by Elisa Wood, via Renewable Energy World

Why do some states avoid creating policies that encourage consumers and businesses to save energy? What’s the psychology of the laggards?

A new report by the American Council for an Energy Efficiency Economy sheds some insight as it examines the states that consistently fall behind in the organization’s annual energy efficiency ranking.

The bottom states are: Alabama, Kansas, Mississippi, Missouri, North Dakota, Oklahoma, South Carolina, South Dakota, West Virginia, and Wyoming. The good news is that even these laggards are beginning to adopt policies to save energy, according to the report, “Opportunity Knocks: Examining Low-Ranking States in the State Energy Efficiency Scorecard.”

But they still have a lot of catching up to do. And why did they fall behind in the first place?

The report authors, who interviewed 55 stakeholders, found one reason is a general lack of awareness about energy efficiency’s benefits. Another is an aversion to government mandates. But one of the most fascinating barriers is a misperception about energy costs.

Industry folklore says that consumers in states with low electric rates have no motivation to save energy. This folklore discourages policymakers from putting time and money into energy efficiency programs. In truth, these states have good economic reasons to  encourage consumers to insulate, install better lighting, and undertake other energy savings measures.  It turns out that even though electric rates are low in these states, consumers are paying high monthly bills.

This may sound counterintuitive. But consider these numbers. In Alabama electric utilities charge 10.67 cents/kWh and households pay an average $147.69/month for electricity. Similarly, in South Carolina rates are 10.5 cents/kWh and monthly bills are $137.59/month. Compare Alabama and South Carolina to Massachusetts and California, two states with aggressive energy efficiency efforts. Massachusetts’ electric rates are high, averaging $14.59 cents/kWh, but monthly bills are low, only $97.34. California, too, has high rates of 14.75 cents/kWh and low monthly bills of $82.85.

So electric rates are higher in Massachusetts and California, yet households in those two states pay less per month for power than households in Alabama and South Carolina. This is because they consume less power. Households in the efficient states have an edge; they need less electricity each month to secure the same level of comfort and service in their homes as those in Alabama and South Carolina. So there should be plenty of good motivation for households in the low-rate states to pursue efficiency measures.

Another point of confusion involves the cost to society of investing in energy efficiency.  Because it’s generally categorized with other ‘green’ initiatives, energy efficiency is perceived as boutique and expensive.  To the contrary, it is cheaper to avoid energy use than to make new electricity, according to ACEEE.  Energy efficiency measures cost an average 2.5 cents/kWh while building a new power plant cost 6 to 15 cents/kWh. Because of this cost differential several states now mandate that utilities institute cost-effective energy efficiency before building new generation.

These are arguments, unfortunately, that might get lost in the din of an election year, one in which energy is shaping up to be a major issue. However, as is often the case, the states are leading the way and not relying on federal policy. Even the laggard states are picking up their pace when it comes to energy efficiency, as the ACEEE report describes. More here.

Elisa Wood is a long-time energy writer whose work appears in many top industry publications. See her articles at RealEnergyWriters.com. This piece was originally published at Renewable Energy World and was reprinted with permission.

by Elaine Gallagher, via Rocky Mountain Institute

Where does your energy come from? Although I live in Colorado now, I grew up in East Tennessee, where many people still assume their power is fairly clean, dominated by 90-year-old hydroelectric plants. In truth, more than 50 percent of my family’s electricity was generated from coal, and still is. I didn’t think about it much.

What price are we paying for energy apathy? What price will our children pay? As a child, I watched coal-seamed mountaintops disappear in the face of an energy crisis. Potentially potable water now goes to the highest bidders for gas and oil extraction, despite recording-breaking drought. Last month marked the second anniversary of BP’s Deepwater Horizon Oil Spill, and the Gulf Coast ecology and economy are slowly recovering. Deforestation, now contributing more to greenhouse gas emissions than transportation, is increasing in previously protected areas as a result of oil and gas exploration and extraction.

n an age of anthropogenic deforestation and wetlands loss, with only about 61 trees per capita on Earth, can we really afford to pay the price that this industry demands? Can we guarantee that our descendants will inherit a thriving planet? A recent survey says that only 24 percent of Americans are knowledgeable about energy. We know more about Kim Kardashian than about the energy that directly affects us, whether we want to or not.

To overcome energy apathy, the best remedy is knowledge. Understand the evolution of energy and its path from conservation of limited natural fuels such as whale oil, to the height of conspicuous consumption throughout the industrial age, to the innovation of 21st century clean energy, and finally to efficiency—beautifully engineered systems, buildings, cities, and machines.

Efficiency is yet a relatively untapped energy source—often forgotten in the face of shiny solar arrays and wind farms. RMI’s research for Reinventing Fire reveals $5 trillion (with twelve zeros) in U.S. energy efficiency savings sitting on the table waiting to be claimed—more if we can move more quickly toward efficiency. That’s $3,205 per person in today’s dollars unrealized—a high fiscal price to pay for energy apathy and just the tip of the iceberg.

We can choose not to pay that price.

Energy efficiency is a powerful economic driver in the face of a slow recovery. It has the potential to generate many jobs in a struggling construction sector. Deep energy retrofits increase property values and revitalize neighborhoods, because this requires a comprehensive approach to reducing energy while improving the owner and occupant experience. Efficiency drives research and innovation, resulting in new technologies with potential for increased American manufacturing and continuous job creation.

Well-engineered, efficient buildings, cities, and systems reflect the highest evolution of energy. They are beautiful and simple, often emulating nature’s own processes and improving quality of life. Energy efficiency isn’t only about high-tech air conditioners; it’s not just batteries and electrons. It is manifested in living and work spaces turned to the outdoors, walkable cities, bike paths that keep us connected physically and culturally, eating fresh and delicious regional foods, daylight pouring into a workplace where ideas bloom like the trees that shade the building.

Some say energy efficiency isn’t sexy, so it’s a hard sell. I think it’s very exciting, and it’s why I come to work every day. It carries tremendous potential for good things, including the potential to cure the world of energy apathy.

Elaine Gallagher is a Senior Consultant with Rocky Mountain Institute. This piece was originally published at RMI’s Solutions Blog and was reprinted with permission.

Electric utilities and policymakers in Japan and Germany have been scrambling for months to find ways to compensate for nuclear power plants shut down in the aftermath of Fukushima.

In both instances, fossil fuels are part of the stopgap solution to offset the declines in nuclear generation in the short term, but longer-term energy policies are shifting definitively toward efficiency and renewables. Now, the unexpected and indefinite shutdown of both units at the San Onofre Nuclear Generating Station in Southern California has raised questions about California’s short-term electricity supply options and long-term contingency plans.

Not surprisingly, efficiency, demand response, and renewables could play a key role in helping to diversify and mitigate risks for Southern California’s electricity supply future. The solutions being pioneered in these three markets, while driven by different circumstances, all take advantage new smart grid technologies to manage and integrate distributed resources.

In Japan, only one of the 54 commercial nuclear reactors that supplied 30 percent of the nation’s electric power prior to the Fukushima disaster is currently operating. It, too, is scheduled to shut down for scheduled maintenance on May 5, leaving the country with no power supplies from nuclear plants for the first time in more than four decades.

Japan’s central government is now seeking to win agreement from local authorities in Fukui prefecture to restart two nuclear reactors operated by Kansai Electric Power Co., but whether and when these reactors might actually be allowed restart remains uncertain.

These unprecedented circumstances raise the possibility of economically damaging power shortages as demand increases during Japan’s hot summer months. Kansai Electric, which depended on nuclear for 49 percent of its generating capacity, has warned that its power supply capacity could fall short of peak demand by as much as 18 percent this summer if none of its reactors are allowed to restart. And while Kansai’s service territory is geographically small, its annual economic output is worth more than $1 trillion.

The principal short-term solutions to the crisis have been emergency demand curtailments and heavy use of imported oil and natural gas in existing thermal power plants, a major factor behind Japan’s trade deficit in fiscal 2011, the first in more than three decades. The International Energy Agency projects that in 2012 Japan’s electric utilities will burn 300,000 barrels per day more oil and 23 billion cubic meters more liquefied natural gas to make up the generation deficit if none of the shut down nuclear reactors is allowed to restart.

The upshot of these events is an intensified focus on energy efficiency and renewables, two solutions that hold promise of bridging the supply-demand gap in the years ahead while simultaneously reducing the current heavy reliance on fossil fueled generation. Under its pre-Fukushima energy policy, Japan had set a goal of increasing renewables from 9 percent of power supply in 2008 to 21 percent by 2030. But an assessment released last year by the Ministry of Environment suggested that Japan could shift even more dramatically toward renewables. Already, major Japanese companies—including Mitsubishi Heavy Industries, Toshiba, Hitachi, and Softbank—have announced plans to build hundreds of megawatts of new solar and wind projects.

At the same time, new investments in smart grid technologies to manage demand and integrate renewable power supplies into the grid are increasing rapidly. Hitachi, Panasonic, Toshiba, Fuji Electric, and Mitsui are among the major companies working to implement new energy management technologies, including pioneering experiments in integrated neighborhood technologies. Accelerated investment in these technologies by Japan’s most powerful technology companies will have global consequences as new products and service models come to market.

Halfway around the world, Germany’s electric power sector is turning to similar solutions in the aftermath of Fukushima. Within months of the Fukushima disaster, Germany revoked the operating licenses of seven of its 17 nuclear power plants and subsequently voted to exit nuclear power altogether by 2022. Germany now plans to get 35 percent of its power from renewables by 2020 and has committed to reaching 80 percent by 2050. The shift to higher shares of variable renewable generation will require parallel investments in efficiency, demand response, and better grid controls to help integrate high levels of variable renewable supplies.

Already, Germany’s largest electric utilities, EON and RWE, are increasing their investments in solar and wind energy to offset nuclear power supplies. Earlier this year, RWE began operating the first commercial scale virtual power plant, weaving together the operations of dozens of green energy sources in order to be able to bid up to 80 megawatts of power supply into the European Power Exchange. The changes already unfolding in Germany foretell the demise of baseload generation, together with increased needs for flexible, dispatchable supply- and demand-side resources.

Do the events in Japan and Germany have relevance to the United States? The answer is yes, and potentially sooner than almost anyone expected. The San Onofre plant is closed because of unusual and excessive wear in hundreds of tubes in the plants’ steam generator units, raising questions about the integrity of the steam generators installed by Southern California Edison (SCE) in 2009 and 2010.

The problems at the plants raise the possibility that California could face power supply challenges this summer not unlike those facing parts of Japan and Germany. San Onofre plays a critical role in Southern California’s electricity grid, so finding short-term solutions will be challenging. California’s policymakers, utilities, and grid operators are hurrying to create contingency plans to reduce demand and ramp up generation from gas-fired power plants and other interim supply sources to meet peak summer demands. Perhaps more importantly, however, even if the problems with San Onofre’s steam generators are overcome, the current troubles could increase the likelihood that SCE will face difficult challenges to relicensing the plant in 2022 for another 20 years of operation. Could efficiency and renewables make up the difference if San Onofre were to go out of service in 2022?

To explore answers to this question, RMI, in collaboration with Energy and Environmental Economics (E3), is studying long-term scenarios for Southern California’s electricity future using models developed on for the California Public Utilities Commission. These scenarios explore pathways to achieve up to 50 percent renewable electricity supply by 2030 with and without nuclear power in the supply mix. Results of the study will be released in June.

James Newcomb is the Program Director for electricity at the Rocky Mountain Institute.

Related Post:

• Germany: Fighting Climate Change And Phasing Out Nuclear Power Are Two Sides Of The Same Coin

by Bracken Hendricks, Adam James

This past February Fannie Mae initiated a pilot program in six of the hardest-hit metropolitan areas to offer pools of repossessed homes to eligible investors looking to rent them out.

The need for this program sprung out of the two mortgage finance giants Fannie Mae and Freddie Mac—both currently in government conservatorship—collectively owning about 230,000 foreclosed homes, mostly from mortgages they insured or securitized before the housing bubble burst several years ago.

Unfortunately, only a small subset of these foreclosed properties are in good enough shape and in strong enough markets to be sold directly to families looking for a place to call home. For the rest, low home prices and weak demand for owner-occupied homes mean that selling hundreds of thousands of them into that market will depress prices for a long time to come.

This pilot program followed most of the recommendations we made in an earlier paper, where we argued for a process we call “rehab-to-rent.” In this process a portion of these properties are removed from the glutted for-sale market and converted into affordable rental units. Yet the pilot program did not include a consideration of retrofit strategy as a part of the bidding process because those properties were occupied. This issue brief argues that bidders should present a strategy for retrofitting properties where it is cost effective, including labor provisions and proof of capacity to ensure quality of work. Here, we look at the wise economics of retrofitting some of these homes so they are made more energy efficient before being rented out, which would:

• Boost the value of the homes when federal government agencies eventually sell the properties
• Spur hiring in local construction markets in the meantime
• Help renters pay less for energy and more for other goods and services in their communities

How would this work? The Federal Housing Finance Agency, an independent agency that regulates the activities of Fannie Mae and Freddie Mac, could allow the two mortgage finance giants to sell a portion of their large portfolios of foreclosed homes to investors who would partner with them when appropriate to create a pool of energy-efficient rental housing that the federal government could eventually sell alongside their private-sector partners. We argue that the Federal Housing Finance Agency should capitalize on the rehab-to-rent process to promote more energy-efficient housing for renters and boost the long-term value of these properties for U.S. taxpayers.

Moving these properties back into private ownership over the long term through a so called “disposition strategy” is the core function of the Federal Housing Finance Agency. To that end, the agency has put forward the idea that they should conduct a disposition strategy that reduces taxpayer losses and stabilizes neighborhood and home values. In evaluating bidders for portfolios of these properties, the agency already boasts a set of criteria which applicants must meet in order to qualify for consideration—a procedure that could easily be modified to include criteria allowing property managers to present a plan for how they will make energy-efficient retrofits to those properties when doing so is cost effective.

This requirement is crucial to meeting the Federal Housing Finance Agency’s dual mandate, succinctly expressed by its acting director, Edward J. DeMarco, as an objective to both “reduce taxpayer losses” and “stabilize neighborhoods and home values.” His agency can do just that enabling Fannie and Freddie through an energy-efficient rehab-to-rent program. In this issue brief we show the real and calculable net benefits to performing cost-effective energy retrofits to federally owned foreclosed homes and we demonstrate why the Federal Housing Finance Agency should seize this opportunity to protect the public interest and realize its dual mandates by:

• Reviewing energy retrofit strategies from future bidders for appropriate foreclosed properties—strategies that consider the capacity to perform the retrofits and include key labor provisions to boost good-paying jobs in these communities
• Considering public-private joint-venture structures in the future sales of these homes so that taxpayers profit from the upside of the retrofitting

We demonstrate that energy savings create real and substantial value in both reducing taxpayer losses—or more positively by maximizing taxpayer returns—and in stabilizing housing values and neighborhoods.

But the ability to capture these benefits for taxpayers will be possible only if the Federal Housing Finance Agency pursues joint-venture structures that allow taxpayers to profit from the operational savings that result from retrofits, and certainly profit when the energy-efficient homes are eventually sold when market conditions are better and the communities they are in are more prosperous. If taxpayers are to profit from the sale of a more valuable property down the line they must have some ownership stake.

Likewise, if taxpayers are to reap the benefits of operational savings, they must have access to revenue streams as property managers. Additionally, the strategies outlined here will promote the solvency of Fannie and Freddie over the long term by diverting homes from the sales inventory into other productive uses such as generating rental income.

But retrofits also compellingly advance the Federal Housing Finance Agency’s larger public purpose of stabilizing neighborhoods and home values. In addition to keeping these properties off the for-sale market, energy retrofits make properties more affordable for tenants, reduce tenant turnover, and create jobs within local communities. By increasing affordability, tenant retention, and assessed property values, energy retrofits uniquely provide neighborhood and home-value stabilization.

These public-good benefits should not be glossed over. The benefits of creating energy-efficient housing stock are both global and local, from improving housing access and affordability, to creating good jobs, to reducing dependence on foreign oil and offsetting climate change. The case study contained in this issue brief makes clear that the Federal Housing Finance Agency should not ignore the tremendous benefits of joint ventures and cost-effective energy retrofits in the course of both future pilots and the broader disposition strategy for this backlog of homes currently held in public ownership.

Below we provide detailed analysis to show that it is in the public interest to use energy retrofits to gain maximum total returns for taxpayers from the foreclosed homes owned by Fannie and Freddie, and to encourage ownership structures that allow taxpayers to participate in the upside when the value of these properties increases.

An energy retrofit strategy is crucial to meeting the dual mandate of the Federal Housing Finance Agency

The acid test for any strategy to move these homes to market is the agency’s dual mandate to maximize returns to taxpayers and stabilize home values. The disposition process is a unique opportunity on both of these fronts because the agency can put forth guidelines on what bidders can present for evaluation as part of participating in the purchase of these homes.

Currently these guidelines vet bidders for certain characteristics, such as financial solvency, because without meeting those criteria, ensuring returns and stabilization would be impossible. We argue that performing energy-efficient retrofits is a clear-cut way to meet this dual mandate, and therefore should be considered at the front end of the bidding process.

There are two conditions that frame this case for retrofits. First, the Federal Housing Finance Agency has the capacity to enter into some of these transactions as a partner in a joint-venture structure. This enables the taxpayer, via the agency, to maintain a financial stake in the properties. Second, the added cost of undertaking an energy retrofit at the time when investors are already making capital improvements to ensure the safety or rehabilitation of the properties is small compared to the increased economic value it will generate. (There is also a strong case to be made for performing retrofits in situations where the property is sold outright instead of a joint venture, or if no rehabilitation occurs, but this issue brief restricts its scope to circumstances where these conditions are met.)

During the disposition process the Federal Housing Finance Agency and the taxpayers it serves will be best protected by the decision to consider entering into joint ventures, and give consideration to property managers who present a plan in the bidding process to perform energy-efficient retrofits where appropriate. This provides both an avenue for taxpayers to access value and the mechanism for creating that value.

Below, we will detail how exactly this mechanism works, and how it relates to the agency’s mandate. Specifically, we argue that energy retrofits:

• Maximize returns in the case of joint ventures both incrementally through decreased operating costs or increased property competitiveness, and terminally upon sale of the property as a higher-quality asset

• Stabilize neighborhood and home values by holding these homes off the for-sale market, increasing the affordability of the property through decreased utility costs, and employing local laborers to stimulate regional economies.

Unfortunately, to date the Federal Housing Finance Agency has focused too strongly on minimizing near-term costs for taxpayers without looking at the total costs and foregone benefits for citizens. While the rapid sale of foreclosed homes does indeed move these assets off the government books, it can also destabilize housing markets, weakening the value of Fannie and Freddie’s larger mortgage portfolio, sacrificing future opportunities for taxpayers to benefit when markets recover, and creating a massive wealth transfer from the public trust to private investors.

Real success means seeing the bigger picture. This is why the Federal Housing Finance Agency must consider the net value of the housing stock in the context of the broader market if they are to succeed in meeting either, or both, parts of its mandate. The lens for looking at bidders should include these longer-term considerations if the taxpayers are truly going to make good on their investment. American taxpayers, who have held a stake in these homes at considerable risk, should be provided with the opportunity to participate in the up side of their value creation instead of just facilitating a value transfer.

Maximizing returns: Retrofits increase property values and generate revenue

Performing energy-efficient retrofits on homes creates returns for taxpayers in two ways when Fannie or Freddie maintains some ownership stake. First, retrofits increase the underlying value of the property, which means that taxpayers profit at the point of sale. Second, property managers can either increase the competitiveness of the property for tenants by offering lower utility costs or creatively structure leases that internalize reduced utility costs depending on the types of properties for rent. Both these options allow taxpayers, through a joint-venture structure, to participate in the ongoing benefits from energy savings and their end game.

Of course, energy efficiency creates real economic value in U.S. housing markets overall. Efficient measures are as much investments in the underlying value of property as installing granite countertops and hardwood floors, and efficiency not only improves resale values but also offers improved profitability and reduced costs of ownership. Improvements to homes in the form of thermostats, insulation, and mechanical-system upgrades all increase the underlying value of the property, reduce operating costs, and where rental properties are concerned, enhance the net operating income or reduces the total operating cost of the investment property.

In the case of real estate owned by Fannie and Freddie as a result of foreclosure, taxpayers will in certain situations receive the greatest value by maintaining a stake in the long-term value of these homes through joint ventures instead of cashing in on bulk sale of housing portfolios. Taxpayers are rewarded by profiting from the eventual sale of more valuable properties into a stronger future housing market, realizing a double win.

The effect of energy-efficient retrofits on resale value is measurable and significant. A comprehensive upgrade has been shown to increase property values by as much as $40,000 after five years in the context of a small multiunit apartment building. Specific retrofit measures (including low-flow shower heads, efficient water heaters, efficient lighting, weather stripping, and attic insulation) have likewise been demonstrated to provide an increased net value of more than $5,000 apiece over five years. These economic benefits mean that a deep retrofit package can double the total profitability of a property over a five-year holding period.

Performing work on multiunit apartments and scattered-site single family home rentals obviously present different cost formulas because the utility considerations and physical layout of the buildings are different. Still, the multiunit example provides an important measure for the core value proposition that retrofits increase the underlying value of the property by showing the affect these investments can have in translating decreased operating costs into increased property value.

Retrofits also create value by lowering operating costs. This value accrues over time to property managers, and therefore to taxpayers, in several different scenarios. The property manager could advertise the lower utility costs of the apartment, increasing the competitiveness of the property in the rental market. This competitive edge could in turn translate to marginally higher rents, which can be proportional to projected savings to create a scenario where tenants still save more than moving into a comparable property without retrofits. To illustrate: A tenant could pay an increase of $50 more in rent, but save $60 in energy costs every month. The tenant’s net savings would be $10 a month, but the property manager would still capture reimbursement for their capital investment in the property.

Another possibility is that the property manager could internalize utility costs by including them in rent. This way, the monthly energy savings would go directly to the manager, allowing them to take advantage of the impressive payback periods from installing different efficiency measures. This approach would make more sense in small multifamily rental properties. To encourage tenants’ responsibility with conserving energy, the lease agreement could be structured to include a reasonable price cap based on projected energy consumption for the home, over which the landlord wouldn’t be obligated to pay. This way, tenants can take advantage of an energy-efficient home, which often boasts higher quality systems, while being held accountable to energy conservation.

All things being equal, both these scenarios should create increased affordability for tenants because the properties have lower operating costs. The ancillary benefits of increased affordability will be discussed in the next section.

By the time these homes make it to the for-sale market they will have significantly increased their profitability either through landlords recouping benefits of operational savings and through greater affordability for tenants. In either case the economic value will be enhanced and residential property investment returns show that improved cash flow translates into greater underlying asset value and improved pricing. This approach improves the quality of that property when reintroduced into the for-sale market place in the future, creating greater public value and healthier markets for future sales of other foreclosed homes in the portfolios of Fannie and Freddie.

Stabilizing home and neighborhood values: Retrofits increase affordability, employ local labor, and spur local economies

Energy retrofits are also an essential tool for protecting taxpayer value in the context of stabilizing neighborhood and home values in the broader market. Lower utility costs from retrofits directly reduce tenants’ energy bills, thus improving their ability to meet their monthly housing payments while increasing the quality of their home. This protects tenants from fluctuating energy prices and also protects property managers by reducing transaction costs associated with vacancies and collections. Additionally, renters can spend their investment dollars on goods and services within the local economy instead of spending them on energy bills, creating improved local economic development outcomes.

Prioritizing an energy retrofit strategy in the bidding process for foreclosed Fannie and Freddie homes would also shift the focus to a different type of investor, biasing against short-term speculators by filtering for candidates who understand the value of a long-term investment in residential real estate. There are significant advantages for retrofitting and holding properties. Property managers who plan for this are qualitatively different from speculators who seek short-term profits at the taxpayers’ expense. Some bidders with a long-term interest in community stability, such as Greenlet Investments LLC, based in Bellaire, Texas, also often provide services for their tenants such as financial counseling, which improves the overall rental market over time.

There is no doubt that these practices are for the public good: more responsible tenants keep finances and budgets under control instead of being funneled away to creditors. Also, this will directly translate to the type of bidding that occurs when long-term investors are willing to pay more for an asset understanding its full market potential as opposed to just flipping property to get it off the books. With long-term investors, taxpayers benefit both directly at the time of sale and also indirectly through the creation of stable markets stocked with high-quality homes and responsible tenants.

Creating the right conditions: Joint venture and marginal additional costs

With joint-venture structures, taxpayers can recoup the long-term value created from reduced operating cost when energy retrofits are part of the equation. In addition, when a property manager has to rehabilitate a home anyway, retrofits make even more sense because the marginal cost is very low. Together, these benefits are compelling, and taxpayers risk foregoing them without the Federal Housing Finance Agency encouraging bidders to present a plan for undertaking retrofits as part of the disposition of these assets.

Joint venture, as used here, is a broad category implying the Federal Housing Finance Agency would undertake a partnership with a property investment management company. In this partnership Fannie and Freddie would contribute title to the property. In exchange a partner or partners would cover the cost of all rehabilitations and retrofit work. There are many possible approaches to disposing government-controlled foreclosed homes, finding a tenant, and managing the rental property throughout a hold period of, say, five years. The partner retains most of the rental income, possibly remitting a percentage back to Fannie or Freddie. This could take the form of a series of payments that are predetermined or related to the appreciation of rents in the neighborhood.

For their part Fannie and Freddie get an improved asset to sell at more than the current value at the end of the hold period, along with the ability to closely monitor the property and assert control over it if the joint-venture partners don’t perform as expected. And taxpayers in the community get a tenanted, improved property that doesn’t sell for a period of years, lowering property turnover and permitting the market to recover.

Furthermore, because Fannie and Freddie are not interested in long-term property management, the partner has the opportunity to purchase the property outright at a point where the home is more valuable in the for-sale market, which translates into direct benefit for taxpayers. This is not to say that joint ventures are always the appropriate option, but that there are times where preventing portfolios of homes from hitting the market to begin with would greatly assist in stabilization overall and also provide the potential to increase returns for taxpayers.

Fair labor provisions also ensure that more profitable housing is created through retrofit contracts. Ensuring that the quality of work being performed is up to par is important for truly capturing operational savings, ensuring that homes are tenanted, and decreasing risk for the Federal Housing Finance Agency (and thus taxpayers) in joint-venture arrangements. Indeed, our analysis of the five “hardest-hit” cities identified by the Federal Housing Finance Agency for pilot program showed:

• The 10-year savings in operating expenses averaged $6,406 per home
• The payback period for the added cost of retrofit averaged 6.14 months

In future pilot programs bidders should present a strategy for how they will retrofit homes where appropriate in order to capture these benefits to the taxpayer and increase overall neighborhood stabilization. Now let’s turn to our detailed analysis.

Using retrofits to capture operational savings: A case study

Comprehensive energy efficiency retrofits can capture the full potential value of foreclosed homes owned by Fannie and Freddie where rehabilitation is necessary. There are measurable and verifiable net benefits from retrofits that we can quantify using the average home in each of the existing jurisdictions of the pilot disposition project launched in February by the Federal Housing Finance Agency. The benefits are substantial across the entire portfolio of foreclosed properties owned by the two mortgage finance giants, but the future opportunity to realize these net savings will be lost unless action is taken at the portfolio level during future pilot programs and once the disposition process begins.

The agency’s February pilot program was launched in some of the “hardest-hit metropolitan areas” to begin testing the disposition process. This case study examines sample homes in five out of the six areas to assess the potential returns from a comprehensive retrofit program.

Methodology and Assumptions

Traditionally, energy retrofits are classed by payback period—how long it takes to break even on the initial investment through energy savings. Rehabilitation fundamentally changes the cost calculation for this payback because an investment is already being made in the property and acquiring homes at the portfolio level helps property managers achieve economies of scale when purchasing materials and hiring workers to do the retrofits. Yet property owners are used to equating initial capital investment with total capital costs in determining payback periods. In other words, property investment managers compare the total amount on the check they are writing against projected savings when sorting out payback periods.

This approach is flawed in cases where homes are already in need of rehabilitation because rental property are choosing between upgrading to an energy-efficient retrofit or a cheaper alternative—not replacing something that works with something new. In economic terms this means the calculation should really be based on the marginal additional cost of the retrofit, not the total capital cost.

Why does it matter? Because in order to calculate the payback for the retrofit, you now consider how long it takes to recoup an entirely different number. For instance, a property owner purchases a home that requires a new thermostat as part of its rehabilitation. The cheapest thermostat costs $100, whereas a “smart” thermostat costs $250. The “smart” thermostat will save $10 a month in energy costs. To justify the extra expense of a smart thermostat, the property owner needs to recoup the extra $150 dollars he spends on it, which will take 15 months. If no rehabilitation were needed, the property manager would have to recoup a $250 capital investment for replacing a working thermostat, which would take 25 months.

Combining this calculation of the incremental cost of upgrading to the most energy-efficient retrofits with the advantages of economies of scale, it is clearly possible and profitable for rental property owners to retrofit multiple properties. This allows them to buy products in bulk, which takes a bite out of the sometimes intimidating capital costs for goods such as high-quality insulation, super-efficient heating, ventilation and air conditioning systems, and energy-management technology such as those smart thermostats. When factoring in the marginal additional cost argument, the economies of scale are even more persuasive because property owners can evaluate payback on bulk payments. A discounted order of 1,000 thermostats will pay itself off quicker than just one, although the labor and tools would have the same marginal efficiencies.

To assess these marginal additional costs, we examined the average home within five of the six “hardest-hit” pilot areas using the Department of Energy’s Home Energy Saver tool. The purpose is to quantify the decrease in the total energy operating costs from a comprehensive retrofit against a case where only basic rehabilitation was performed. What percentage of these savings gets passed along to the property owner versus the tenant obviously depends on the structure of the rental agreement. Also, because each home is unique, this analysis does not indicate which retrofit improvements should be implemented on any given home but rather shows that choosing a cost-effective basket of retrofit strategies will have a net positive impact on the cash flow of these rental properties over the long term.

Key findings

The average energy savings over 10 years for a single home in our analysis is $6,406, and that value rises exponentially as you consider larger portfolios of homes that would be available for upgrade with the bulk sale of Fannie- and Freddie-owned foreclosed homes under the Federal Housing Finance Agency’s rehab-to-rent program. These savings are apparent across different geographical regions in our analysis. (see Figure 1 above).

As Figure 1 shows, there are significant net benefits for average homes in all representative zip codes for every pilot city in five of the hardest-hit metropolitan areas. The first two columns show information that should be common knowledge to most property managers. But the third column reveals a number that is new and crucial for cost calculations—the added cost of doing retrofit in addition to rehabilitation in the home. As the data in the fourth column shows, the added cost is recouped through less than eight months of energy savings in all pilot cases.

The final column show how Fannie and Freddie and its joint-venture partners in the private sector can profit from the 10-year savings delivered by energy retrofits. By investing in energy-efficient retrofits the joint-venture partners will have established a track record of energy savings that will accrue to the new owners of the properties when they are sold. This will boost the value of the properties, especially if Fannie and Freddie sell to their joint-venture partners, who have already realized a major portion of the cumulative investments in the energy retrofits. To be sure, not all of these savings will go to Fannie and Freddie in every case, but in a joint venture there is the potential for those benefits to accrue to the taxpayer depending on how the arrangement is structured.

Of course, every home does not need rehabilitation and must be evaluated on a property-by-property basis. But this exercise proves that performing cost-effective retrofits generates large amounts of real value in each of the areas considered. It is in the best interest of the taxpayers for potential bidders to present a strategy for addressing and capturing this value while under consideration by the Federal Housing Finance Agency when it expands it ongoing rehab-to-rent program.

Using retrofit provisions to improve job quality outcomes

Energy retrofits also create more and better jobs, which further benefit community stability.  Including responsible contracting provisions on skills, job quality, and local hiring for energy-efficient retrofits can also play a central part in a enhancing the long-term community benefits realized through a retrofit strategy. Retrofit work is almost exclusively done by local construction workers to install largely domestically manufactured products. These are two industries that were hit especially hard by the economic downturn.

To ensure that rehab-to-rent leads to job creation in the communities hit hardest by the foreclosure crisis, the federal government can favor investors with a retrofit workforce comprised primarily of local employees earning family-supporting wages and benefits. Using local workers and promoting investment in contractors who pay their employees well stimulates local business, boosts production and manufacturing, and helping contractors pay their bills.

We offer several thoughts on a framework for further maximizing the long-term public value of nurturing a stable, skilled, and middle-class workforce through rehab-to-rent programs. The following framework offers a set of measures that can help achieve good jobs at good wages for energy retrofits done through this federal program.

Certification of energy-efficiency employees

If energy-efficiency measures are to achieve the cost savings intended it is vital that the workers installing these measures are properly trained. A recent McKinsey study reported, “Contractors install some 90 percent of HVAC equipment and insulation suboptimally, reducing efficiency by 20 to 30 percent.” They recommend a federally facilitated certification program for heating, ventilation, and air conditioning systems to “overcome the barrier of homeowner risk and uncertainty.”

The accreditation of training programs such as those of recognized industry experts—among them the Building Performance Institute and the Laborers’ International Union—should follow the forthcoming Department of Energy protocols for efficiency-personnel training. These skills certifications ensure that workers are properly trained in energy-efficiency practices to ensure that jobs are done to the highest standards and the economic benefits of energy savings are ultimately realized by property owners and tenants. Such a certification will offer a measure of investor-risk mitigation and will also help strengthen the value of the department’s energy-certification program generally.

Local job creation

Communities hit hardest by home foreclosures are generally those most in need of economic development through jobs and reinvestment. A policy framework that offers incentives for creating jobs in these neighborhoods will spur a virtuous cycle of reinvestment in local housing markets that will in turn raise the long-term value of rental housing assets for investors.

Locally targeted job creation can best be achieved by using the capacity of existing labor in these communities, since local community organizations are ideally suited to prescreen job seekers and partnerships with union training centers create viable career pathways with connections to employers. This is why we recommend that the investment partners in any Federal Housing Finance Agency energy-retrofit program incentivize the hiring of local workforces for at least 50 percent of any new hires.

Proper classification of employees

Construction, especially in the residential sector, is an industry plagued with the improper classification of workers as “independent contractors” when they serve in all aspects as regular employees. Such an illegal misclassification is used by employers to avoid paying costs for workers, such as payroll taxes, unemployment insurance, and health care contributions where mandated by state law.

Misclassification is commonly associated with poor performance standards and lack of investment in training. The use of contracting standards in this program would require that contractors strictly comply with their legal obligations to properly classify workers. This measure would provide further benefits by helping to improve the long-term structure of residential construction labor markets.

Responsible contractor policies

The Home Star Energy Retrofit Act of 2010 (H.R. 5019)—passed by the House of Representatives but blocked in the Senate——offers an example of a light-touch framework for a quality-assurance program that incorporates appropriate worker-certification standards for all energy-efficient retrofits under our proposed program. In order to ensure quality performance of all work undertaken in the program, the Federal Housing Finance Agency should require participating investors in the rehab-to-rent energy-retrofit program to adopt best practice industry standards for audit, inspection, and work performance, at least comparable to the Quality Assurance Framework in the Home Star Energy Retrofit Act.

Conclusion

In this issue brief we have argued that the Federal Housing Finance Agency should consider plans for cost-effective, energy-efficient retrofits in the bidding process. Retrofitting these properties, where appropriate, would enable the Federal Housing Finance Agency to meet their dual mandate of maximizing returns to taxpayers and stabilizing neighborhood and home values.

Pursuing joint-venture structures on retrofitted properties enables taxpayers to participate in the aggregated savings from this program as well as the upside at the point of sale. The increased assessed property value, tenant retention, and affordability ensure neighborhood and home-value stabilization in communities hit hard by the home foreclosure crisis. Additionally, a framework for effectively engaging skilled local labor can protect workers, investors, and homeowners and ensure not only the creation of good jobs but also the quality of work and the realization of anticipated energy cost savings, all of which is in the taxpayers’ interest.

We have demonstrated in our analysis the real and calculable net benefits to performing cost-effective energy retrofits to foreclosed homes owned by Fannie and Freddie. This is why we urge the Federal Housing Finance Agency to seize this chance to create more energy- efficient rental homes while maximizing value to taxpayers and maintaining a greater public good by requiring retrofit strategies from future bidders.In Fannie Mae’s pilot series, the average savings on operating expenses for properties were $6,406 per home and the average payback was 6.14 months. According to our analysis, the business case for the taxpayer is too good to ignore.

Indeed, if well managed, these assets can create wealth and help create strong and stable communities and allow taxpayers to participate in the benefits of the upside of this economic recovery. It is now incumbent on the Federal Housing Finance Agency to take advantage of these opportunities offered from cost-effective energy-efficiency retrofits and rebuild the housing market while improving the quality of life for thousands of Americans who will live in and work on these homes.

Bracken Hendricks is a Senior Fellow at the Center for American Progress. Adam James is a Special Assistant with the Energy Policy team at the Center. This piece was originally published at the Center for American Progress website.

Arizona State Senator Judy Burges believes efficiency programs are a way to create a one-world government

Citing conspiracy theories about “a one-world order,” the Arizona Tea Party is attempting to slip a bill through the legislature that could strip programs designed to help residents in the state become more energy efficient.

The bill’s sponsor, Arizona State Senator Judy Burges, says her goal is to wipe out any environmental program administered or funded by the government to prevent “social engineering … including where we live, what we eat.”

Burges’ bill, Senate Bill 1507, is based upon an unfounded conspiracy theory about “Agenda 21,” a non-binding international plan for environmentally-sustainable development crafted by the United Nations. The plan was adopted in 1992 by 178 countries, including the United States under the George H.W. Bush administration.

Burges and other members of the Tea Party believe that clean energy programs in Arizona are a plot by the United Nations to create a single world government in order to control people’s lives. AZ Central reported on SB 1507:

The bill would bar the state and Arizona counties and cities “from adopting or implementing the United Nations Rio Declaration on Environment and Development.”

Under the provisions of Burges’ bill, the state, counties and cities could not accept funds from, spend funds from or give funds to “certain non-governmental organizations,” including non-profit groups and contractors, for any of the declaration’s initiatives.

Wes Harris, a Phoenix resident and tea-party member, also testified with Burges, repeating theories about the declaration that have been floated among conservative organizations such as the John Birch Society, which refer to the declaration as “Agenda 21.”

Harris claimed the declaration “is an attempt to implement a one-world order. It’s been going on for 20 years. It has not been ratified by the U.S. Senate. It has been snuck around the back door by the Clinton administration.”

The Arizona conspiracy bill has already moved through the Senate, through a House committee, and is now set for discussion on the House floor. If passed by the House, the bill could block state and municipal programs that help home and business owners invest in energy efficiency improvements.

Chad Campbell, the Democratic House Minority Leader called the legislation “the most ludicrous … I’ve seen in six years…. You could pretty much shut down any form of government sustainability” program.

An onlooker with the Sierra Club called it “wacky.”

The bill was crafted through a “strike-everything” amendment, which allows a legislator to re-write an existing law with limited scrutiny. Burges has substituted language in an unemployment bill with the Agenda 21 wording that would severely limit Arizona’s ability to adopt efficiency and clean energy programs.

This isn’t the first conspiracy theory Judy Burges has been involved in. She is also a fierce “birther” who questions President Obama’s citizenship, despite being presented with a certificate of live birth.

Her previous attempts to pass legislation demanding Obama’s long form birth certificate have failed. But this latest conspiracy-laden bill actually has momentum in the Arizona legislature — threatening to derail the state’s valuable clean energy programs in the process.

by Frank Alsup, via Rocky Mountain Institute

Momentum is building around the nation for deep energy retrofits of buildings—which have a critical role in transforming our energy system and ending the use of fossil fuels.

For example, President Obama has ordered $2 billion worth of federal building retrofits and has partners for another $2 billion of work in the private sector. U.S. Senator Al Franken of Minnesota has kicked off a “Back to Work Minnesota” retrofit initiative. New York City, to spur retrofits, requires owners of buildings larger than 50,000 square feet to audit their property’s energy use every 10 years and report their annual gas, oil, and electricity consumption by May 1.

Now, in California, state Controller John Chiang is pushing for legislation to jump-start retrofits.

California has been at the forefront of the building efficiency movement, setting a goal of net zero energy for all new residential construction by 2020 and new commercial construction by 2030. But, as important as that step is, it does not address energy waste in the bulk of California’s existing buildings.

Our existing building stock must be addressed in order to significantly impact overall energy consumption. Buildings are energy hogs, consuming 42 percent of the nation’s primary energy, 72 percent of it is electricity, and 34 percent of it is directly used natural gas. California uses more energy than any country except China and the United States as a whole.

The California legislation will provide a financing method for private owners to pay for energy efficiency investments in existing buildings.

“It is a market-driven policy that will spark our economy by bringing investment capital into our state—and help California dig out of this recession with little risk to California taxpayers,” Chiang said in a recent statement.

RMI’s work was referenced in the framing of the bill. “While teaching at UC Davis I closely followed the work of Amory Lovins and continue using his materials with my students. When the controller tasked me with identifying opportunities for investments that might put Californians back to work on projects with long-term sustainability, the work done by RMI on economic benefits to energy efficiency became the foundation of our efforts,” said Alan Gordon, deputy state controller for environmental policy.

Financial barriers have typically made it difficult to fund energy retrofits even though they often pay for themselves over the life of the improvement. Current loan mechanisms, when available, often do not offer a low-enough cost of capital to make the investment attractive. In addition, the amount of time required to pay back the loan may be longer than the owner plans to hold the building. Chiang’s proposed state-controlled mechanism would funnel the debt into revenue bonds issued by the state, which are secured by a lien on the deed of the building. This structure offers increased security for financiers to lend, and the burden of repayment transfers to whoever holds the building deed. The financing is designed to cost the state nothing.

The legislation, introduced in both the California Senate and Assembly, is an effort to align incentives. It is touted as a method to unite environmentalists, building owners, and the construction industry. “This bill is a triple win for Californians: It puts people back to work, lowers energy costs for businesses and consumers, and protects our resources,” said Assemblywoman Nancy Skinner, co-author of the bill.

All of the work is seen as not only money- and energy-saving, but as a key to job creation in a buildings sector slowed since the financial crash of 2008. A recent study from the Rockefeller Foundation and Deutsche Bank said retrofitting buildings for energy efficiency could help boost the economy by creating jobs and saving $1 trillion over the next 10 years.

This legislation and other efforts around the country are built upon the ideas that our existing building stock, on average, can use 50 percent less energy through efficiency retrofits and that such retrofits are a great business decision.

RMI sees deep energy retrofits as critical to transitioning our country off of fossil fuels and nuclear power. In the buildings sector alone, this would create $1.4 trillion of profit by 2050. “It’s great to see legislation is beginning to help realize deep energy retrofits and their underlying benefits,” said Mike Bendewald, an RMI consultant.

Of the few who are currently doing energy retrofits, many merely switch out lighting or HVAC motors with more efficient versions of the same size and count. This leaves out bigger savings stemming from deeper measures like new windows, which can reduce loads to the point where big-dollar items can be reduced in size and cost. These types of strategies are typically not considered because of high up-front cost and perceived higher risk.

If approved, beneficiaries of the California legislation should be careful to not be short-sighted in utilizing the financing. A deeper and more thoughtful approach should be the goal. Doing so can dramatically increase returns and energy savings. It also can capture other benefits, such as managing utility costs, attracting and retaining employees and tenants, and complying with present and future sustainability reporting requirements.

A deep energy retrofit takes into account the business-as-usual scenario, considering all major capital needed in the building over the next several years, and builds upon them to create higher efficiencies cost effectively. “While it’s difficult in most cases to know what capital cost is attributable to energy efficiency and what is for business-as-usual upgrades, we’ve seen deep energy retrofits require as low as a 3 percent cost premium,” noted Bendewald.

To help owners and managers of building portfolios think through how they can use deep energy retrofits, RMI has issued a 2012 Portfolio Energy RetroFit Challenge. The Institute plans to work with six portfolio owners to dramatically rethink and reduce building energy use.

– Frank Alsup, originally published at Rocky Mountain Institute.

And if you can’t measure it, you can’t make money from it.

If we want to get serious about making this country more energy efficient, we need better measurement tools to help us understand how much our buildings are consuming. After all, buildings account for 40% of energy use in the U.S.

One of the simplest tools is the energy disclosure law — a requirement that all buildings over a certain size make their energy consumption public. The law may also include a rating system for ranking the performance of buildings online or in real estate dealings.

By making the information public and setting up a rating system, it provides an additional incentive for building owners to make efficiency upgrades.

There are currently five cities and two states that have passed such laws for commercial and multi-tenant buildings. Around four billion square feet of buildings are covered under these areas — double the number of LEED buildings in the U.S.

However, there’s still no serious push for the policy on a national level. And that could be preventing building owners from saving tens of billions of dollars in energy costs.

Two new reports from the Institute for Market Transformation illustrate how this straightforward policy could break the energy efficiency retrofit market wide open, potentially unlocking $18 billion in energy savings and 59,000 jobs by 2020.

The energy disclosure laws covered in the report would cover commercial buildings 25,000 square feet and greater. It would also cover multifamily residential buildings 20 units and greater.

Here’s how researchers describe the tool:

Brilliant in its simplicity, public disclosure of building energy consumption will start a stampede to upgrade buildings – motivating the good buildings to achieve higher levels of efficiency and prompting the laggards into action.

Using the nationally accepted ENERGY STAR performance scoring system – which grades buildings from “1” to “100” and is based on actual utility bills – an anemic score of 17 in a “class A” Manhattan office tower will generate action: An energy auditor will be hired, meters installed, lighting ungraded, fans and motors tuned, and old refrigerators replaced. The ENERGY STAR score of 17 becomes 77. New jobs will be created and the building owners and tenants will spend less on their utility bills.

The law isn’t designed to penalize or threaten building owners. It simply provides an opportunity for operators to track their energy use, thus providing an incentive to upgrade buildings and control costs. As we see in cities and states that require energy disclosure, commercial building operators have been responding to these laws, thus creating new opportunities for energy efficiency businesses in the area.

The IMT report highlights a number of businesses that are seeing a direct impact from disclosure laws. For example, after New York City passed its law, Ecological, a company that develops sustainability plans for building owners, gained more than 400 clients.

“We saw a significant rise in the number of clients that are interested in the actions they can take to improve their building’s efficiency, and their bottom lines. We anticipate that this trend will continue in the New with each year of compliance reporting,” said Lindsay Napor McLean, the company’s chief operating officer.

All that activity results in new jobs. Working with the Political Economy Research Institute, IMT estimates that a nationwide initiative would create more than 59,000 net jobs over the next eight years.

Simple, effective national efficiency laws could also help attract businesses looking to set up shop in the U.S.

Tim Donovan is CEO of Day One Energy Solutions, a company deploying efficiency and energy-tracking technologies on commercial and government buildings. He’s based in California, but does business in the UK. He told Climate Progress recently that his business had moved over the UK because of its “bold, aggressive steps to address climate change, and deploy efficiency and renewables.”

With a strong nationwide efficiency program, carbon reduction requirements, and a bank to help finance projects, Donavan calls it “very fertile ground for efficiency.” Of course, the U.S. government has put unprecedented support behind efficiency in recent years. But it hasn’t come together in a comprehensive way like in other countries.

“I just don’t see the U.S. as the best market. As we continue to grow in the UK, we’d love to be over here.”

A national energy disclosure law for large commercial buildings is one piece of making the U.S. a more attractive market. It would send a strong signal to the business community that the country is committed to efficiency — helping build new companies, create jobs and save buildings operators billions of dollars.

Sadly, America’s wildly successful energy efficiency standards have fallen victim to politics in recent years. Despite being used over the decades as a way to encourage innovation, increase customer choice, and reduce pollution, efficiency targets have been bizarrely branded as a government tool to control people’s lives.

Well, here’s more evidence that energy efficiency standards for equipment and lighting actually help consumers: A new report from the American Council for an Energy Efficiency Economy shows that these standards reduced energy consumption by 7% in 2010 — and could help consumers save $1.1 trillion in energy costs by 2035.

Assuming that 11 new standards being considered for computer equipment, electric motors, fans, and pumps get established, the U.S. could see a 14% reduction in annual electricity use by 2035 compared with current projections. According to the ACEEE report, assuming household appliances are updated every 15 years through 2040, the average American household could save 180 megawatt-hours of electricity and over 200,000 gallons of water. Translated into understandable figures: Roughly $30,000.

Here are some other interesting factoids on energy savings from these standards:

• Annual natural gas savings in 2035 of about 950 trillion British thermal units (TBtu), or enough to heat 32% of all natural-gas-heated U.S. homes.
• Peak demand savings in 2035 of about 240 gigawatt (GW), saving about 18% of what the total generating capacity projected for 2035 would have been without standards.
• The CO2 savings from existing standards in 2010 were 203 million metric tons, an amount equal to the CO2 emitted by 51 coal-fired power plants. By 2025, the CO2 savings grow to 448 milion metric tons, an amount equal to the emissions of 112 average-sized coal-fired power plants.
• Annual emissions reductions in 2035 of around 470 million metric tons of carbon dioxide (CO2), an amount equal to the emissions of 118 coal-fired power plants.

Since they were established in the 80′s, efficiency standards have clearly worked. They are a no-brainer for helping reduce peak demand, save consumers money and reduce global warming pollution. They also help drive innovation in business through consistent national standards.

Why would such common-sense measures get dragged into politics?

Big Hairy Audacious Goals. Jim Collins and Jerry Porras described them in their book Built to Last as a success strategy of visionary companies. What exactly is a big hairy audacious goal (BHAG)?

A BHAG is an “audacious 10- to 30-year goal to progress toward an envisioned future… A true BHAG is clear and compelling, serves as unifying focal point of effort, and acts as a clear catalyst for team spirit. It has a clear finish line … people like to shoot for finish lines.”

In 2008, the California Public Utility Commission established a few BHAGs of its own: By 2020, all new residential construction in California will be zero net energy (ZNE). The regulators defined zero net energy as a project that “employs a combination of energy efficiency design features, efficient appliances, clean distributed generation, and advanced energy management systems to result in no net purchases of energy from the grid.” By 2030, all new commercial construction will meet the same goal.

California calls its ZNE goals Big Bold Energy Efficiency Strategies, or BBEES, “not only for their potential impact, but also for their easy comprehension and their ability to galvanize market players.” Indeed, ZNE captures the imagination and inspires action. A goal to achieve zero net energy provides a tangible benchmark with an ostensibly clear finish line—at least on the building or community level.

But what about the system level? Does a world of zero net energy buildings make for a sustainable energy future?

The Challenge

Applying ZNE design principles has the potential to create superior environmentally sustainable buildings with multiple benefits. The design considerations that go into making a ZNE building dramatically more efficient can also simultaneously improve indoor environmental quality, comfort, and occupant satisfaction. For example, buildings that use daylight as a primary source of ambient lighting will generally have better indoor visibility. Attention to airflow in buildings results in better ventilation, and fresher interiors.

Also, by design, most ZNE buildings will interact with the electricity grid. While no one definition standard exists, ZNE is often defined as achieving a net-zero energy balance annually through on-site renewable generation, provided from sources such as solar photovoltaics (PV) or biogas-powered fuel cells. However, while the time scale of ZNE is annual, our electricity system operates on a smaller time scales—starting with milliseconds. Unlike other commodities, electricity cannot be stored cost effectively, which means supply and demand must be matched at all times. No more, no less.

A DG and ZNE customer receives less energy from the grid but the utility but still relies on the grid for power supply and network services to export power to the grid.

Although the total amount of energy demanded from the grid is smaller through efficiency and on-site renewable generation, the ZNE’s demand profile changes substantially. On smaller timescales, such as hours, day and weeks, the amount of grid power that must be imported or exported could fluctuate considerably. In fact, a ZNE building’s peak demand on the grid could be when it is exporting power. These phenomena represent a fundamental shift in the formerly one-way power system from both a technical and institutional perspective.

With the proliferation of more ZNE buildings, there could be steeper peaks and valleys that the grid will have to meet. If the building-grid interaction at smaller time-scales is not considered, as might be the case for some ZNE buildings, these buildings could have unintended consequences for the electrical grid and/or miss opportunities for additional value creation.

Emerging Trends

In Reinventing Fire, RMI looked out to 2050 and asked what it would take for the U.S. economy to dramatically and profitably reduce fossil fuel consumption for the benefit of our nation’s security, health, environment, and pocket books. What is the future vision, and what would the transition entail? In the buildings and electricity sectors, two key themes emerged: efficiency and flexibility.

First, efficiency will remain the least expensive, least risky option for meeting our growing demand for electricity services in the 21st century. Not only is efficiency the most cost-effective option for customers in the short run, it also enables massive cost savings for the system in the long run. The more electricity we save, the smaller the investment in infrastructure we must build to generate and deliver it.

Second, flexibility will become increasingly valuable in an evolving electricity system, which will require new operating and planning mechanisms, rules, and market structures. That need for flexibility will be twofold: 1) strategic flexibility to respond and adapt in a changing environment and 2) physical flexibility in the grid to adapt to major renewable energy sources, like wind and solar, which fluctuate with the weather. On the latter, having sufficient flexibility, in the form of responsive demand, fast-acting power plants, or even storage, will be key.

The Implications—And Opportunity

These principles also apply to how we define and design ZNE buildings and communities. Like investments in the electricity sector, buildings have long lifetimes; decisions made today define our future. Our designs must be flexible in not only how they perform for occupants but also in their interactions with the system at large. A more flexible load shape will have significant value in the emerging future.

To create a truly sustainable energy future, we must coordinate and calibrate our ZNE and grid interactions. Connected to larger ecological and utility systems, ZNE buildings will need to operate as metabolic nodes, exporting electricity to the grid and acting as electrical or thermal storage systems when needed. By itself, ZNE is insufficient to describe the energy performance of a building and its role as an active participant and contributor to the electricity system of which it is a part. To be the most beneficial, ZNE will need to take into account the interaction with the electricity grid. Recent conversations around the world are starting to explore methods for integrating quantitative indicators, which designers could include as they consider design options.

Advances in IT and demand-side technologies that enable bidirectional power flow, distributed intelligence, and operational control will enable the interaction between buildings and the grid to be “richer” in information and interaction. Like biological systems, they will be able to flexibly sense and respond to optimize their interaction with their surrounding environment. As a result, the role that customers and buildings play will expand.

We have the opportunity to design new avenues of communication between utilities and buildings, which are both critical aspects of the same overall system. The ZNE building future is fast approaching us, with broad appeal and manifold implications. Figuring out how the interdependence of these components are optimized may be the biggest opportunity for us to implement our BHAG of a low carbon renewable energy future.

Virginia Lacy is a Senior Consultant for Electricity at RMI and Victor Olgyay is an AIA Principal for Buildings at RMI. This piece was originally published at the Rocky Mountain Institute website.

by Patrick Lynch, re-posted from NASA

On the hottest day of the New York City summer in 2011, a white roof covering was measured at 42 degrees Fahrenheit cooler than the traditional black roof it was being compared to, according to a study including NASA scientists that details the first scientific results from the city’s unprecedented effort to brighten rooftops and reduce its “urban heat island” effect.

A new study of how different white roofing materials performed “in the field” in New York City over multiple years found that even the least expensive white roof coating reduced peak rooftop temperatures in summer by an average of 43 degrees Fahrenheit. If white roofs were implemented on a wide scale, as the city plans to do, this reduction could cut into the “urban heat island” effect that pumps up nighttime temperatures in the city by as much as 5 to 7 degrees Fahrenheit in the summer, said the study’s lead scientist, Stuart Gaffin of Columbia University. Image credit: Patrick Theiner, Creative Commons

The dark, sunlight-absorbing surfaces of some New York City roofs reached 170 degrees Fahrenheit on July 22, 2011, a day that set a city record for electricity usage during the peak of a heat wave. But in the largest discrepancy of that day, a white roofing material was measured at about 42 degrees cooler. The white roof being tested was a low-cost covering promoted as part of Mayor Michael Bloomberg’s effort to reduce the city’s greenhouse gas emissions 30 percent by 2030.

On average through the summer of 2011, the pilot white roof surface reduced peak rooftop temperature compared to a typical black roof by 43 degrees Fahrenheit, according to the study, which was the first long-term effort in New York to test how specific white roof materials held up and performed over several years.

Widespread installation of white roofs, like New York City is attempting through the NYC CoolRoofs program, could reduce city temperatures while cutting down on energy usage and resulting greenhouse gas emissions, said Stuart Gaffin, a research scientist at Columbia University, and lead author on a paper detailing the roof study. The paper published online Mar. 7, 2012, in Environmental Research Letters.

The urban landscape of asphalt, metal, and dark buildings absorbs more energy from sunlight than forests, fields or snow- and ice-covered landscapes, which reflect more light. The absorption leads to what scientists call an “urban heat island,” where a city experiences markedly warmer temperatures than surrounding regions. New York City’s urban heat island has a more pronounced effect at night, typically raising nighttime temperatures between 5 and 7 degrees Fahrenheit relative to what they would be without the effect, according to Gaffin’s previous research.

This comparison of white and black roof temperatures at a test site on top of the Museum of Modern Art in Queens reveals the consistent discrepancy between the surface temperature of the two during a period of June-August 2011. The white surface here was the acrylic paint coating promoted by the NYC CoolRoofs program. Credit: Gaffin et al.

The problem leads to everything from spikes in electricity usage and greenhouse gas emissions to poorer air quality and increased risk of death during heat waves. In recent years, city planners worldwide have discussed cutting into this effect by converting dark roofs to either “living” roofs covered in plants or to white roofs, the far less expensive option. The options tested in this study included two synthetic membranes requiring professional installation and a do-it-yourself (DIY), white-paint coating that is being promoted by the city’s white roof initiative.

“Cities have been progressively darkening the landscape for hundreds of years. This is the first effort in New York to reverse that. It’s an ambitious effort with real potential to lower city temperatures and energy bills,” said Gaffin. “City roofs are traditionally black because asphalt and tar are waterproof, tough, ductile and were easiest to apply to complex rooftop geometries. But from a climate and urban heat island standpoint, it makes a lot of sense to install bright, white roofs. That’s why we say, ‘Bright is the new black.’”

With climate change, the urban heat island problem will likely intensify in coming decades, said Cynthia Rosenzweig, a scientist at NASA’s Goddard Institute for Space Studies in New York City and a co-author on the paper.

“Right now, we average about 14 days each summer above 90 degrees in New York. In a couple decades, we could be experiencing 30 days or more,” Rosenzweig said.

The study found similar temperature reduction when all the surfaces were first installed, but that the professionally installed membranes maintained their reflectivity better over multiple years.

The fraction of incoming solar radiation reflected skyward determines what is called a surface’s albedo. The citywide program is in effect an “albedo enhancement” program. In addition to measuring rooftop surface temperature, the study also looked at how the reflectivity and emissivity of the white surfaces held up over time. Reflectivity measures how much light a surface immediately reflects skyward. Emissivity measures how much infrared radiation a surface emits after absorbing solar radiation.

Both the reflectivity and emissivity of the professionally installed white membrane coverings (which cost about $15 to $28 per square foot) held up remarkably well after even four years in use. These surfaces continued to meet Energy Star standards, set by the EPA’s Energy Star Reflective Roof program. The effectiveness of the white coating (which only costs about 50 cents per square foot) was about cut in half after two years, ultimately falling below the Energy Star standard. However, Gaffin said, the low-cost surface improved albedo markedly over typical black, asphalt roofs.

“It’s the lowest hanging fruit. It’s very cheap to do; it’s a retro-fit. You don’t need a skilled labor force. And you don’t have to wait for a roof to be retired,” said Gaffin referring to the DIY acrylic method. “So if you really talk about ways in which you brighten urban albedo, this is the fastest, cheapest way to do it.”

NASA studies the urban heat island effect to better understand and model how urban surfaces and expanding urbanization might impact regional and global climate, said Marc Imhoff, a biospheric scientist at NASA Goddard Space Flight Center, Greenbelt, Md.

“We’re trying to build a capability where we can expand our knowledge with data on more locations, and ultimately develop computer models that would allow us to predict urban heat islands and urban temperatures on a town level,” Imhoff said. “Eventually, we could incorporate our findings into large-scale, global climate models.”

Patrick Lynch is with NASA’s earth science news team. This piece was originally published at NASA.

This fact was first featured in the ThinkProgress Progress Report: “Five Facts About Gas Prices.”

by Jorge Madrid and Adam James

Energy efficiency upgrades to low-income homes help struggling families use less energy and lower their utility bills while still meeting their daily energy needs. A family living in an older home, for example, could cut their yearly energy bill in half with a full home weatherization.

Despite the clear benefits of energy efficiency upgrades, only a small portion of America’s low-income homes, which qualify for assistance based on the Department of Energy’s weatherization metric, have been retrofitted with such upgrades to date. Why is this the case?

In this issue brief we will examine three barriers to weatherization in low-income communities and discuss three strategies to unlocking widespread energy efficiency in low-income households, among them:

• Generating greater access to energy-efficient products
• Paying for the purchase and installation of these products
• Boosting demand for energy-efficient upgrades through innovative community outreach and education programs

Clearly identifying and overcoming barriers is crucial to expanding the use of energy-efficiency programs and measures in low-income communities. While the strategies discussed here are not necessarily the definitive answer to overcoming all barriers—other effective programs certainly exist—they nonetheless represent a crucial and much-needed step forward.

Barriers to energy efficiency

The average low-income household in the United States spends upward of 15 percent to 20 percent of their total monthly income on energy costs—money that could otherwise be used for groceries, education, health care, or other basic necessities.

A recent USA Today article notes:

Households paid a record $1,419 on average for electricity in 2011, the fifth consecutive yearly increase above the inflation rate. The jump has added about $300 a year to what households pay for electricity. That’s the largest sustained increase since a run-up in electricity prices during the 1970s.

In light of these high costs and the fact that low-income families are financially hard-pressed in our struggling economy, energy efficiency should be a priority for states and cities. Unfortunately, some formidable barriers stand in the way of significantly increasing the number of homes retrofitted with energy-efficiency upgrades.

Cash flow, capital costs, and financial incentives

For a family struggling to get by, retrofits requiring major capital costs upfront are off the table, even if it meant saving money in the long run. This lack of short-term cash flow represents the first major barrier to adopting energy efficient upgrades in low-income communities.

A second barrier compounding the cash-flow problem is the issue of split incentives for families who rent their homes. Specifically, building owners don’t make efficiency investments because it’s the renters who pay the energy bills. Conversely, renters aren’t likely to make investments in property they don’t own.

What’s more, even if renters did desire to take on the costs themselves, they are at a significant disadvantage when it comes to securing financing for large capital projects. The reason: They usually don’t have the equity to leverage such as owning a home.

Information and outreach

A third barrier is the dearth of information and outreach needed to educate communities about available avenues for low- or no-cost weatherization services. A number of case studies and analyses of low-income weatherization programs, including one by Lawrence Berkeley National Laboratory, note a lack of demand from consumers, even those who qualify for low- or no-cost energy-efficiency assistance.

These case studies note similar information and outreach barriers, including customers being unaware of the service due to insufficient marketing; the application and paperwork being too complicated to navigate; and a pervasive sense of mistrust among low-income families toward their utility company and its representatives, and toward individuals selling energy-efficiency services—what Lawrence Berkeley Labs calls “a lack of trusted messengers.”

Credible solutions

While the aforementioned issues are formidable barriers to deploying energy efficiency in low- income communities, we propose a suite of solutions that can bridge the financial and information gaps. They include generating access through financing and through community outreach and education. Let’s consider each in turn.

Generating access through financing

The Weatherization Assistance Program, or WAP, has been around since 1972 and is the traditional method for financing low-income home energy-efficient retrofits. WAP channels federal appropriation dollars into state programs, which in turn fund individual home weatherization programs for those who qualify.

While this program was underfunded and saw only meager growth over the first several decades, it has experienced a period of great expansion in the past few years after receiving $5 billion in funding through the American Recovery and Reinvestment Act. In 2010 homes that benefited from the Weatherization Assistance Program across the country saved $2.1 billion for low-income families, including $437 on heating and cooling costs alone for individual households per year. More than 600,000 homes to date have been weatherized with Recovery Act funding, and more than 788,000 have been weatherized, when including the money given to WAP through annual appropriations.

As we have argued before these numbers stand in stark contrast to those of critics of the program. With the cost of weatherization clocking in at a modest $6,500 per home, and the multitude of environmental and economic benefits that energy savings brings, the Weatherization Assistance Program has been a resounding success.

Still, with an estimated 38.6 million American households still eligible for weatherization services, and factoring in that we as a nation are still spending about $231.1 billion annually for residential energy use, it is clear that there is plenty more work to be done. And while the Weatherization Assistance Program is making meaningful strides in penetrating the market for low-income homeowners, renters are unfortunately still literally being left out in the cold since the program is mostly used by homeowners (see the “split incentive” barrier above). The renter population is a crucial demographic to assist, with 18 million very low-income people (50 percent of the median) in the United States renting—representing an increase of almost 2 million renters in six years.

Enter another innovative financing program that has made inroads in several parts of the country, most recently in New York state and in California—a public-private partnership financing program called on-bill financing. On-bill financing gives renters the ability to finance energy-efficiency improvements to their homes at no upfront cost while at the same time allowing them to repay the loan through the energy savings realized on their monthly energy bill.

The monthly bill is calibrated by the utility to be lower than (and to never exceed) the average electricity cost for that time of year. Thus the renter enjoys immediate savings on their utility bill while also paying for upgrades to their home in the same bill. (see Figure 1 above)

Further, this mechanism allows the loan to be attached to the building rather than to an individual, so that the costs are transferable upon sale—meaning that if a tenant leaves or is removed, the next tenant will pick up the repayment when he or she turns the power on. On-bill financing also incentivizes building owners by improving the value of their total property while transferring the monthly repayment to renters of an individual unit.

The market for residential on-bill financing is quite new—20 states are home to utilities that have implemented or are about to implement these programs. Thus continued analysis and fine-tuning must occur. Likewise, these programs certainly face their own challenges and barriers, as outlined by the American Council for an Energy Efficiency Economy, or ACEEE—upfront costs to utilities that need to modify their billing systems; the perception that utilities must operate as financial institutions to participate; risks of nonpayment of the finance charge; and raising startup capital. Still industry, financial, and environmental organizations agree that on-bill financing poses enough of an upside to move forward.

The Weatherization Assistance Program and on-bill financing provide two viable options for cities and states to help low-income families afford the desperately needed energy-efficiency retrofits that would otherwise be out of their reach.

Generating demand through community outreach and education

Even with effective financing or public subsidies available, weatherization programs still need low-income families to subscribe and “buy-in” in order for these services to reach meaningful scale and significant market penetration. Often these programs are underutilized due to nonfinancial reasons—namely an information and outreach gap resulting from insufficient or ineffective marketing, an intimidating or overly complex application process, or a general distrust of solicitations from utilities or private contractors. In other words, there is a basic communication breakdown between the people who need these services and the companies or nonprofit agencies that can provide them.

One way to overcome these nonfinancial barriers has been piloted by nonprofit organizations in numerous low-income neighborhoods across the country. These organizations utilize a community organizing model to sign up neighborhood residents for efficiency upgrades. While these programs take a variety of forms, they have a common theme—engaging established community leaders and existing social infrastructure such as a church group, parent-teacher association, or other existing nonprofit organizations, and relying on peer-to-peer outreach to sign up homes and businesses for weatherization services. These groups educate residents about the benefits of weatherization, inform them about financing options, and guide them through the application process. This model has proven to be effective in engaging residents who would have otherwise been hard to reach. (See case study: Groundswell)

Further, some of the most successful programs have also bundled demand—10 or more homes and business in one neighborhood—to leverage project agreements with utilities or independent contractors producing additional positive benefits for communities. These “bundled” contracts can include clauses like local-hire and workforce training agreements, preference for women- and minority-owned contractors, clean energy preferences, competitive or reduced pricing and interest rates, and favorable and flexible repayment options.

Understandably, there is not a one-size-fits-all strategy when it comes to generating demand for energy-efficiency retrofits. In fact, the strength of this approach is its highly localized and contextualized nature. The 38.6 million homes that still qualify for weatherization (and the millions more rental units that could utilize on-bill financing) show that there continues to be a gap between need and demand. Community-organizing approaches help to connect these dots—showing people who need efficiency upgrades how to generate and bundle demand in the marketplace and ultimately realize the benefits of an energy-efficient home.

Conclusion

The Weatherization Assistance Program and on-bill financing have come a long way in helping low-income families overcome the high upfront costs of installing energy-efficient retrofits. Many of these families are now seeing lower energy bills as a consequence. In addition, the unique community-organizing approach employed by nonprofits such as Groundswell have provided information and resources to unite communities and have helped them to more fully access energy saving programs and products. By continuing to chip away at the financial and information barriers that exist for low-income families with the types of innovative approaches discussed here, American energy independence can truly begin take root in every American home.

Jorge Madrid is a Research Associate and Adam James is a Special Assistant on the Energy Policy team at the Center for American Progress. This piece was originally published at the Center for American Progress website.

by Alexis Karolides, cross-posted from the Rocky Mountain Institute

Which commercial building sector uses more energy per square foot than all but one other and is more than twice as energy-intensive as office buildings and schools? Grocery stores, second only to food service.

With utility costs rising—and already a significant percentage of the famously thin profit margin on food sales—stores must get serious about energy efficiency, particularly if they care to keep prices low for value-conscious customers.

Now, imagine slashing the energy use of a new or existing store in half, while achieving a better customer environment. How could this be done? Rocky Mountain Institute’s whole-system approach, reaping multiple benefits from single design moves, works particularly well when a retailer is willing to push the boundaries.

In 2010, building on years of experience with several other grocery chains and related industries, RMI worked closely with Texas grocery retailer H-E-B to inform a dramatically efficient design being used for a store that is to begin construction this year in a brownfield redevelopment area at Austin’s former airport site. The plan is expected to reap 50 percent energy savings. RMI studied H-E-B’s efficiency opportunity areas in energy, water and waste, and then held a workshop to innovate breakthrough strategies for designing efficient new stores and retrofitting existing ones.

Illustration by Lisa Haney

RMI often uses innovation workshops, engaging many disciplines within a client’s organization (including design, engineering, and operations staff) as well as an RMI team of experts in various disciplines, to turn complex challenges into integrative design solutions. The goal is not just to solve the problem, but to transform how the client designs and runs all its facilities, and to help shift the underlying strategy and culture, so the change is durable and creates competitive pressure for emulation.

Bill Reynolds, architect and group vice president-facility alliance for H-E-B, said that not only is the new Austin store on track to meet its 50 percent energy savings goal, but the RMI charrette was a catalyst for H-E-B to incorporate progressively better efficiency strategies in other new and existing stores.

“The tipping point was the [RMI] charrette,” Reynolds said, using the architectural term for an intensive, roundtable, transdisciplinary design workshop with ambitious deliverables.

To understand the energy savings H-E-B will achieve, let’s look at where grocery store operations use energy. Of all utility costs (including truck fuel, landfill fees, water, gas, and electricity), store electricity is by far the biggest expense. Breaking this down into end uses of electricity, the biggest chunk goes to refrigeration, then refrigerated-case anti-sweat devices and other equipment, heating ventilation and air conditioning, and then lighting.

How is H-E-B’s new store design, located at Austin’s Robert Mueller Airport Redevelopment site, going to use 50 percent less energy than this capable firm’s standard design of new stores, as well as efficient water and waste use? These integrative design moves are key:

• An airlock store design with vestibules (so trucks can deliver goods without making a big hole in the back of the building) and enhanced insulation.
• A lighting scheme that allows daylight to provide all of the ambient light when possible, eliminates glare, highlights product, enhances merchandising, and dims night lighting to comfortable levels inside while providing adequate lighting outside with LEDs (this can be enhanced by light-colored pavement that also reflects heat during the day).
• A highly efficient refrigeration and air conditioning system, with chillers and cooling towers, combined with a radiant slab that can heat or cool.
• Landscape and drainage strategies that eliminate irrigation and provide unique Texas character to the site.
• Indoor water use efficiency, including high-performance domestic fixtures, and such kitchen improvements as using portable pressure washers and eliminating seafood display ice.
• Reclaiming condensate for cooling towers.
• Aggressively composting and recycling remaining waste streams. Already H-E-B recovers over 50 percent of its waste, but the company’s sights are now set much higher.

Not only do these efficiency gains save energy and resources, they can also improve the indoor environment. Natural daylight and better electric lighting design improve the shopping experience—and studies show that shoppers spend more time in well-daylit stores. Well-designed nighttime lighting can reduce glare and eyestrain, while nontoxic finishes (eliminating vinyl floors and off-gassing paints for instance) improve indoor air quality.

The store is being touted as the “most sustainable” store H-E-B has ever built.

“RMI was the catalyst that spurred the green design,” said Charlie Wernette, H-E-B’s director of engineering. Next, H-E-B will implement these whole-system efficiency strategies across its existing store portfolio.

Given the grocery sector’s energy intensity, the implications can be even greater, with these steps serving as a model for other retailers. H-E-B’s execution of RMI’s Reinventing Fire principles are a critical example of making the ideas real. Buildings use 42 percent of the nation’s energy, costing more than Medicare—and most of that is wasted through inefficiency. Reinventing Fire shows that scalable efficiency solutions can transform our buildings from energy hogs to more comfortable, livable, healthful, and workable spaces that help usher in an efficient, secure, renewable energy era.

These steps are how RMI design recommendations would reduce typical store electricity demand:

• High-efficiency refrigeration systems—saves up to 18 percent of the store’s total electricity use.
• Skylights, and high-efficiency interior and exterior lighting—saves 12 percent.
• HVAC efficiency: chilled water, efficient fans and ductwork, desiccant dehumidifier—saves 10 percent.
• Radiant heating and cooling—saves 6 percent.
• Superinsulated walls, tight construction—saves 3 percent.
• Greatly reduced infiltration at entrances (vestibules)—saves 3 percent.

Potential water savings and waste recovery, though smaller in total expenditures, are even more dramatic on a percentage basis. Water efficiency could reduce consumption by 80 percent:

• Xeriscaping—saves 28 percent.
• Low-flow restroom fixtures and sink aerators—save 23 percent.
• Rooftop rainwater capture and use—saves 11 percent.
• Kitchen improvements such as portable pressure washers and pre-rinse spray valves—save 5 percent.
• Reclaiming HVAC condensate—saves 3 percent.

– Alexis Karolides is a principal architect working in the Electricity practice area at the Rocky Mountain Institute. This piece was originally published at the RMI website.

“There is an old joke, widely told among economists, about an economist strolling down the street with a companion when they come upon a $100 bill lying on the ground. As the companion reaches down to pick it up, the economist says ‘Don’t bother — if it were a real $100 bill, someone would have already picked it up’.”

by Ryan Matley, reposted from the Rocky Mountain Institute

President Obama’s call in his State of the Union address to capitalize on “the strongest two-year period of manufacturing growth since the 1990s” by encouraging businesses to bring work back to the United States can be accelerated with energy efficiency innovation.

While Obama urged Congress to take a series of tax steps to encourage businesses to bring jobs back to the United States, RMI has strong evidence that industry can take cost-saving efficiency steps without waiting for policy-makers. Doing so can quantifiably improve U.S. manufacturing’s competitive advantage right now.

Stories about the death of U.S. manufacturing are a recurring theme since the “Japanese invasion” of electronics and autos in the early 1980s, and the sector hemorrhaged 5.5 million jobs over the past decade. But U.S. manufacturing is far from dead, in fact providing a rare bright spot in today’s economy.

Manufacturing employment has grown each of the last two years, driven by a rebounding auto sector, and now employs 11.7 million people.

A number of trends are coinciding to make U.S. manufacturing increasingly competitive globally. Wages and benefits are growing rapidly in China—as Obama noted in his speech—at the same time that U.S. manufacturing wages are falling. The risks of operating a supply chain that stretches halfway around the world are growing: rising transportation costs, the threat of import duties, less product flexibility, slower time to market, intellectual property theft, and product safety/reputation risks are growing concerns when moving manufacturing offshore. All of these factors are translating into making U.S. manufacturing more appealing.

Efficiency and whole-system design can help industry accelerate these growing advantages. Analysis from Reinventing Fire, RMI’s blueprint to running a 158 percent bigger 2050 U.S. economy powered by efficiency and renewables reveals that the industrial sector can achieve 84 percent greater production using 9 to 13 percent less energy, and save $0.5 trillion net.

JR:  That’s a big bill on the ground waiting to be picked up (see also “Energy efficiency is THE core climate solution. Part 1: The biggest low-carbon resource by far”).

For example, with RMI’s help, Texas Instruments (TI) built a new, million-square-foot semiconductor fabrication plant in Richardson, Texas. This facility, opened in 2009, was the first LEED Gold rated semiconductor facility, and its innovative design saved $4 million in annual energy operating cost and 35 percent of its water use compared with TI’s previous chip fab built just four miles away. Building this facility added up to less than 1 percent of the construction budget.

These savings were generated through a combination of simple steps, including building orientation and exterior shade screens to minimize solar gain, light shelves to increase daylighting, big, straight pipes that reduce friction and pumping energy compared to small, crooked pipes. The design team was even able to remove an entire floor, saving the materials needed to build it and energy needed to operate it. Most importantly, these energy savings were obtained while exceeding management’s target of spending 30 percent less capital than the prevailing design. Meeting that goal meant the facility and its 1,000 jobs stayed in Texas rather than heading overseas.

The Texas Instruments story is recently joined by a wave of good news as companies from GE to Intel bring manufacturing back to the U.S. and invest in factories here. Rust Belt economies devastated by offshoring over the past decade are starting to repopulate their vacant industrial land (albeit with lower-wage jobs) while manufacturing in the South continues to grow.

The rising tide does not assure continued U.S. manufacturing growth, though. A number of clouds remain on the horizon. These barriers include a burdensome tax structure — Obama’s target Tuesday — stifling and lengthy permitting processes, and a lack of skilled workers to operate increasingly complex and automated manufacturing processes. Many of these barriers will require some act of Congress for real progress. But industry can take many clear steps on its own.

“The easiest way to save money is to waste less energy,” President Obama said, proposing that manufacturers be incentivized to eliminate energy waste in their factories as a way to lower energy bills, cut pollution, ramp-up manufacturing and provide more American jobs.

Radical energy efficiency improvements, made possible through whole-system design, can unlock far greater efficiency gains than typically thought possible, often at the same or lower capital cost than conventional designs. Because whole-systems design brings together all project stakeholders, from the designers and engineers to the production staff and owners, it can also break down costly assumptions and rules of thumb and yield diverse benefits such as improved productivity, product quality and working conditions.

Successfully nurturing a whole-systems design process from inception to construction is not easy. Despite all the benefits, the approach poses number of sticky challenges to navigate along the way. Whole-systems design takes more time than an off-the-shelf solution, and the exact outcome cannot be predicted at the outset. New approaches not yet familiar to the design team carry perceived technical risks, but a growing body of robust examples show the power of whole-systems design.

Manufacturing serves as the bedrock of our economy. It is the engine that has driven our dramatic economic growth and lifestyle gains since World War II. It has the largest multiplier of any other sector by far—for every $1 in manufacturing value added, $1.40 of value is created in other areas of the economy. It is worth our attention and persistent investment in ensuring its success. Alan Mulally, CEO of Ford Motor Co. after leading a resurgence at Boeing, underscores the point: “We have to make manufacturing a priority. It’s the foundation of everything associated with the economy.” It’s time to unlock the next industrial revolution through efficiency.

– Ryan Matley is an electricity consultant with the Rocky Mountain Institute. This piece was originally published at the Rocky Mountain Institute blog.

An innovative energy-smart finance program for homeowners – called Property Assessed Clean Energy, or PACE – has a chance for revival. Over the next 60 days (until March 26th, 2012), a broad bipartisan coalition of business leaders, environmentalists, property owners and federal, state, and local policymakers will finally have a chance to make their voices heard and explain to federal regulators why PACE makes economic and environmental sense.

The PACE Saga

PACE programs, run by towns or counties, enable property owners to finance the initial cost of energy efficiency improvements or small scale renewable energy projects and pay them off in small increments that are added to property taxes over an extended period of up to 20 years.  Participation in PACE programs is entirely voluntary and from the start, homeowners can save more on their energy bills than the cost of the payments thanks to the clean energy projects. Improvements financeable under PACE can include better insulation, more efficient windows, more efficient heating and cooling systems, and solar panels. (See: Babylon Steps Up the PACE of Green Jobs: “For Energy Savings, Carbon Reduction and Job Creation”).

Because of the economic and environmental benefits PACE could provide, PACE programs were supported by wide range of stakeholders: from labor unions to Fortune 500 companies and environmental groups.  Starting in 2008, over 27 states and the District of Columbia passed PACE enabling legislation and a large number of municipalities in those states started or were preparing to launch PACE programs locally.

However, nearly all existing PACE programs were halted in July 2010, when the Federal Housing Finance Agency (FHFA) and the Office of the Comptroller of the Currency issued instructions to Fannie Mae, Freddie Mac and the national banks that effectively froze PACE financing programs nationwide. The result was millions of dollars in federal stimulus funds in limbo, thousands of jobs implementing the projects left on the drawing board, and economic development plans and climate change goals across the country on hold. Lawsuits and proposed legislation followed, in addition to widespread frustration that the regulators had failed to consider the full range of implications of their actions.  You can read about the status of the lawsuits at my colleague Kit Kennedy’s blog.

As described in more detail in Kit’s post today, a court order has forced FHFA to post an “advanced notice of proposed rulemaking.”  FHFA now must turn back the clock on their rulemaking and provide public notice in the Federal Register of their intent to propose a rule on PACE and allow the public 60 days to comment and provide their perspectives on PACE.

NRDC, together with PACENow and a broad bipartisan coalition, are now working hard to ensure that PACE’s supporters make their voices heard and that FHFA properly considers them.  The regulators’ initial July 2010 attack on PACE was a backdoor surprise attack.  Now, the chance to submit comments on the FHFA’s position on PACE could breathe new life into an important vehicle for jobs, the economy, and the environment.

Go to PACENow for more information about how to comment and be a part of PACE’s revival, and see the FHFA’s Federal Register posting for information on how to submit comments. Please make your voice heard to revive PACE!

Alisa Valderrama is a finance analyst with the Natural Resources Defense Council. This piece was originally published at NRDC’s Switchboard.

Related Posts:

• Babylon Steps Up the PACE of Green Jobs: “For Energy Savings, Carbon Reduction and Job Creation”
• Finally, Some Bi-Partisanship on Clean Energy in Congress: PACE Financing Returns

Located in Puget Sound, Bainbridge Island has been a major energy hog — with residents consuming 60% more electricity than the regional utility’s average customer due a large chunk of building stock not being up to modern energy codes.

Residents were offered a choice by the utility: pay for a new substation to support increasing energy demand, or reduce energy consumption. The island chose the latter — and in the process is helping train new workers, save residents money, and illustrate the power of collective action.

Helped by a grant from the Department of Energy’s Better Buildings Neighborhood Program — an initiative created through the stimulus package — island residents have created an online community network for monitoring energy use. In the first winter since the RePower Bainbridge project was rolled out, peak power consumption dropped by 10 megawatts. Over the next few years, the program will also facilitate efficiency upgrades for 4,000 houses and 150 businesses, while training around 65 people.

Watch the video below, produced by Climate Solutions, to see the local action that’s driving change in Bainbridge. You can also check out the Climate Solutions website for more great Solutions Stories.

RePower Bainbridge from Climate Solutions on Vimeo.

by Alon Cohen, Jordan Eizenga, John Griffith, Bracken Hendricks, and Adam James

This piece is a primer for a Center for American report on Rehab to Rent, which can be found here.

Half a million houses, many of them vacant and deteriorating, are languishing in a bloated U.S. real estate market, threatening to turn some cities into ghost towns, undermining the stability of working families, and proving to be an anchor on a shaky economy. Many of these vacant homes, nearly a quarter-million, are controlled by the federal government.

If the situation wasn’t already bleak enough, there are also more than a million additional American homes saddled with delinquent mortgages that are in the process of foreclosure. Chances are many of these homes will also end up as the property of the federal government. The only way to lower the inventory of decaying homes is to find a use for the ones we have before new ones swell the pool. Without assistance, the current “overhang” of foreclosed homes is expected to take four years to work back into the market.

The good news is the Obama administration and independent federal regulators are formulating plans to sell government-controlled foreclosed properties to investors who would bring them onto the rental market. The aim is to reduce the number of vacant homes which depress housing prices and burden the economy while meeting an increasing demand for rental homes. If made affordable these new rentals can help meet the needs of approximately 100 million American households—about half of all renters—who are “rent impoverished” today, meaning they devote more than a third of their monthly income just to housing. This is a key indicator of pent-up demand for new rental housing.

The Federal Housing Administration, or FHA, and the two mortgage giants Fannie Mae and Freddie Mac—both currently in government conservatorship—collectively own about 230,000 foreclosed homes, mostly from mortgages insured or securitized before the housing bubble burst. Unfortunately, only a small subset of these foreclosed properties are in good enough shape and in strong enough markets to be sold directly to families looking for a place to call home. For the rest, low home prices and weak demand for owner-occupied homes mean that selling hundreds of thousands of them into that market will depress prices for a long time to come.

In this paper we lay out a set of priorities for removing a portion of these properties from the glutted for-sale market by converting them to affordable rental units, a process we call “Rehab-to-Rent” or “R2R.”

With home prices slumping and rental demand and rents rising, these government-owned properties could earn a greater return for taxpayers and do more to promote an efficient and resilient housing market if they are taken out of for-sale markets and converted into rental units. Residents of these communities and American taxpayers who are on the hook for homes now owned by Fannie, Freddie, and FHA would be best served if these homes were rehabilitated, potentially retrofitted for energy efficiency, and then rented out at affordable rates.

The Federal Housing Finance Agency, or FHFA, which is responsible for Fannie Mae and Freddie Mac as their regulator and conservator, earlier this year solicited information from companies, community groups, governments, and other stakeholders on how to do this successfully. Our response was one of over 4,000 received, demonstrating a healthy appetite for this program.

When deciding what to do with these properties, we believe FHFA should focus on its congressional mandate to:

• Preserve and conserve the government-controlled assets and property of Fannie and Freddie.
• Ensure Fannie and Freddie support stable and liquid mortgage markets by operating in a financially safe and sound manner even though they are in conservatorship.
• Maximize assistance for homeowners, where warranted, and minimize preventable foreclosures.

We acknowledge a possible tension in this mandate, namely between maximizing short-term return to Fannie Mae and Freddie Mac—likely by selling the foreclosed homes they own to the highest bidder—and stabilizing local housing markets to benefit taxpayers generally by not flooding the housing market with the mass sale of foreclosed single-family homes. But we believe these goals can actually work in tandem if FHFA focuses on maximizing the medium- and long-term returns on these assets, which will in turn stabilize housing markets and neighborhoods hit hardest by the foreclosure crisis.

This paper offers key considerations for any Rehab-to-Rent initiative Fannie, Freddie, and FHA wish to pursue. It expands on the principles laid out in the Center for American Progress’s official response to FHFA’s request for information, focusing on how R2R could best work in the real world to serve multiple goals. This paper focuses exclusively on how a Rehab-to-Rent program could deal effectively with the continuous flow of so-called “real estate-owned,” or “REO” properties—industry parlance for lender-owned foreclosed homes—that are under federal government control. But we believe that its success could pave the way for similar private-sector initiatives to deal with the quarter-million foreclosed homes held by banks and other financial institutions.

This paper is the product of many hours spent with the underlying economic and housing data as well as conversations with stakeholders in both public and private spheres, including institutional investors, community-based nonprofits, rental-property managers, and representatives from federal, state, and local governments. Because many of those with whom we spoke are intimately involved in internal discussions about what to do with government-controlled foreclosed properties, those conversations took place with the understanding that we would not attribute statements to particular groups or individuals.

The results of our research are detailed in the main pages of the report, but briefly here we present a summary of our proposal.

How R2R would work

This paper is built on two assumptions: First, Fannie Mae, Freddie Mac, and FHA should each determine the best way to dispose of its own REO inventory because each of them brings separate business processes, corporate attitudes, and legal and financial tools to managing their portfolio of foreclosed-upon houses. Combining their inventories of foreclosed properties could have benefits to R2R, but the complexity makes it an unlikely prospect.

Second, Fannie, Freddie, and FHA should use multiple methods to dispose of their stock of foreclosed houses—determining which to sell to individual owner-occupants (referred to as the “retail market” in this paper), which to sell in bulk to investors and community groups, and which to hold as assets and possibly rent out through joint ventures for a period of time. Regardless of the configuration, any disposition strategy should target the same goals, namely:

• Maximize the long-term return of foreclosed single family homes to taxpayers • Stabilize local home prices by reducing the glut of foreclosed properties on the market
• Stabilize communities hit hard by the foreclosure crisis
• Expand affordable rental housing in markets with unmet need
• Expand the stock of energy-efficient homes
• Create new jobs and economic activity in depressed areas

With these goals in mind, we’ve set out benchmarks below by which any R2R strategy should be evaluated. Each benchmark may not apply to every government-controlled foreclosed property, but we believe that each should at least be considered for every community where substantial quantities of them exist. Let’s examine these benchmarks more closely.

Benchmark #1: Tailor strategy to the specific needs and market conditions of the community

As FHFA Acting Director Edward DeMarco stated in his testimony before Congress on November 3, 2011, a “single, national program for REO disposition” will not work. FHFA is rightly interested in “proposals tailored to the needs and economic conditions of local communities,” such as employment opportunities, industry mix, income-level, and the age and quality of the housing stock.

What is required instead is a set of criteria that will help FHFA identify a few fundamental traits that make R2R possible in a community and then look to bidders to make the case for viability in that community. Considerations include having sufficient numbers of government-controlled REO properties within a specific geographic area, unmet demand for rental housing, and financial incentive to invest in rental properties.

Benchmark #2: Ensure bidders have a track record and viable plans to rehabilitate and rent the units

If R2R is to have a measurable impact on communities or the balance sheets of Fannie, Freddie, and FHA then it will have to achieve substantial scale—at the very least tens of thousands of homes within a couple of years. Based on our discussions with Fannie and Freddie representatives, these institutions have around 60,000 to 90,000 foreclosed properties available for active sale right now; larger potential investors have told us they would purchase 10,000 to 25,000 properties immediately if they could. If even a fraction of this is achieved, tens of thousands of homes across the country will be moving into the hands of new owners to be held out for rent. A failure by any one of these new owners—even a partial failure, such as a big delay in rehabilitating properties—could have a large impact on the community where those homes are located.

While we don’t harbor idyllic notions of working within a perfect system, a top priority has to be to qualify buyers and property managers based on proven track records in property rehabilitation and market performance as well as demonstrated potential to provide local benefits through community engagement. Fannie, Freddie, and FHA should consider a bidder’s track record in acquiring, rehabbing, and managing scattered-site, single-family homes; primary location of operation; knowledge of the local real estate market; relationships with the community; and, where appropriate, the organization’s history of community and economic development.

Benchmark #3: Acquire properties for R2R in communities that will maximize long-term returns to taxpayers and stabilize housing markets

One of the most prominent issues in FHFA’s request for information was how to get the properties from the hands of the federal government to those who will responsibly manage them for rent. The primary focus here should be selling to responsible buyers under terms that are most likely to maximize long-term returns. In some instances, that may be an auction to a qualified bidder in order to yield the highest immediate reward. In others, a multiyear joint venture where Fannie, Freddie, or FHA holds the title while the joint venture partner rehabilitates, retrofits, maintains, and rents the properties could yield a greater overall return under certain circumstances.

Regardless of the resulting ownership structure, the process for transferring properties from the federal government for R2R must be carefully designed to avoid cherry picking, to accommodate consortiums of bidders and property managers, and to ensure that neighborhood stabilization remains a key consideration.

Benchmark #4: Expand the affordable rental housing market

At a time of high unemployment and stagnant middle-class wages, affordable housing is critical to our economic recovery. The more low- and moderate-income families spend on housing each month, the less they spend in stores, making businesses leery of investing and hiring new employees. People coming out of their homes due to foreclosure need a place to live, as do workers who need to move to find jobs and will need access to affordable rental housing.

Indeed, the need for affordable rental housing is unprecedented in recent history, therefore any disposition plan should include mechanisms to encourage its provision. One way to do this is by encouraging the participation of local community organizations with experience rehabilitating and managing affordable rental properties. But these nonprofits often lack the capital necessary to be competitive with certain classes of investors such as private equity groups. That is why it is important to provide low-cost seller financing to ensure the participation of mission-driven community groups.

Benchmark #5: Provide incentives to property owners to properly renovate properties and undertake economically justifiable retrofits

Hundreds of thousands of steadily deteriorating foreclosed properties sit vacant today. They will need to be rehabilitated before they can be rented. In some cases, especially when the federal government maintains some financial stake in the property through a joint venture (as we discuss later), this provides an opportunity to reduce the total cost of ownership through economically justifiable, energy-efficient retrofits.

Since individual owners will be rehabilitating many properties simultaneously in a relatively short time period in any Rehab-to-Rent program, they will have an opportunity to go beyond mere rehabilitation and improve home energy-efficiency performance through a deeper retrofit at marginal additional cost. If a new owner of these properties, for example, is already replacing windows or heating systems, energy savings can be achieved for little additional cost by installing higher-quality materials and mechanical systems. There are also social benefits of energy-efficient rental housing: it helps lower our dependence on foreign oil, reduces carbon emissions to help combat climate change, and lowers utility bills for tenants, many of whom are low- and moderate-income families.

Retrofits should be encouraged in any R2R program. Through financing and other methods, the federal government can offer incentives to property owners to conduct proven and cost-effective energy and water saving retrofits that can enhance the long-term value of the property.

Benchmark #6: Ensure sufficient measures are in place to monitor compliance

It is a given that with such an ambitious undertaking involving large numbers of buyers, things will occasionally not work as planned. It is imperative that the government sets up strong monitoring and contingency plans in place not to simply mitigate the risk of failure, but also to effectively respond if investors fail to meet certain compliance requirements. FHFA must monitor those who hold formerly government-owned REO properties out for rent and lay out clear penalties for noncompliance.

Fannie, Freddie, and FHA should restrict a poor-performing investor’s ability to acquire more properties, and for the most serious offenders, establish a mechanism for recapturing properties. The federal government should draw on its experience (both good and bad) in previous efforts to transfer properties from government to private entities, such as the Resolution Trust Corporation set up after the savings and loan crisis of the 1980s.

We take a more detailed examination of each benchmark later in this report, but first let’s turn to a detailed assessment of today’s foreclosed property market to understand more clearly how our Rehab-to-Rent approach can help resolve several festering problems resulting from the housing market crash and subsequently slow and uneven recovery.

You can find the full report on Rehab to Rent here.

Alon Cohen is a consultant for American Progress and also serves as senior vice president and general counsel for a Washington, D.C. startup; Jordan Eizenga is a Policy Analyst with the Economic Policy team at American Progress; John Griffith is a Research Associate with the Economic Policy team at American Progress; Bracken Hendricks is a Senior Fellow at American Progress and works at the interface of global warming solutions and economic development; Adam James is a Special Assistant on the Energy Team at the Center for American Progress.

The Best “Austerity” is Cutting Energy Costs

by Trevor Winnie, reposted from Clean Edge

A rising attitude of austerity has been sweeping the nation for some time now, with the loudest voices putting near term deficit concerns in front of commitment to long term economic growth. But a temporary spike in government spending might be the most effective way to boost demand for goods, services, and labor in the face of lingering U.S. economic malaise – and at a relatively low cost.

Boosting investment in infrastructure – namely our energy system, telecommunication networks, and roads and rails – has long been the remedy argued for by bright minds like Nobel laureate economists Paul Krugman and Joseph Stiglitz, and Washington Post columnist Ezra Klein.

“Because of the recession, construction materials are cheap. So is labor. And your borrowing costs? They’ve never been lower. That means a dollar of investment today will go much further than it would have five years ago—or than it’s likely to go five years from now,” explained Klein in an October 2010 Newsweek Op-Ed. “So what do you do? If you’re thinking like a CEO, the answer is easy: you invest.”

Fifteen months later, Klein’s words remain potent. Krugman and Stiglitz have both voiced similar cases for increased investment. Support for a clean-energy economy has, not surprisingly, played a central role. “Increased investment to retrofit the economy for global warming would help to stimulate economic activity, growth, and job creation,” says Stiglitz.

So what does this mean for clean tech? The immediate reaction might be to build as much clean-energy generating capacity as possible. But it’s important to look beyond a strategy that focuses solely on new solar panels and wind turbines. Instead, any energy-related infrastructure investing should first and foremost be focused on improving the energy efficiency of our factories, offices, and homes. Buildings are responsible for roughly three-quarters of our electricity use and more than 40 percent of our total energy consumption (surprisingly, 60 percent of this can be traced to just three activities: space heating/cooling, lighting, and water heating). Improving the efficiency of our built environment ­– through readily available technologies like efficient lighting, low-energy appliances, and weather-resistant windows – would not only put many Americans back to work in the short term, it would also provide long run energy savings that will put money directly into the pockets of American families and businesses for years to come.

And the potential savings are significant. A 2009 study by consulting firm McKinsey & Company concluded that the U.S. could save $1.2 trillion through 2020 by investing $520 billion in non-transportation energy-efficiency improvements, reducing the projected national energy use in 2020 by about 23 percent. A similar and more recent investigation by the American Council for an Energy-Efficient Economy (ACEEE) envisions a scenario in which efficiency improvements could cut U.S. energy consumption by the year 2050 almost 60 percent, achieving as much as $400 billion each year in energy savings. And another small detail to consider: energy efficiency continues to be the cheapest way to get electricity – in this case, with “negawatts” from moderated demand – averaging roughly 3.5 cents per kWh and besting even traditional fossil fuel sources, according to the Institute for Electric Efficiency (IEE).

With savings of this magnitude there for the taking, support for efficiency has begun to gain some noticeable momentum. The Obama Administration recently announced nearly $4 billion in combined federal and private sector investments to pursue energy upgrades to buildings over the next two years. And energy-efficiency programs are on the rise in the U.S., with budgets up by more than 25 percent in 2011, reaching a record high of $6.8 billion, according to the IEE. As important as this progress is, it is only the first step in what is needed to realize the full potential of energy-efficiency improvements – especially if efficiency investments are to act as stimulus and catalyze an economic recovery.

The opportunity for large-scale energy efficiency is reflected in the rise of high profile “deep retrofit” efforts. Most notably, the recent renovation of the iconic Empire State Building – a joint effort by the Rocky Mountain Institute, Clinton Climate Initiative, Johnson Controls, Serious Energy, and others – will cut the building’s energy consumption by 40 percent, and by saving $4.4 million annually will pay for itself in less than four years.

Today’s partisan gridlock and the paralysis of election year politics may have all but killed hopes for new stimulus spending, but energy-efficiency investment is unique. If carried out properly, upfront costs incurred by the U.S. government can be directly paid for by energy savings down the road, with savings beyond the initial costs going directly to the American public. If this case can be made to the austerity hawks in Congress, government spending in the form of energy-efficiency pursuits might just have a fighting chance.

– Trevor Winnie is Clean Edge’s senior research analyst. He is involved in a range of activities, including preparation of reports, subscription products, and consulting projects. This piece was originally published at Clean Edge.

by Shakeb Afsah, Eric Ness and Kendyl Salcito* in a repost

Summary

This follow-up note on the issue of energy efficiency and energy rebound is structured into three parts. We first discuss the shortcomings in the dataset used by Dr. Saunders for analyzing energy efficiency trend and rebound in thirty industrial sectors. Next we discuss that Breakthrough and the New Yorker’s David Owen have offered no convincing analytical evidence to show that the indirect macro level rebound will offset most of the gains from energy efficiency. Then we discuss how Prof. Pielke Jr has overlooked the use of unpublished grey literature by Breakthrough—an issue for which he has shown zero-tolerance in the case of IPCC.  In conclusion we suggest that there should be a proper discussion to evaluate if Breakthrough should retract or revise its rebound report. Specific issues raised by Breakthrough and Prof. Pielke Jr in their blog and emails are addressed in the appendix.

Until the time Breakthrough and David Owen claims can be validated and peer-reviewed, they cannot be used in any meaningful form in policy discussions.

*We have benefitted from our conversations with Danny Cullenward and Jonathan Koomey of Stanford, and Skip Laitner of ACEEE. All errors and opinion expressed in this note should be attributed only to the authors and the CO2 Scorecard Group.

Inappropriate Dataset for Rebound Analysis

In our research note “Energy Efficiency is for Real, Energy Rebound a Distraction” we showed that the energy rebound estimates in Saunders (2010) are either over-estimated, as in the case of the steel sector, or wrong, as in the case of mining and electric utilities. The problems don’t stop there. In addition to weaknesses in the theoretical model and the empirical methodology, the dataset used in Saunders 2010 is itself inappropriate for analysis of energy rebound. All three essential components of his paper—the theory, the empirical econometric methodology and the data – come up short.

There is a simple reason that Saunders’ dataset is not appropriate for analysis of energy rebound and energy efficiency trends: it is a dataset on the monetary value of energy expenditure by industrial sectors at a highly aggregate level. This means that the numbers in the dataset are current values of energy cost reported in million dollars—not in BTU or MWh or Joules, the conventional measures of energy use.  As a result, it is impossible to directly estimate energy efficiency, productivity or intensity in physical units.

How did Saunders convert dollars to energy efficiency?  Using the principle of duality from micro-economics it is theoretically possible to convert the question of production to a question of cost—but it comes with a number of mathematical and statistical assumptions. According to the principle of duality, the production function—how factories produce their goods—is the primal (original) question, and the cost function is its reflection in the mirror—the dual, the doppelganger. All this is fine in theory, but reality tells a different story.

Assumptions Rule

Converting data on energy expenditure to estimates of energy use, rebound or efficiency is fraught with risks. With the number of estimates and assumptions it involves, it’s the mathematical equivalent of estimating the travel time from Washington DC to New York City in a hot air balloon in bad weather. There’s no certainty you’ll arrive at your destination, let alone on a schedule. Saunders’ expenditure data is a hot air balloon, and the accompanying assumptions provided all the weather it would take to send the analysis off course.

One key assumption underlying the application of duality is that energy price is the sole factor driving producers to adopt energy efficient technologies or production processes. Prices definitely matter, but there are many other factors that influence an industry’s technology choices, as discussed in our last week’s research note. Such considerations are excluded from Saunders’ methodology.

Additionally, Saunders suggests that production systems are “adaptable and flexible” and can seamlessly substitute energy for other factors of production. As we pointed out in the electric utility and mining sectors, once an operation starts, managers are often locked into their production processes and technologies, sometimes for decades. This reality defies the image of flexibility that Saunders describes in this video clip (at 6.45 min). Many times producers are not at liberty to change their technology every year; they can tinker at the edges but frequent technological change towards energy efficient systems is not a norm—a point also described in Greening 2000.

Finally, the dataset Saunders uses is highly aggregated for macro level analysis—the big picture assessment—but he attempts to validate it at the micro level. For example, at the 2-digit level of industrial aggregation (as in Saunders’ data), the estimates for primary metal merge the steel sector with iron, aluminum and other non-ferrous metals. Yet Saunders credits the adoption of efficient electric arc furnaces with massive energy rebound for the entire primary metals sector. It’s like using a feather to calibrate a truck scale. As our earlier research note showed, his implied energy efficiency estimate for the steel sector is more than 100% off.

We are not the first researchers to cast doubt on Saunders’ dataset. In early 2011, Skip Laitner of ACEEE, and Prof. Jonathan Koomey and doctoral student Danny Cullenward at Stanford noted the inappropriateness of Saunders’ dataset for energy rebound analysis. Prof. Koomey documented his exchange with Breakthrough on this matter in considerable depth—a note we strongly recommend for all.

The bottom line is that Saunders’s analysis is built on far too many assumptions, which put his results on thin ice. Saunders recognizes the risks associated with these assumptions and lists more than five pages of caveats in his paper. He even notes that “This impressive list of limitations should not be dismissed out of hand by rebound analysts as minor or irrelevant.” Saunders should be credited for making these assumptions transparent, and if this paper were to remain cloistered in academia, these data caveats would serve as essential input for continually improving the research. But once such an unpublished research crosses over into policy discussions, as with Breakthrough’s reports and blogs, the same data caveats should be treated like the fine print of a loan or a credit contract with Banks—the devil is in these details.

The Macro Energy Rebound Illusion

We have already shown that the direct rebound effect of energy efficiency for household, transportation, and industrial sectors is low and tolerable in the range of 0-30%. These sectors together account for most of the energy consumed at the national and global levels. On the indirect rebound effect at the macro level, Dr. Amory Lovins of the Rocky Mountain Institute and Prof. Jim Sweeney of Stanford (Koomey 2011) have already highlighted the problem of double-counting of energy use in Breakthrough’s formulation.

So why has David Owen of the New Yorker argued that “rebound” effects will offset much, most, all, or more than all energy savings from increasing end-use efficiency. Analysts have repeatedly pointed out that re-spending effect at the macro level is capped between 6-8% on average, and explained in detail in blogs at the Rocky Mountain Institute (RMI) and the Council for Foreign Relations (CFR). In fact Michael Levi exasperatedly comments in his CFR blog post: “Schipper basically makes this point to Owen, without the numbers and without confronting this specific example; why Owen can’t see what it says about this particular case is beyond me.”

Owen explained his position in a recent interview:

“For Lee [Schipper], energy is a very small part of the economy – 6 or 8 percent. But looking at it that way understates the role of energy in what we do. If we eliminated energy consumption from the economy our energy consumption [sic] wouldn’t fall 6 or 8 percent, it would completely disappear. Increasingly we are dependent on that primary energy to power almost everything. You see it directly in your personal life when you lose your power. There’s nothing you can do. You can turn on your car to charge your cellphone, as I did, but nothing else in my life worked.”

All that is true but it is neither an evidence of large economy-wide energy rebound nor a validation of the claim that indirect rebound effects can offset the savings from energy efficiency. That removing energy from our economy will shrink it by more than 6-8% means that factors of production in our economy are interlinked perhaps serially with each other in complex ways and their co-existence is necessary for maintaining our economic output at the current equilibrium. Such a notion is captured in a 1993 paper titled “The O-Ring Theory of Economic Development” inspired by the way the space shuttle Challenger exploded due to the failure of one component—the O Ring. David Owen appears to have a similar idea about the role of energy in our economy. He is right. If there is mistake, as in the case of Challenger, and our entire energy supply system goes down, the economic impact will be much more than the 6-8% of the GDP.

But Owen’s argument is incomplete. So far it is an imaginative brainstorm, not a detailed analysis. To prove that the indirect economy-wide rebound effect is large in such a framework of production system, Owen still needs to explain the precise mechanism through which rebound effect has a multiplier effect. It will require a mathematical formulation supported by proper economic concepts and real-world evidence. Once such a mechanism is available publicly it can be reviewed, even empirically tested and there can be substantive discussions of the indirect rebound effect. Indirect macro level rebound has undergone no such process, and we encourage Breakthrough and David Owen to begin a scientific validation.

Dr. Jonathan Koomey has urged the same. He writes: “The normal burden of proof is on those advocating the existence of some unexpected and novel effect to show the underlying causal mechanisms that lead to that result, so the assumptions can be peer-reviewed.” Until the time Breakthrough and David Owen claims can be validated and peer-reviewed, they cannot be used in any meaningful form in policy discussions.

The Honest Broker’s Blind Spot

Our initial research note focused on substantive problems in Breakthrough’s rebound report. Prof. Pielke Jr. reminded us of the importance of protocol and standards for using unpublished research, however, which forced us to closely examine Breakthrough’s own formal reports. Prof. Pielke Jr. in particular has shown zero-tolerance when the Inter-Governmental Panel for Climate Change (IPCC) has used unpublished or non-peer reviewed papers in reports. In his blog post from December 22, 2009 titled “Peer Review in the IPCC” Prof. Pielke Jr. writes:

“This situation highlights the problem of the “laundering of grey literature” associated with IPCC reports, which occurs when an analysis or claim occurs outside the peer review literature and is subsequently cited in the assessment report.”

On January 21, 2010 he told the New York Times that “….he was concerned that, in this case, “a non-peer reviewed source [was] elevated to a finding by the IPCC….”. Similarly on July 12, 2010 once again in his blog he wrote:

“We can conclude unambiguously that the citation of Rowell and Moore by the IPCC was improper as it was not only “grey literature,” but also devoid of scientific support for the claims that it advanced that were repeated in the IPCC.”

These are good principles regarding the use of grey literature. In a quick tabulation of more 1,300 of Prof. Pielke Jr’s blogs between June 13, 2009 and January 16, 2012 we found that nearly 20% of his posts use the terms or the variants on peer-review, unpublished and published.

Yet when it comes to using unpublished research in the energy rebound report by the Breakthrough Institute, where he is a fellow, he turns a blind eye. In Breakthrough’s “Energy Emergence: Rebound & Backfire as Emergent Phenomena” the authors boast a 96-article bibliography. Remarkably, some of the most salient points in the Breakthrough report cite Saunders 2010 as the source. Though Saunders is a published author, his 2010 piece has not, to date, been picked up by a peer-reviewed journal.

Conclusions

We therefore propose that Breakthrough should consider retracting or revising its rebound report. The same applies to the EU Environmental Commission report. Further in the interest of consistency, Breakthrough should adopt and follow the same standard on grey literature as their colleague Prof. Pielke Jr. requires of the IPCC and other such organizations.

Appendix: Specific Response to Breakthrough and Prof. Pielke Jr

Our research note on energy efficiency and rebound, released on January 12, 2012, generated strong endorsements of our key findings and policy recommendation: rebound or not, energy efficiency works. Criticism came in the form of one blog post by Prof. Pielke Jr. and several emails from the Breakthrough team, in which they expressed disagreement with our analysis. There was no direct or specific disagreement with our numbers or statistics that showed that Dr. Saunders’ estimates of energy rebound was either over-estimated or wrong, Breakthrough and Prof. Pielke Jr claimed that (1) we mischaracterize their position on energy efficiency and (2) we don’t understand the difference between energy efficiency and energy intensity. In a response through email to Breakthrough on January 12, 2012 we stated that:

“In our view, BTI is lukewarm at best on energy efficiency and negative to it at worst, and BTI’s emphatic case for rebound and backfire has a clear and logical policy implication: efficiency needn’t be prioritized. We stand by our analysis and interpretation based on our research.”

We think it is important to demonstrate the source of our perception, which is shared by others. While Breakthrough occasionally suggests that energy efficiency is needed, their core message remains that energy rebound under-cuts the savings from energy efficiency enough to fully neutralize it or even increase it.

From the very first paragraph from their flagship report “Energy Emergence: Rebound & Backfire as Emergent Phenomena” Breakthrough casts doubt on the energy efficiency policy stance of the IEA, IPCC, experts like Dr. Lovins and organizations like Mckinsey.

In the second paragraph of their report Breakthrough writes:

“Economists, however, have long observed that increasing the efficient production and consumption of energy drives a rebound in demand for energy and energy services, potentially resulting in greater, not less, consumption of energy.”

The anti-energy efficiency tone continues in the FAQ section of their website, where they write: “…rebound effects mean that for every two steps forward we take in energy savings through efficiency, rebound effects take us one (and sometimes more) steps backwards. We may still move forward, but not as much as we initially expected.” In the deck of Breakthrough’s PowerPoint slides accompanying this report, one slide explicitly questions the energy efficiency estimate of the IEA.

Breakthrough attempts to counter our characterization of their position on energy efficiency by pointing out such comments as:

Q: Are you saying energy efficiency is a waste of time then? Are you arguing against pursuing efficiency?

A: Most certainly not! Truly cost-effective energy efficiency improvements make great economic sense and improved energy efficiency may be a key determinant of future economic welfare. In this sense, it may also contribute indirectly to climate mitigation and decarbonization objectives.”

In our view these are feeble statements supporting only the partial benefits of energy efficiency—improvement in economic welfare, and not how energy efficiency cuts energy use. If Breakthrough is truly supportive of energy efficiency it must retract its emphasis on high energy rebound and backfire, and embrace energy efficiency as a core policy tool for climate management as experts like Amory Lovins and Skip Laitner or organizations like the IEA, IPCC, McKinsey and many others have stated. It is not enough for Breakthrough to be on both sides of energy efficiency—first downplay it using the case of high energy rebound and then try to embrace it by making a few token statements of support.

Energy Efficiency and Energy Intensity

The new report outlines three scenarios under which the U.S. could either continue on its current path or cut energy consumption by the year 2050 almost 60 percent, add nearly two million net jobs in 2050, and save energy consumers as much as $400 billion per year (the equivalent of $2600 per household annually).

According to ACEEE, the secret to major economic gains from energy efficiency is a more productive investment pattern of increased investments in energy efficiency, which would allow lower investments in power plants and other supply infrastructure, thereby substantially lowering overall energy expenditures on an economy-wide basis in the residential, commercial, industrial, transportation, and electric power sectors.

“The evidence suggests that without a greater emphasis on the more efficient use of energy resources, there may be as many as three jokers in the deck that will threaten the robustness of our nation’s future economy,” explains John A. “Skip” Laitner, ACEEE’s director of economic and social analysis.

Examples of potential large-scale energy efficiency savings identified by ACEEE include the following:

• Electric Power. Our current system of generating and delivering electricity to U.S. homes and businesses is an anemic 31 percent energy efficient. That is, for every three units of coal or other fuel we use to generate the power, we manage to deliver less than one unit of electricity to our homes and businesses. What the U.S. wastes in the generation of electricity is more than Japan needs to power its entire economy. What is even more astonishing is that our current level of (in)efficiency is essentially unchanged in the half century since 1960, when President Dwight D. Eisenhower spent his last year in the White House.

• Transportation.   The fuel economy of conventional petroleum-fueled vehicles continues to grow while hybrid, electric, and fuel cell vehicles gain large shares, totaling nearly three-quarters of all new light-duty vehicles in 2050 in the report’s middle scenario. Aviation, rail, and shipping energy use declines substantially in this scenario through a combination of technological and operational improvements. In the most aggressive scenario, there is a shift toward more compact development patterns, and greater investment in alternative modes of travel and other measures that reduce both passenger and freight vehicle miles traveled. This scenario also phases out conventional light-duty gasoline vehicles entirely, increases hybrid and fuel cell penetration for heavy-duty vehicles, and reduces aviation energy use by 70 percent.

• Buildings.   In residential and commercial buildings the evidence suggests potential reductions of space heating and cooling needs as the result of building shell improvements of up to 60 percent in existing buildings, and 70-90 percent in new buildings. The ACEEE scenarios also incorporate advanced heating and cooling systems (e.g., gas and ground-source air conditioners and heat pumps and condensing furnaces and boilers), decreased energy distribution losses, advanced solid-state lighting, and significantly more efficient appliances.

• Industry. In the industrial sector, energy efficiency opportunities reduce 2050 energy use by up to half, coming less from equipment efficiency and more from optimization of complex systems. The ACEEE analysis focuses on process optimization in the middle scenario, but also anticipates even greater optimization of entire supply chains in the most aggressive scenario, allowing for more efficient use of feedstocks and elimination of wasted production.

Are such advances in energy efficiency realistic?

As the ACEEE report points out, the U.S. already has achieved considerable advances in the energy efficiency context and is poised to do more: “The U.S. economy has tripled in size since 1970 and three-quarters of the energy needed to fuel that growth came from an amazing variety of efficiency advances-not new energy supplies. Indeed, the overwhelming emphasis in current policy debates on finding new energy supplies is such that emphasis on new supplies may be crowding out investments and innovations that can help to achieve greater levels of energy productivity. Going forward, the current economic recovery, and our future economic prosperity, will depend more on new energy efficiency behaviors and investments than we’ve seen in the last 40 years.”

This is a news release published by ACEEE. You can find the whole report at the ACEEE website.