Why does energy efficiency matter?

Jobs—Comprehensive energy efficiency retrofits to existing buildings can create thousands of new jobs in Washington State, reduce carbon emissions, and at the same time save money for struggling families and small businesses alike. 

How many jobs? A Washington State University analysis found that retrofitting 1 million homes in Washington could create 43,000 new jobs across the state—reducing the unemployment rate by more than a percentage point.

Problem: Why do we under-invest in energy efficiency?

A host of obstacles block the way to cost-saving efficiency investments, but one of the most significant is obtaining financing—getting loans—for the upfront costs of installing insulation, upgrading water heaters, replacing windows, and the like. Many families simply can’t afford those up-front costs, especially now when money is tight. One good solution is to allow local governments to do what utilities already can: loan money for retrofits. Letting property owners pay back the loan on their regular energy bills makes the process easier.

Solution: Family-friendly retrofit financing

Energy conservation loans can pay for the up-front costs of energy upgrades, like new furnaces, insulation, or windows.  As long as the savings on utility bills are bigger than the loan payments, property owners come out ahead. In principle, the energy loan model could: invest federal, state, or local stimulus dollars wisely; generate good, local 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. For starters, few building owners are energy experts.  They don’t know with energy efficiency investments    will pay for themselves, or how much energy or money they might save.

To compound the problem, few private sector lenders make loans for energy-efficiency investments.  Banks lack the expertise to judge which conservation lending strategies make sense.  And because developing a conservation loan portfolio takes time and money, many banks fear that they conservation loans aren’t a good money-making venture—even if the loans themselves aren’t risky.

That’s where local governments can step in.  Local governments have some flexibility that banks don’t have. In cases where conservation investments yield multiple benefits to local residents—new jobs, say, or big savings on energy bills—local governments can make investments that a bank might not. Revolving loan funds, which wise governments are also creating with federal stimulus dollars, are a smart way to reuse an initial pool of money:  as initial investments are paid off.

Problem: How can we know which energy investments will make the biggest savings?

Not all energy retrofits are created equal. Some energy retrofits save more money than others. Finding the right efficiency investments is important. Financing window replacement, for example, can be pricey and sometimes won’t save as much money as a less expensive project like installing insulation. How do we make sure we get the best return from our investment in energy efficiency?

Solution: Performance Contracting

Performance contracting is a time-tested tool used by local governments and schools—and it’s a tool that could be applied to homeowner efficiency financing. Here’s how it works. A public agency applies to participate in the program. If the agency meets the basic criteria an Energy Services Company—or ESCO—is contracted to conduct an audit to determine where the greatest opportunities for savings can be found. There are three big things that make performance contracting appealing to public agencies.

First, there is no bidding process for the contractors since the state takes care of the selection of the ESCOs and creates a registry of preapproved contractors. The ESCO handles all aspects of the work, from the audit through completion of the project. Second, there is no up-front cost for the project as it is covered through financing pre-arranged by the state and the ESCO. Finally, the ESCO gets paid with a portion of the energy savings. No savings through efficiency upgrades, no payment. In other words, the very nature of the financing mechanism provides an incentive to the ESCO to do the work that will save the most energy and money for the agency.

The principles of performance contracting, if applied to local loan programs, would ensure that the very best energy retrofits—the ones that get the most savings for the money invested—are the ones that get made.  It’s a responsible use of funds loaned to families and businesses.

Question: Financing sounds complicated. How do we make it easy? 

Giving families and small businesses low interest loans and then allowing them to pay those loans back on energy or tax bills makes saving money simple and transparent—in other words it is a huge incentive for people to make investments in retrofitting their homes or businesses. And remember, more demand for retrofits means more jobs.

Solution: Let families and business owners pay for retrofits on utility or tax bills.

One of the smartest efficiency financing programs in the country comes from Washington’s next-door neighbor. Clean Energy Works, a Portland-based partnership, is a pilot project that will allocate $2.5 million of stimulus money for the retrofits, starting with 10 homes and completing another 490 retrofits in the next two years.

Clean Energy Works provides reasonable financing terms for improvements that will yield energy savings, reduce greenhouse gas emissions—and put people to work. Good financing for property owners spreads out the costs of the improvements over time, which means that spending $2,500 on air sealing and insulation won’t devour a family’s cash supply.

The loan installments are also paid “on bill”—as part of the ordinary utility bill—which makes paying back the loan relatively painless. The three local utilities—NW Natural, Pacific Power, and Portland  General Electric—simply add loan payments as a line-item in their customer’s bills. For example, payments for that $2,500 air-sealing and insulation project would be spread out over time and would show up on regular energy bills. And the monthly energy savings would likely be enough to offset the monthly increase to pay for the loan, or at least come close. This makes payback simple and essentially invisible, a big selling point for property owners.

The bottom line: Jobs, saving energy, and saving money

Energy efficiencies—everything from turning out the lights to getting a new boiler—mean big changes and big savings.  Allowing local governments to make low interest loans for energy efficiencies and letting people pay those loans back on their regular utility bills is a big step toward self sufficiency and sustainability.

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    Michael McCormick: A Retrofit Success Story Waiting To Happen

    Michael McCormick poured his first home foundation mo
    re than three decades ago. Since then, he’s built everything from starter houses to mansions to a transplanted English castle.

    But the 55 year old found work in short supply when the Puget Sound housing market collapsed.

    Then he heard a Presidential candidate Barack Obama talk about green-collar jobs as a way to fix the country’s crumbling economy.

    “I didn’t know exactly what that meant, I just knew it was the direction I would go,” said McCormick. “I figured he’d been listening to enough people that he had a pulse on what it was going to take to get things going again.”

    Since then, McCormick has done many of the right things to move his career in that direction. He’s gotten training in restoring historic buildings and completed an energy auditing class at Shoreline Community College. He hopes to become accredited to verify that “green” homes are being built to national standards.

    For now, though, McCormick remains laid off.

    There are few laws requiring existing homes to become more energy efficient, McCormick said. Though interest among homeowners may be growing, it still seems spotty, he said. So far, the Pacific, Washington, resident hasn’t seen evidence that homeowners on a large scale have been convinced that energy efficiency investments is worth the hassle.

    “Right now there’s no demand. The people from the top down are saying that but no one from the bottom up is saying it,” he said. “Unless that changes, it doesn’t matter how much training I get.”

    First and foremost, money is always an issue, he said. There has to be a compelling financing mechanism that allows a building’s owner to help cover the costs of an up-front investment with the energy savings they’ll realize in years to come.

    He’s eager to start retrofitting homes and businesses to save energy, improve their performance and make them healthier. All he needs is demand for his services.

    “If it does bust loose, I’ll be ready,” McCormick said. “Our country is so energy inefficient…and now we’re being asked to change our ways, and I was the first one to say ‘I’ll do that.'”

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    More resources:

    Alan Durning et al., “Green-Collar Jobs: Realizing the Promise,” Sightline Institute, October 2009, http://www.sightline.org/research/green-collar-jobs/green-jobs-primer/green-jobs-primer-pdf

    Sightline Institute, “Green-Collar Jobs: Realizing the Promise—Energy Efficiency,” http://www.sightline.org/research/green-collar-jobs/GCJ-two-pager-pdf.

    Sightline Institute, “Faces of the Green-Collar Workforce,” http://www.sightline.org/research/green-collar-jobs/green-collar-profiles/green-collar-profiles-faces-of-the-green-collar-workforce.

    Sightline Institute, “Green-Collar Jobs: Defined and Explained,” http://www.sightline.org/research/green-collar-jobs/green-collar-jobs.