 percent rate.
The loans terms are generous, because ShoreBank Enterprise Cascadia’s mission—and that of its benefactors—is to replace as many faulty septic systems as it can with the same pool of money, by reloaning the same capital each time a loan is repaid.
The same loan design, ShoreBank Enterprise Cascadia argues, can apply to energy retrofits as well as to septic upgrades. In fact, it may work better: retrofits generate monthly bill savings that can repay the loan. The nonprofit hopes to launch a $20 million capital pool to fund loans in greater Seattle soon—an ambitious figure for a modestly sized nonprofit but a thimbleful of ocean compared to the need and to the potential scale of a green stimulus.
Two innovations practiced elsewhere could complement ShoreBank’s. I’ll write about them next time.
I’ve been wondering something: Given a hypothetical number of dollars I have to spend to help prevent climate change, is it more effective for me to spend my money making my house and transportation more energy efficient, contributing to more energy-efficient housing and transportation for other people in my community, or sending those dollars to some (hypothetical) organization in China that will help make homes and transportation there more energy-efficient?
JE,An interesting question—and probably not one that can be answered with certainty. The size of the cost-effective conservation potential probably increases with each step along your list, but the probability that your money will be put to good use decreases in parallel motion.A fourth option is to donate the money to organizations working to change energy policy and create climate policy.
Alan,This is a great plan. But it seems to me there is still something missing that would make this self-propagating, and truly change the market.I’ve just come from delivering a workshop for appraisers over in Richland on appraising energy efficient homes. It would seem that energy efficiency would increase the value of a home. But currently energy efficiency means nothing to an appraiser. The reason is (they told me) that the banks only want to see how a subject property’s value compares to a similar, recently sold property. so they are faced with several difficulties. First, there is no way to identify an energy efficient home based on the MLS listing. So there’s no awareness amongst anyone involved in the transaction that there’s anything different about this particular home. Second, if they are aware that they are appraising an energy efficient home, they cannot find any home to compare it with because there is no way to identify an energy efficient home based on the MLS listing.Finally, and perhaps most problematically, buyers don’t seem to value energy efficiency in a home. They don’t ask about a home’s energy efficiency, and don’t research the subject. So even if an appraiser identifies and energy efficient property, the selling price is not likely to reflect the energy efficiency features.The result is that energy efficiency upgrades require subsidization (or sky high energy prices) to be attractive.The solution to the first two is to update the MLS. Ben Kaufman of Greenworks Realty here in Seattle has been leading an effort here to do that. But other parts of Cascadia need a similar effort.In regard to the third problem, an Energy Performance Certificate program such as that described by Sean Penrith in response to your previous post, will give energy efficiency more visibility in the home sales process. It gives the buyer something to look for and consider when making the purchasing decision. And that will make energy efficient homes more valuable beyond the immediate program being put together by SustainableWorks. If energy efficiency upgrades make a property more attractive, you can bet they will become more common.If anyone would like more information on energy perfromance certificates in the Puget Sound area, or how to prioritize energy efficiency upgrades, please contact me at pbirkeland(at)IntegratedRenewableEnergy.comThanks for the post, Alan!PaulP
Thanks, Paul,On my long and growing list of things to study and write about is, you guessed, Energy Performance Certificates. And, related to it, the need for efficiency ratings at time of sale or rental.
Paul and Alan – Thanks for the interesting posts! Paul, your points mirror a similar issue: mobility. Specifically, how does one incorporate transportation costs into home purchasing/renting decisions? I recently did some consulting work with WalkScore.com, and the old axiom of “drive until you qualify” seems still to resonate with significant parts of the country. The challenge: how does walkability, or bike-ability, or transit-ability – in essence, the ability to not rely on a car (and its costs) – get integrated into buying decisions? To me, these increasingly-visible deficiencies in the MLS seem like great points of differentiation for upstarts like Zillow, Trulia, or others to exploit. Of course, they’re small fish relative to NAR, but one must start somewhere. Keep up the great work. Gabriel Re-Vision Labs
Retrofitting a home – where are the skilled workers? Customers need to “get stuck with a good job.”Especially because energy use can make or break an ‘affordable’ home. And for many reasons, it’s critical to reduce energy use in all homes. The Architecture 2030 Challenge addresses this energy element by requiring home energy consumption be reduced by 70%-90%. Not to disparage any current efforts, these necessary Deep Energy Retrofits will not come from re-hab and weatherization work as usual. This goal requires a building science based program that treats every house as a system, generates a detailed work scope, provides onsite quality assurance, final commissioning and produces documented savings. This goal will require training many new workers in 21st century skills and practices with smarter and more versatile building products. Proposal: 1) Use foreclosed homes for infield training program to produce the needed 21st century workers. 2) When foreclosed home meets a threshold requiring major upgrades Renovate to 2030 standards as demo project & to gain energy & green house gas savings. Bonus: empty homes are safer/easier to work on, quicker to complete, facilitate group training.Training and education opportunities—including but not limited to:1.0 train the trainers—many trainers needed to train many workers2.0 house diagnostic technicians—2.1 train to document the house system and diagnose building performance issues, 2.1.1 systems testing makes occupant anecdotes less necessary2.2 provide a home energy rating (or EPS as noted in earlier post from Sean Penrith), 2.2.1 energy use profile and Green House Gas footprint2.3 produce work scope for both moderate and 70%-90% energy reduction2.3.1 this work scope triage allows for future upgrades & caluclating potential reductions in energy & GHG for program development2.4 provide onsite guidance / inspection, real time quality assurance and ongoing training 2.5 post test, commission building systems, document savings, home owner handbook3.0 building trades & building officials —3.1 learn about the ‘house as a system’ and how building science affects their work3.2 gain experience over a wide range of house styles3.2.1 each contractor crew generates cash flow while training on different houses3.2.2.Crew skill and competency certification (RESNET/BPI—see next page)3.2.3 improved skills = higher production quality, reduced call backs, more profit3.2.4 skilled workers put more value into home, improved referrals4.0 building material suppliers—4.1 learn about the ‘house as system’ 4.2 learn how building science works with their products4.3 learn how proper product selection, application and installation are critical to success5.0 realtors & lenders—5.1 learn about the ‘house as a system’ 5.2 how to quantify building science based home improvements 5.3 how to value the whole package: health, safety, comfort, affordability, durability6.0 policy makers & general public—6.1 learn about the ‘house as a system’6.2 how building science based improvements and documented savings address 6.2.1 home affordability—money saved: energy bills, repairs and health care6.2.2 community livability—more jobs, more families in healthy homes 6.2.3 climate change goals—the local connection6.2.4 energy security goals—the local connection6.3 retrofits producing 70+% energy reduction provide template for future programs7.0 bonus: 7.1 home ready for the 21st century7.1.1 home is healthy, safe, comfortable, affordable and durable7.2 ocommunity has more jobs, a stronger economy, and documented GHG reduction7.3 energy utility gains more capacity and control of peak demands