TODAY’S STUDY: BRINGING ENERGY EFFICIENCY HOME

Delivering Energy Efficiency to Middle Income Single Family Households
Mark Zimring, Merrian Goggio Borgeson, Ian Hoffman, Charles Goldman, Elizabeth Stuart, Annika Todd, and Megan Billingsley, December 2011 (Lawrence Berkeley National Laboratory)

Executive Summary

Middle income American households – broadly defined here as the middle third of U.S. households by income1 – are struggling. The recession has exacerbated long term trends that are putting downward pressure on these households, threatening fundamental aspirations like economic stability, secure retirement, and educational opportunities (Commerce 2010). Many middle income households are under significant financial strain, and rising energy bills are a contributor to this stress…Energy efficiency improvements have the potential to provide significant benefits to these households – by lowering bills, increasing the structural integrity of homes, improving health and comfort, and reducing exposure to volatile, and rising, energy prices. Middle income households are also responsible for a third of U.S. residential energy use (EIA 2005).3 Increasing the energy efficiency of their homes would deliver substantial public benefits: reducing power system costs, easing congestion on the grid, and avoiding emissions of greenhouse gases and other pollutants.

To achieve those goals, utilities and governments are beginning to look beyond typical residential energy efficiency programs that discount compact fluorescent light bulbs (CFLs) or provide rebates for high efficiency appliances and equipment. Increasingly, they are turning to programs that improve the energy efficiency of the entire house – by sealing up leaks, reducing plug loads, adding insulation, and replacing inefficient heating and cooling systems. These more comprehensive programs typically offer the same incentives for all non-low income households and usually require customers to pay a significant portion of the costs. These comprehensive home energy improvements often cost $5,000 to $15,000 per home. In practical terms, higher income households are better positioned financially to take advantage of programs that promote comprehensive home energy upgrades and require substantial household investment…

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This leaves millions of middle income homes leaking energy and exposed to rising energy costs. Delivering comprehensive energy efficiency improvements to just one-third of the 32 million single family middle income households could save roughly as much energy each year as is used by every home in Houston, Phoenix and San Francisco, for as long as the more efficient measures last. These energy upgrades – at minimum, adding insulation, sealing air leaks and repairing ducts – would require an investment of roughly $30 billion to $100 billion for just a third of the single family middle income market…

By comparison, total estimated program funding for multi-measure home energy efficiency upgrades targeted at all non-low income households is about $7.7 billion over the next decade.6 And while there is some private sector energy efficiency services activity occuring, the costs of delivering multi-measure energy upgrades to the middle income market far exceed both expected public resources and naturally occurring market activity. A more aggressive effort to target middle income households will require both significant customer contributions to fund these energy saving measures and an interlocking framework of supportive public policy and more innovative program design.

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Research Scope & Methodology

The large majority (83 percent) of middle income households lives in single family homes, and 67 percent of middle income households own their home (more than 75 percent of single family dwellers own their home) (see Figure 1). The highest concentrations of middle income households live in metropolitan areas, but chiefly in the smaller cities and suburbs outside of the largest cities. Their homes present good energy savings opportunities as they are are often older and less efficient than those of their wealthier peers. This report focuses on that 83 percent of middle income households who live in single family homes and either rent or own them – a total of 32 million U.S. households.

The question posed in this report is: How can programs motivate these middle income single family households to seek out more comprehensive energy upgrades, and empower them to do so?

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Research methods included interviews with more than 35 program administrators, policy makers, researchers, and other experts; case studies of programs, based on interviews with staff and a review of program materials and data; and analysis of relevant data sources and existing research on demographics, the financial status of Americans, and the characteristics of middle income American households.

While there is no ‘silver bullet’ to help these households overcome the range of barriers they face, this report describes outreach strategies, innovative program designs, and financing tools that show promise in increasing the attractiveness and accessibility of energy efficiency for this group. These strategies and tools should be seen as models that are currently being honed to build our knowledge and capacity to deliver energy improvements to middle income households. However, the strategies described in this report are probably not sufficient, in the absence of robust policy frameworks, to deliver these improvements at scale. Instead, these strategies must be paired with enabling and complementary policies to reach their full potential.

Driving Demand for Energy Improvements…Reduce Participant Costs & Risk…Use Trusted Messengers…Solve a Problem that Households Recognize…Make It Easy (But Not Too Easy)…

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Building Structure Issues

A significant number of middle income houses have building structure and maintenance issues that reduce their value and can adversely affect the health and safety of their occupants. Households are often aware that these problems need to be addressed, but in an uncertain economy, households are reluctant or unable to invest scarce resources in making fixes before those problems turn into emergencies. Frequently, these problems must be addressed before – or in conjunction with – the installation of energy improvements. While more expensive in the short run, addressing non-energy issues as part of energy efficiency program delivery can attract more participants and address important health and safety hazards. The following program elements may make addressing these issues easier for programs and households alike.

�� Leverage Weatherization Contractors. The existing network of more than 1,000 organizations that deliver the services of the federal Weatherization Assistance Program may have the skills and experience needed to serve middle income households with both energy and non-energy housing issues.

�� Allow Non-Energy Measures in Energy Efficiency Financing. Allowing households to use a portion of their energy efficiency loan for non-energy measures may be an attractive way to address these issues.

�� Coordinate Public Funding from Multiple Sources. Streamlining existing funds and services can reduce intervention costs and enhance benefits for households by presenting the homeowner with multiple complementary services in a single, coordinated package. For example, the Green & Healthy Homes Initiative is bundling weatherization services with home health services (such as lead hazard reduction and indoor allergen reduction) to implement a comprehensive assessment, intervention, and education program that improves health, economic and social outcomes of low and middle income families.

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Access to Capital

The upfront cost of home energy improvements is a significant barrier to investment. Middle income households have historically invested in home improvements, and many (65 percent) have not needed financing to do so (Guererro 2003). But the recession has depleted household savings, suggesting that many middle income households need financing to overcome this barrier.

Challenges to Accessing Capital

Housing wealth is the primary asset against which middle income households have historically borrowed, and that foundation has eroded. Nationally, housing prices have declined by almost a third (32 percent), but middle income households have been disproportionately impacted, as they had more of their wealth invested in their primary residences heading into the recession and their primary residences have lost a greater percentage of property value as compared to the homes of their wealthier peers…

At the same time that home equity has declined, lenders have responded to increasing consumer risk by restricting access to other types of loan products. Today, many of the largest energy efficiency loan programs have application rejection rates in the 20-50 percent range – and these rejection rates are higher among middle income households than upper income households.

Opportunities for Increasing Access to Capital…Credit Enhancements…Alternative Underwriting Criteria…

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Innovative Financing Tools.

New financial products may be more effective at serving middle income households. Here we highlight four of these financing tools:

�� On-bill financing (OBF). Many households have long histories of paying their utility bills regularly, and some financial experts believe that on-bill repayment will reduce loan delinquency and increase household willingness to finance energy improvements. In some cases, programs attach the repayment obligation to a household’s utility meter (instead of the individual customer). Subject to existing regulatory practices, nonpayment could also trigger utility shut-off, a powerful customer incentive to make payments…

�� Loan products that are paid off when properties transfer (deferred loans). Some middle income households – particularly those on fixed incomes – simply do not have the financial capacity to make consistent principal and interest payments on debt. This is especially true when the financed improvements lead to uncertain cash flow, or if building rehab needs to be funded in addition to energy upgrades, increasing net monthly payments. There are many housing and economic development agencies around the country that will fund home improvements through deferred loans – often health and safety-related rehab for fixed income seniors that have equity in their homes. No monthly payments are required, but a lien is attached to the property that must be paid off when the property is sold or otherwise transferred.

�� Paycheck-deducted loans. Paycheck-deducted financing involves repaying a loan through regular, automatic deductions from an employee’s paycheck. Under one model developed by the Clinton Climate Initiative, a credit union provides the loan capital, and loan repayment is deducted through payroll and automatically transferred to the credit union. The security of the payroll deduction allows credit unions to do more lenient underwriting and offer a lower interest rate than they would otherwise offer for standard unsecured loans.

�� Property assessed clean energy (PACE). For those middle income households who have equity in their homes, PACE may be a promising financing tool if it gets past the current regulatory hurdles. PACE programs place tax assessments in the amount of the improvement on participating properties, and property owners pay back this assessment on their property tax bills. Like other property taxes, these assessments are treated as senior liens – which makes them very secure. PACE is debt of the property, which suggests that underwriting need not be based on a borrower’s personal creditworthiness (and that the financing can be transferred with the property) – potentially getting around the credit score and debt-to-income issues highlighted in Chapter 5: Access to Capital. PACE currently faces significant regulatory hurdles, which have largely eliminated its use around the country for the residential market, pending court rulings or federal legislation.

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The Role of Policy

While important for reaching middle income households, the program design, outreach and financing strategies outlined in this report are probably not sufficient to deliver energy improvements to this market at scale. Instead, they should be seen as potential bridges or complements to more robust public policies that bring additional focus and funding to bear on unlocking this energy efficiency resource. A range of policy options are discussed below – and several are likely to enhance energy efficiency across all markets, in addition to ensuring that substantial allocations are made for delivering home energy improvements to middle income households.

Energy Savings Targets

More than half of the states have established energy savings targets of some sort through an Energy Efficiency Resource Standard (EERS), a statutory requirement for utilities to acquire all cost-effective energy efficiency, or energy efficiency goals that are described in utility resource plans. These states and the federal government are expected to spend $7.7 billion on non-low income multi-measure home energy efficiency programs over the next 10 years (SEE Action Residential Retrofit Working Group 2011). The design features of these policies influence the degree to which energy efficiency program administrators are motivated to provide more comprehensive home energy services. EERS’s with comprehensive, long-term savings goals and “all cost-effective” policy guidelines that consider a societal perspective (e.g. including social impacts, environmental externalities) are more likely to encourage comprehensive residential energy efficiency programs.

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Cost Effectiveness Considerations…Building From Voluntary Programs to Regulatory Solutions

Better funding for voluntary programs targeted at driving demand for middle income energy improvements are just one piece of an evolving effort to secure energy savings for the public at large. Additional policy options include codes, standards, labeling, and upgrade regulations.

�� Codes, Standards and Work Specifications. Building energy codes and appliance, lighting, and equipment standards can contribute substantially to efficiency among middle income households. “Reach” codes and financial incentives for even higher efficiency buildings and equipment can encourage market innovation.

�� Labeling, Disclosure and Upgrade Regulations. Labeling and energy use disclosures can build a more efficient marketplace by making the full costs of operating a home more transparent to renters and homebuyers. These tools make energy efficiency more visible—and valuable—in the home real estate market. They can also build the foundation for the implementation of regulations as these disclosures can be transitioned into minimum energy performance standards. Augmenting voluntary programs with regulations may allow policymakers and energy efficiency program administrators to target limited public funds toward increased support for the most financially vulnerable low and middle income households.

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Conclusion

It is important to recognize that progress is being made on delivering home energy efficiency upgrades to the residential sector. Many residential energy efficiency program administrators are reducing their reliance on lighting and appliance rebates and increasing their emphasis on more comprehensive home energy upgrade program offerings. As the mix of residential programs evolve, contractors are adding to their skill sets and adjusting their business models. Despite this progress, improving the home energy efficiency of middle income households is a challenging prospect.

There is no single solution to this challenge. Beyond the significant barriers to driving demand that exist in the general population, middle income households face greater financial insecurity that can make proactive investment in energy improvements prohibitive. Those middle income households who are motivated to act are often unable to access financing or must address costly structural and maintenance issues in their homes before investing in energy efficiency. This report describes a number of financing tools, program delivery models, and outreach strategies that show promise in overcoming these barriers. However, it is clear that while these approaches may prove effective on the margin, they are not enough to be effective at the requisite scale for addressing broad public policy goals. Instead, these approaches should be seen as potential bridges or complements to robust public policies that provide access to energy efficiency for all market segments.