<%BANNER%>

An Analysis of the Financing of Residential Energy Upgrades

Permanent Link: http://ufdc.ufl.edu/UFE0025033/00001

Material Information

Title: An Analysis of the Financing of Residential Energy Upgrades
Physical Description: 1 online resource (66 p.)
Language: english
Creator: Denegre, Brooke
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2009

Subjects

Subjects / Keywords: efficiency, energy, financing, home, ownership, remodeling, residential
Building Construction -- Dissertations, Academic -- UF
Genre: Building Construction thesis, M.S.B.C.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Homeownership, household energy use, and energy prices are all on the rise. This rise in energy use and prices continues to be a considerable part of many homeowners monthly expenses. Home energy efficiency upgrades are an important facet of energy demand-side management programs. Home energy efficiency upgrades offer an opportunity for homeowners to save money by making their homes more efficient in addition to reducing environmental impact from wasted energy use. This research reviews energy efficiency upgrade programs and will serve as background for a discussion of energy efficiency program funding models and participation rates. In addition, it will analyze hypothetical cash flow models for various levels of energy savings financed at a variety of loan interest rates. This analysis will explore the relationship between expected monetary savings from energy efficiency upgrades and the effect that loan interest rates have on those expected monetary savings. A loan modeling tool will be developed to help define parameters for loan amounts given current energy use, expected energy savings, and loan interest rates.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Brooke Denegre.
Thesis: Thesis (M.S.B.C.)--University of Florida, 2009.
Local: Adviser: Ries, Robert J.
Local: Co-adviser: Stroh, Robert C.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2009
System ID: UFE0025033:00001

Permanent Link: http://ufdc.ufl.edu/UFE0025033/00001

Material Information

Title: An Analysis of the Financing of Residential Energy Upgrades
Physical Description: 1 online resource (66 p.)
Language: english
Creator: Denegre, Brooke
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2009

Subjects

Subjects / Keywords: efficiency, energy, financing, home, ownership, remodeling, residential
Building Construction -- Dissertations, Academic -- UF
Genre: Building Construction thesis, M.S.B.C.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: Homeownership, household energy use, and energy prices are all on the rise. This rise in energy use and prices continues to be a considerable part of many homeowners monthly expenses. Home energy efficiency upgrades are an important facet of energy demand-side management programs. Home energy efficiency upgrades offer an opportunity for homeowners to save money by making their homes more efficient in addition to reducing environmental impact from wasted energy use. This research reviews energy efficiency upgrade programs and will serve as background for a discussion of energy efficiency program funding models and participation rates. In addition, it will analyze hypothetical cash flow models for various levels of energy savings financed at a variety of loan interest rates. This analysis will explore the relationship between expected monetary savings from energy efficiency upgrades and the effect that loan interest rates have on those expected monetary savings. A loan modeling tool will be developed to help define parameters for loan amounts given current energy use, expected energy savings, and loan interest rates.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Brooke Denegre.
Thesis: Thesis (M.S.B.C.)--University of Florida, 2009.
Local: Adviser: Ries, Robert J.
Local: Co-adviser: Stroh, Robert C.

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2009
System ID: UFE0025033:00001


This item has the following downloads:


Full Text

PAGE 1

1 AN ANALYSIS OF THE FINANCING OF RESIDENTIAL ENERGY UPGRADES By BROOKE DENEGRE A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN BUILDING CONSTRUCTION UNIVERSITY OF FLORIDA 2009

PAGE 2

2 2009 Brooke Denegre

PAGE 3

3 To Darcy, without whom my trip through graduate school would not have been po ssible

PAGE 4

4 ACKNOWLEDGMENTS I would like to thank all of my committee members, Dr. Ries, Dr. Stroh, and Dr. Sullivan for all of their help and feedback in the preparation of this thesis. I would also like to thank the many people that stood in the halls of the Rinker building with me discussing green building topics and a vision for a better built environment.

PAGE 5

5 TABLE OF CONTENTS page ACKNOWLEDGMENTS .................................................................................................................... 4 LIST OF TABLES ................................................................................................................................ 7 LIST OF FIGURES .............................................................................................................................. 8 ABSTRACT .......................................................................................................................................... 9 CHAPTER 1 INTRODUCTION ....................................................................................................................... 10 Need for Delivering Energy Efficiency Upgrades to Homeowners ......................................... 10 Objectives .................................................................................................................................... 10 Scope ............................................................................................................................................ 11 Contribution to Energy Efficiency and Homeowners ............................................................... 13 2 LITERATURE REVIEW ........................................................................................................... 14 Introduction ................................................................................................................................. 14 Housing and Energy Trends ....................................................................................................... 15 Housing Trends .................................................................................................................... 15 Energy Trends ...................................................................................................................... 16 Building Codes ..................................................................................................................... 16 Similar Work Done by Others .................................................................................................... 17 Energy Efficiency and Low Income Housing .................................................................... 17 Energy Use and Occupant Behavior ................................................................................... 19 Energy Effic iency Upgrades and Affordability in New Homes ....................................... 20 Carbon Credits as an Additional Energy Efficiency Incentive ......................................... 22 Consumer Willingness to Pay for Efficiency Upgrades .................................................... 23 Overview of Energy Efficiency Programs and Their Limitations ........................................... 25 UC Berkeley Study .............................................................................................................. 25 The Short List ...................................................................................................................... 26 Financing Options for Home Remodeling ................................................................................. 28 Basic Hom e Loan Products ................................................................................................. 28 Funding Products Aimed at Energy Efficient Homes and Green Building ..................... 29 Other Finance Strategies Related to Bu ilding Efficiency. ................................................ 29 Portlands feebates ....................................................................................................... 29 Harvards green building loan fund ............................................................................ 30 Rooftop leases for distributed energy generation ....................................................... 31 Berkeley FIRST and Berkeley RECO ........................................................................ 31 Basis for Investigati on into Energy Savings Versus Financing ............................................... 33 3 METHODOLOGY ...................................................................................................................... 39

PAGE 6

6 4 RESULTS AND ANALYSIS .................................................................................................... 41 Cash Flow Analysis..................................................................................................................... 41 $5,000 Investment in Energy Improvement Upgrades ...................................................... 42 $10,000 Investment in Energy Imp rovement Upgrades .................................................... 42 Matching Loan Payments to Expected First Year Energy Savings .................................. 43 5 CONCLUSIONS AND DISCUSSION ..................................................................................... 54 APPENDIX A PROGRAM OVERVIEW SUMMARY -FULLER ................................................................... 58 B UPGRADE RANKING BY EFFICIENCY GARDNER AND STERN .............................. 6 1 LIST OF REFERENCES ................................................................................................................... 64 BIOGRAPHICAL SKETCH ............................................................................................................. 66

PAGE 7

7 LIST OF TABLES Table page 2 1 Typical Interest Rates ............................................................................................................. 34 2 2 Energy inflation rates 1995 to present ................................................................................. 37 4 1 Example cash flow analysis. .................................................................................................. 45 4 2 Maximum loan amounts to produce positive cash flow after year one based on neutral cash flow on year one ................................................................................................ 52

PAGE 8

8 LIST OF FIGURES Figure page 2 1 Percentage of homeowners from 1900 to 2000. ................................................................... 34 2 2 Energy consumption by sector overview 1950 to 2009. (Energy Information Administrat ion 2007c) ........................................................................................................... 35 2 3 Average retail prices of electricity from 1960 to 2009. (Energy Information Administration 2007b) ........................................................................................................... 36 2 4 Natur al gas prices by sector from 1967 to 2009. (Energy Information Administration 2007a) ..................................................................................................................................... 38 3 1 Screen shot of cash flow parameter tool. .............................................................................. 40 4 1 Cash flow for 30% energy savings versus interest rate for $5,000 investment .................. 46 4 2 Cash flow for 30% energy savings versus interest rate for $10,000 investment ............... 47 4 3 Cash flow for 40% energy savings versus interest rate for a $5,000 investment ............... 48 4 4 Cash flow for 40% energy savings versus interest rate fo r a $10,000 investment ............. 49 4 5 Cash flow for 50% energy savings versus interest rate for a $5,000 investment ............... 50 4 6 Cash flow for 50% energy savings versus interest rate for a $10,000 investment ............. 51 4 7 Interest rate effects on initial loan amounts. Based on 20 year loan term and annual energy bill of $1,320 .............................................................................................................. 53 A 1 Program Results Summary 1 (Fuller 2008) .......................................................................... 59 A 2 Program Results Summary 2 (Fuller 2008) .......................................................................... 60 B1 Household energy end use ranked by magnitude (Gardner and Stern 2008) ..................... 61 B2 Energy saved by 27 household actions ((Gardner and Stern 2008) .................................... 62 B3 The short list (Gardner and Stern 2008) ............................................................................... 63

PAGE 9

9 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Require ments for the Master of Science AN ANALYSIS OF THE FINANCING OF RESIDENTIAL ENERGY UPGRADES By Brooke Denegre August 2009 Chair: Robert Ries Cochair: Robert Stroh Major: Building Construction Homeownership, household energy use, and energy prices are all on the rise. This rise in energy use and prices continues to be a considerable part of many homeowners monthly expenses. Home energy efficiency upgrades are an important facet of energy demand -side management programs. Home energy efficiency upgrades offer an opportunity for homeowners to save money by making their homes more efficient in addition to reducing environmental impact from wasted energy use. This research reviews energy efficiency upgrade programs and will serve as background for a discus sion of energy efficiency program funding models and participation rates. In addition, it will analyze hypothetical cash flow models for various levels of energy savings financed at a variety of loan interest rates. This analysis will explore the relations hip between expected monetary savings from energy efficiency upgrades and the effect that loan interest rates have on those expected monetary savings. A loan modeling tool will be developed to help define parameters for loan amounts given current energy us e, expected energy savings, and loan interest rates.

PAGE 10

10 CHAPTER 1 INTRODUCTION Energy use in the United States is at an all time high and continues to rise. Energy prices continue to fluctuate and rise, further stressing homeowners incomes. Much of the ex isting housing stock, especially in older communities is not up to current energy codes. These factors result in increased energy consumption and cost for homeowners. Many homeowners are living in inefficient homes that will require significant investment for upgrading While homeowners may want to invest in energy efficiency upgrades, participation in this type of energy demandside management program remains low nation wide. Need for Delivering Energy Efficiency Upgrades to Homeowners A potential probl em is the lack of a nationwide coordinated effort to deliver home energy improvement project support and funding to the majority of homeowners. Although various programs do exist, participation in these programs remains relatively low. This research focuse s on two main questions related to this issue: 1) What is the current state of home energy improvement programs in the United States ? 2) What is the relationship between monetary savings from these home energy upgrades and the loan interest rates at which they are financed ? Objective s First, this research will look at an overview of the programs in place in the United States to assist homeowners with home energy improvement projects. This overview will serve as background for a discussion of energy efficie ncy program funding models and participation rates. In addition, recent initiativ es to expand participation in energy efficiency programs and streamline funding for these programs will be reviewed.

PAGE 11

11 Secondly, this research will analyze hypothetical cash flo w models for various levels of energy savings financed at a variety of loan interest rates. This analysis will explore the relationship between expected monetary savings from energy efficiency upgrades and the effect that loan interest rates have on those expected monetary savings. A loan modeling tool will be developed to help define parameters for loan amounts given current energy use, expected energy savings, and loan interest rates. This could be used to determine the type and level of loan support that a program should plan to provide. Scope Conservation initiatives in the United States come in many shapes, sizes, and forms. This research is focused on the discussion of energy conservation at the community level through reduction in overall use at the h ousehold level. Households are considered end users of electricity production, unless that house is exporting more energy to the electrical grid than it is consuming. Although still rare, net electricity export to the utility grid is becoming more common t oday because of solar panel initiatives by utilities t hat add electrical capacity to the grid by installing solar panels on homes th rough various funding initiatives Adding capacity in this manner is an alternative to building a conventional generating pl ant. Energy efficiency upgrades to homes are considered a Demand Side Management (DSM) strategy. This term refers to managing energy use from the demand-side, which is the end users side, which in this case are homes Other end uses, for example, are business and schools. This is in contrast to Supply Side Management which focuses on efficiency upgrades in energy generation and transmission. The topic of energy efficiency upgrades crosses many research discipline boundaries. This research focuses on t he issue of affordability for households that undertake energy efficiency upgrades by analyzing cash flows for installed upgrades and suggesting the concept of

PAGE 12

12 setting parameters for energy efficiency upgrade expenditures by matching loan payments to expec ted first year energy savings. What actually motivates homeowners to undertake upgrade projects is not well researched and undoubtedly varies between households and over time depending on the households priorities and cash flows. This research suggests a process for matching loan expenses to upgrade expenses in order to create positive cash flows for the homeowner, thus making the investment in an upgrade less financially speculative. The installed energy efficiency upgrades in the case of this research are generic upgrades costing $5,000 and $10,000 and producing energy savings levels of 30%, 40%, or 50%. Because of the variation in home types and climates found in the United States, and the various combinations of upgrades that could be used in any part icular home to meet the suggested 30%, 40%, or 50% energy savings levels, this research will not define specific packages to meet these levels of savings. The concept of a 30% reduction in energy use costing X number of dollars is the same whether that upg rade is one item or a number of small items combined. There is other research available related to the topic of efficiency packages and commercial services that actually perform this function. Examples of these types of resources include Gardner and Stern 2008, Grosskopf 1998, Hudson 2008, Taylor 2007, and websites such as the Department of Energys Building America resource and the U.S. Environmental Protection Agencys Energy Star program. Similarly, the effects of rebates or down payments on upgrade expenses are not covered directly in this research because of the wide variation in ways to pay for any given upgrade. Upgrades can be paid for through any combination of cash, rebate, or financing tool such as a bank loan. This research focuses on the ong oing expense of the financed portion of an upgrade as

PAGE 13

13 it relates to the monetary savings created by that upgrade because the financing expense has serious impacts on the net cash flow of that efficiency upgrade. One of the major factors that contributes to the impact of financing an upgrade is the interest rate at which the upgrade is financed. This research details the effects of interest rates on cash flows for generic efficiency improvements of 30%, 40%, or 50% and costing $5,000 and $10,000. This analysis explores the trends related to interest rates for financing home energy upgrades. Contribution to Energy Efficiency and Homeowners This research aims to bring together the topics of current programs for promoting home energy upgrades and progressive f inancing models for these upgrades to increase homeowner participation rates in these programs. The contribution of increasing delivery of home energy upgrades comes in three main areas: Environmental: Avoiding wasted energy, thus reducing carbon emission s, extending the viability of existing power supplies while decreasing the need for additional resource extraction; Economic: Saving money for homeowners and utilities in addition to c reating a larger market for remodeling contractors and material produce rs during a time of economic slowdown in the construction industry; Social: Empowering homeowners with the necessary tools to make their homes more sustainable while saving money on utility bills that can then be reinvested into the family.

PAGE 14

14 CHAPTER 2 LITERATURE REVIEW A literature review was performed using the University of Florida libraries holdings and access to online journals followed by a World Wide Web search to access various government and business websites. First, recent Masters theses and Docto ral dissertations from the College of Design, Construction, and Planning were searched using the University of Florida Libraries website: http://www.uflib.ufl.edu/etd.html. Keyword search terms included: Ener gy, Upgrades, Affordable, Homeowner, Interest Rates and Community Development. From these papers sources of information were gathered and reviewed for relevance to this project. The reviewing consisted of: 1 Reading through the papers 2 Identifying previously researched topics that would apply to this project 3 Following links to previous researchers references and sources of data By tracing previous researchers references, websites were visited and information about those sources were gathered and evaluated f or relevance to this project. Secondly, a World Wide Web search was performed to look for federal and community programs that already exist to support and encourage homeowners to improve the energy efficiency of their homes. These programs were reviewed an d evaluated for: 1 Identifying the programs target audience 2 Evaluating the programs funding model 3 Evaluating the programs historical success rates Introduction Utility bills are a fact of life for families that live in grid connected houses. Until recently, utility rates have remained reasonably low for the basic services of electricity and gas. These relatively low utility rates have led to building codes and energy conservation codes that until recently have been fairly relaxed when it comes to energy cons ervation and

PAGE 15

15 envelope construction. Since the cost of energy has risen, homeowners are now suffering these building practices. Poor insulation volumes and detailing, little attention to air infiltration, and poorly performi n g windows and doors are just a few of the problems that homeowners are now trying to remedy in the face of rapidly rising energy prices. As with most problems, the energy efficiency problem is multifaceted. What follows is an overview of some of the facets that are relevant to the issue of providing opportunities for homeowners to cost effectively upgrade their homes. This literature review will cover the following topics: 1 Current trends of housing development, home ownership and energy costs 2 Historic housing standards 3 Current work that has been done examining the issue of housing efficiency 4 Progressive approaches to financing The aim of this literature review is to outline the need for an analysis of potential savings of energy efficiency upgrades versus the cost of financing those upgrades. Housing and Energy Trends Housing Trends There are more homeowners today than ever before. The United States population has grown 8% in the past 8 years from roughly 281 Million to 304 Million people (U.S. Census Bureau 2008a) The percentage of people that own homes has risen in the past century from 46.5% in 1900 to 66.2% in 2000 (Figure 2 1) (U.S. Census Bureau 2000) The total number of housing units in the United States reached 128.2 million in 2007, with 110.7 million of those being occupied units (U.S. Census Bureau 2008a) This equates to 84.9 million homes that are owned with the remainder being rented. From 2000 to 2007 roughly 12 million new homes were built (U.S. Census Bureau 2008b) In addition, the average size of new homes has been increasing from 1,750sft in 1978 to 2,479sft in 2007

PAGE 16

16 (National Association of Home Builders 2007) Energy Trends Energy consumption in the residential sector has continued to rise steadily from 15,787 trillion Btus in 1980 to 21,753 trillion Btus in 2007 (Energy Information Administration 2007c) According to the Energy Information Administration, energy prices remained relatively constant from the mid 1980s until early 2000. Since that time, e lectricity prices have consistently risen with residential electricity prices continuing to be higher than other sectors (Figure 2 2) (Energy Information Administration 2007b) Table 2 2 shows the average electricity prices for the past 15 years and the 5, 10, and 15 year average escalation rates Natural gas prices also show a similar trend, but with more price fluctuation in recent years (Figure 24) (Energy Information Administration 2007a) Building Codes In the past there were a variety of residential building codes in the United States. Some of these included the National Building Code (NBC), the Southern Building Code (SBC), and the Uniform Building Code (UBC). This historical variety of codes translates into a variety of housing performance results depending upon what codes the builder may have used at the time, if a code was used at all. Because of the longlived nature of houses, the re are many homes still in existence that were built before the development of any codes. In 1994 these code groups were combined into the International Code Council and developed the International Residential Code (IRC) (International Code Council 2009) This code is a model for states and/or municipalities to develop their own region -specific building codes. States have the right to choose which parts of the codes that they want to adopt. This means that even with a uniform model code, codes will vary state by state in terms of adoption and enforcement While this type of flexibility is critical to match buildings to their climactic a nd

PAGE 17

17 seismic environments, it serves to further complicate the issue of building efficiency. The IRC is continually being updated and a new version is released every three years. In rural areas, code requirements may not exist, potentially increasing the variability of construction. Codes are often prescriptive measures that a builder must meet, rather than performance based standards. The International Code Council also publishes an International Energy Conservation Code that was first developed by the Council of American Building Officials (CABO) in 1995 and titled Model Energy Code There is a continuing effort among code offic i als to incorporate energy efficiency into code enforcement although adoption still varies widely. There has been an effort i n recent years to make codes more performance based rather than simply prescriptive measures with the hope that this will promote ingenuity in building design and construction rather than specifying a standard assembly. Similar Work Done by Others Energy Efficiency and Low Income Housing In his Masters thesis, Taylor detailed some of the most extreme cases of energy wastage in the Gainesville, Florida community (Taylor 2007) He studied the low income population in Gainesville and found a correlation between income and energy usage. He found that low income populations have a much greater energy use intensity ( k ilowatt hours per square foot) than do more affluent population s. By partnering with Gainesville Regional Utility (GRU) and using a survey and home inspections, Taylor was able to identify the following factors contributing to this disproportionately high-energy intensity: 1 Number of people in the household quite of ten in low -income areas many individuals live under the same roof to help reduce costs 2 Age and type of structural material used of the dwelling (i.e. wood frame vs. concrete block)

PAGE 18

18 3 Occupancy status (i.e. tenant vs. owner -occupied) little incentive exis ts for a landlord to care about energy usage by a tenant, so necessary upgrades to appliances and HVAC equipment is too often delayed or ignored completely 4 Age, condition, and number of appliances again, potentially tied to the lack of incentive for abse ntee landlords to upgrade appliances 5 Type of air conditioning/heating and the age of these systems 6 Availability of natural gas, which is often a more efficient energy source than electricity 7 Lack of tree cover to reduce solar heat gain 8 No price signal related to energy use increasing numbers of rental units include utilities in rent so the occupant never sees the bill or gets the appropriate price signal to modify behavior 9 Lack of knowledge about conservation opportunities and savings While Taylors study focused on low -income renters and homeowners, the data likely reveals some of the issues that all homeowners are dealing with. Just because you do not fall into the low income bracket does not mean that your house does not suffer from some of the same problems. Often times neighborhoods are developed in waves, much like the installation of a large subdivision. This means that many of the houses in a similar area will suffer from similar problems if t heir systems have not been upgraded. Taylor noted that when it came to delivering energy efficiency programs, it was much harder to be successful with lower income populations than it was other income brackets. He went on to cite U.S. Department of Housin g and Urban Development (HUD) data which classified 35% of the households in the Gainesville municipal service area as housing-cost burdened, which means that the occupants spend more than 30% of their gross income on housing costs (U.S. Department of Housing and Urban Development 2008) While this is an alarming number the other 65% of the population that may be suffering from similar problems with their homes, and are potentia lly easier to reach with efficiency upgrade information, as noted by Taylor in his study.

PAGE 19

19 Energy Use and Occupant Behavior Locke took a similar approach to studying home energy intensity, but chose to focus her work on the role of occupant behavior as it r elates to high energy intensity in low income populations (Locke 2006) This type of conservation, similar to what Taylor describes, is considered Demand Side Management or DS M. Locke gives a history of DSM programs and notes some of the benefits and problems with DSM programs. Locke states that in order for DSM programs to be successful: A few key factors in securing the success of DSM programs include instituting regulatory strategies that encourage a commitment to the programs and creating a cost -effective method of measuring the many impacts of DSM programs. Through the use of a survey of lifestyles and habits, Locke determined that occupants behavior had a significant i mpact of the amount of energy that their home used. Some of the most notable results were: 1 The set points of thermostats in the home above and below the recommend temperatures for heating and cooling, 2 The use of incandescent bulbs instead of compact fluor escents, 3 Leaving lights on unnecessarily 4 Extensive television use 5 Clothes dryer use versus little or no cloths line use 6 Lack of knowledge about any form of energy efficiency programs offered through their utility. From the Taylor and Locke studies we can conclude that there are many homes that suffer from poor energy efficiency because of either physical deficiencies with the structure or because of homeowner lifestyles.

PAGE 20

20 Energy Efficiency Upgrades and Affordability in New Homes In his study, Hudson focus ed on developing a list of home upgrades for new homes that would have a positive energy saving return (Hudson 2008) He went on to rank combinations of these upgrades as low end to high end improvements and calculated the potential energy savings and payback periods for these combinations. He also introduced the concept of the Zero Energy House (ZEH) as an example of the high end goal for energy efficient homes. A ZEH would be a home that is built to produce as much energy as it uses. This is usually accomplished thr ough superior construction techniques to reduce overall energy demand and an onsite renewable energy source, most often solar photovoltaic panels. Energy is typically produced during the day and exported to the grid and then purchased back from the grid at night for a net effect of zero energy use. Hudson references a list published by Toolbase Services, hosted by the National Association of Home Builders Research Center, which lists some of the steps taken to achieve this low energy use profile: 1. Decrease the energy requirements for space heating, cooling, and water heating; o a. Orient the home with smaller walls facing west and include overhangs and porches o b. Increase foundation, wall, and ceiling insulation. o c. Use low U-value, low E windows in all cl imates and low solar heat gain (low SHGC) windows in cooling climates o d. Seal all holes, cracks, and penetrations through the floor, walls, and ceiling to unconditioned spaces o e. Install adequate ventilation, especially from kitchens and baths. 2. Increas e the efficiency of the furnace (or heat pump), and the air -conditioner. o a. Buy as high -efficiency equipment as affordable for the climate. o b. Design the supply and return duct system appropriately and seal tightly using approved tapes or mastic. o c. Consi der ground-source heat pump technology where space and cost conditions permit.

PAGE 21

21 o d. Where climate appropriate consider alternative cooling systems such as ventilation only or evaporative coolers. 3. Install a solar hot water pre -heat system, an efficient ba ckup water heater, and an efficient distribution system: o a. Consider a parallel, small diameter piping system for the hot water outlets. o b. Install low -flow fixtures. o c. Choose water -heating equipment with a high Energy Factor. o d. Look for a knowledgeable solar hot water installation company. o e. Evaluate solar systems using the Solar Rating and Certification Corporation (SRCC). 4. Install efficient lighting fixtures: o a. Consider permanent fluorescent fixtures in as many locations as possible. o b. Look for the ENERGY STAR label. 5. Install efficient appliances: o a. Include the refrigerator, dishwasher, and laundry appliances. o b. Look for the ENERGY STAR label. o c. Compare appliance efficiencies. 6. Install a properly sized photovoltaic (PV) system: o a. Look for a knowledgeable solar PV installation company. o b. Evaluate tax and other incentives. o c. Use PVWATTS for a quick estimate of PV output. o d. Find a Certified Solar PV Installer form the North American Board of Certified Energy Practitioners. 7. Turn off lights, computers, and appliances when not in use. (Toolbase Services 2008) While retrofitting every home in the community to be a ZEH would be a monumental task, the Toolbase outline serves as a nice framework from which to approach retrofitting homes as it highlights some of the areas and concepts that need to be addressed when trying to decrease home energy consumption. Hudsons conclusions and recommendations form a starting point for much of this analysis. Hudson details a few points of interest in his conclusions that are worth noting here. Hudson concluded that when upgrades were paid for with cash, the user gained a higher savings to investment ratio than when the user financed the upgr ades at 6%

PAGE 22

22 interest as part of a 30 year mortgage. This makes sense as part of your savings from the efficiency upgrade, in this case 6%, is going directly towards financing the component. As most people will probably have to finance home improvement upgra des, this raises the question: Given the savings potential of various home energy upgrades, what is a favorable interest rate that makes these upgrades worth while when financed? This topic will be addressed later in this paper. Carbon Credits as an Additi onal Energy Efficiency Incentive Bass studied the potential for marketing CO2 credits that are generated by a Cap and Trade System (Bass 2007) This system would be applied to the residential home market after a baseline of acceptable CO2 levels was set. Then homeowners, or developers in the case of Basss wor k, would be able to sell credits for any reduction in CO2 levels they achieved below the baseline. Based on a Florida Power and Light estimate, and substantiated by the Congressional Budget Office, Bass estimated that each ton of CO2 saved would be w orth about $10. He calculated that an average house of 2,000 square feet could save a marketable volume of 80 188 tons of CO2 over a twenty year period with corresponding energy reductions of 30 70% below that of a standard U.S. home or about 4 tons per y ear of saleable credits at the 30% reduction level According to Bass, not only would the homeowner be saving on their reduced utility bill an average of $640 $1495 per year from direct energy use reductions, they would also be earning income from their c arbon credits of about $40 per year in year one. (4 tons CO2 reduction per year X $10 per ton in year one = $40) This payback from direct energy use reductions and subsequent marketable carbon credits would increase each year as the value of energy and CO2 continued to increase because of energy inflation and the growing

PAGE 23

23 need to control CO2 emissions. Bass estimated these savings to be worth $21,370 over 20 years at the 30% reduction level, before the costs of upgraded infrastructure and interest are deduc ted. While $40 per year is not as significant as the $640 in direct energy savings, this number begins to multiply when implemented on a large scale. For instance, under a new system, if a city energy conservation department could help 100,000 home owners to reduce their energy consumption by 30%, they could then own those carbons credits as an asset which they could then leverage to cover the costs of their energy conservation initiatives. For instance, if 100,000 homes saved 80tons of CO2 each (through a 30% reduction in energy use) at the marketable rate of $10/ton, this equates to 80 X 100,000 X $10 = $80, 000,000 over a 20 year period or $4,000,000 per year. As noted in Basss work, the value of those carbon credits continues to grow over time. It sh ould be noted that a 30% reduction in home energy use is readily achievable through modest investment and lifestyle changes. Consumer Willingness to Pay for Efficiency Upgrades In his Doctoral dissertation Grosskopf explored the concept of operationalizin g sustainable residential development in several high-growth new home markets in Florida (Grosskopf 1998) In particular he looked at life cycle cost models for various efficiency improvement packages to several new home plan types and then used market survey assessments to quantify consumers willingness to pay for those efficiency upgrades. Grosskopf answered the following questions: Q: To what extent will capital costs and life -cycle return on Investment (ROI) affect consumer willingness to -pay for sustainable energy and watergy alternatives? A: Data showed that consumers were most willing to -pay for high cost, high return alternatives (42%) compared to moderate (25%) or low capital cost, low return (22%) alternatives.

PAGE 24

24 Q: To what extent will consumer cost rank with other issues (i.e., security, appearance, location) in the selection of sustainable energy and watergy alternatives? A: As shown in Figure 5.7 above, costs are clearly the most important variable in the decision making process of the consumer, carrying 42% of the overall decision weight compared to 34%, 17% and 7% for appearance, security and location respectively. Q: What types of cost structures (i.e., total cost, interest rates, resale value, monthly mortgage) are most important to customers? A: As shown in Figure 5.9, total and monthly costs were most important to consumers (34% and 27% respectively). Q: To what extent do consumers assess a) margin of aff ordability (maximum capital cost investment), b) minimal attractive rate of return (savings -to -investment ratio, capital cost recovery period), and c) maximum return on investment in their decision to select sustainable energy and watergy alternatives? A: Surprisingly, willingness to -pay was positively correlated to increase in capital costs, meaning willingness to -pay increased as capital costs increased (r=0.90). The consumers willingness to -pay for higher capital costs likely stems from corresponding i ncreases in total returns over the product life cycle. Similar to capital costs, willingness to -pay was positively correlated to increase in capital cost recovery, meaning willingness -to -pay increased as the time necessary to recover the capital cost inves tment increased (r=0.79). The consumers willingness to -pay for extended recovery periods most likely results from corresponding increases in total returns over the product life cycle. Results find that willingness to pay for each alternative is positively correlated to the actual dollar amount of maximum return oninvestment (r=0.90). Grosskopfs findings are important because they show a demonstrated interest in the notion of investing in longterm monetary savings by investing in energy efficiency upgrades to a new home. Granted, the action of investing in a new home upgrade is more clean-cut than remodeling an existing home and replacing existing equipment, although the concepts are the same. The difference is that with an existing home, you already have equipment that is functioning at some level of performance and your goal is a margin of improvement over that existing level. This becomes a very difficult choice when the equipment is either: a) still running and serviceable or b) the margin of improveme nt of the upgrade is more difficult to quantify.

PAGE 25

25 Funding upgrades can also present a challenge because they are not usually rolled into the typical one loan mortgage process (for better or for worse) that typifies buying a new home. While these extra fundi ng steps to install upgrades generally present additional logistical challenges of arranging financing, as will be explored later in this paper, financing an upgrade at 6% interest for 30 years may not prove to be the best financial solution from a life cy cle cost point of view. Overview of Energy Efficiency Programs and Their Limitations UC Berkeley Study In her paper entitled Enabling Investments in Energy Efficiency, A study of energy efficiency programs that reduce first -cost barriers in the residential sector Fuller gives a detailed overview of eighteen energy efficiency programs that have been tried in the past or are in operation today (Fuller 2008) Fuller details each type of program the program costs for delivering their services and identifies some of the barriers to delivering these programs that she identified during her study (Appendix A). These barriers include : Transaction costs The time and effort required to get enough information to make a decision, apply for financing, and arrange for the work to be done may simply not be perceived as worth the return in energy savings. Lack of information Many customer s do not know how to implement energy efficiency measures or understand and have confidence in the benefits of a project. Uncertainty of energy savings On average, a set of measures might produce a predictable level of savings, but savings can never be perfectly predicted for an individual home. Split incentives Split incentives occur when the decision-maker does not receive many of the benefits of a measure. An example is the case of rental property owners who lack incentives to invest in building effi ciency upgrades because it is the tenant who pays the utility bill. Initial capital investment The first cost of a project may deter investment, either because the resident does not have access to capital or they choose to make higher -priority investment s.

PAGE 26

26 Fuller goes on to report that despite a large number of loan programs for residential energy efficiency upgrades, there are still low participation rates. She found that in 2007, utilities that offered these programs only reached 0.1% of their potential customers. (This number is derived by dividing all of the households that used the loan program by the total number of households served by the utility.) She also notes that the Sacramento Municipal Utility District has reached approximately 26% of its customers (135,900 loans in total) since its inception in 1977 as an example of program success over a longer time period. Fuller concludes that while financing is a very important part of helping homeowners overcome the first cost barriers of energy eff iciency upgrades, that current financing does have some limitations as listed above and financing alone cannot solve these problems. This paper offers a good overview of financing programs from which to move forward. It should be noted, as shown in Appendi x A, the interest rates for the programs that Fuller details range from 0% to 12.49%, with most programs being over 4%. It is important to remember that interest on home energy improvement loans decreases the net savings that a homeowner will experience fr om installing an upgrade. A more through examination of this conflict will follow later in this paper as this point ties directly into Fullers third problem discussed above, namely, Uncertainty of Energy Savings. The Short List In an article published in the journal Environment, Gardner and Stern explored the ideas around ranking actions by effectiveness that households can take to reduce their greenhouse gas emissions (Gardner and Stern 2008) They make the claims : When strategies are proposed for households, they often appear in laundry list format, giving little or no priority to effectiveness. Given interest -driven campaigns to minimize the threat, messages about the seriousness of the problem may be important t o motivate people to act rather than deny the threat, but

PAGE 27

27 such messages have a poor track record of producing measurable behavioral change by themselves. They also found that much of the information around this issue leads homeowners to believe that cu rtailment rather than efficiency is the most effective form of conservation. This is not to down play the importance of curtailment, but rather to stress the very important gains that can be achieved through focusing on system efficiency. Their analysis le ads them to survey the many of the suggestions made to homeowners for lowering their greenhouse gas emissions and to rank them by effectiveness. (See Appendix B for tables.) Their first table ranks percentage of household energy use by end use. It is impor tant here to note that after personal vehicle use, home heating and cooling combined makeup the second largest energy use per household. In their second table they compare curtailment activities versus efficiency upgrades, further making their case for a f ocus on efficiency in addition to curtailment. Their third table is described as: Table 3 is a guide to priority setting, not a prediction. Although the savings estimates are only approximations, they can help households differentiate between highand low impact actions. Although their work is specifically focused on greenhouse gas emissions, it is important to the discussion because they bring in the concept of ranking actions by effectiveness. It should be noted that greenhouse gas emissions and energy use are very closely correlated because the majority of household energy comes from fossil fuels, and thus has direct greenhouse gas emission consequences. While discussing the role of policymaking they offer the suggestions: National policy should develop and validate simple guides, such as Table 3, and disseminate them using established communication principles. It should also include making more nuanced, household -specific information widely available -for example, by supporting the provision of credible, convenient, and low cost household and travel energy audits and carbon calculators. Gardner and Stern also note that from research conducted in the 1980s, programs focused on reducing upfront costs were the most widely implemented, but the best results c ame from

PAGE 28

28 programs that were well marketed across multiple spectrums and made the implementation of upgrades as convenient as possible for homeowners to implement. While this current research is not specially focused on ranking home energy upgrades, it is focused on setting parameters for expenditures on efficiency upgrades, thus creating a focus on effectiveness per dollar spent on upgrades. The result will be, as Gardner and Stern suggest, a simple table that offers clear and concise dollar information about matching funding for a set of upgrades with expected energy savings. Financing Options for Home Remodeling Basic Home Loan Products Historically there have been relatively few ways to pay for home improvements. Traditional methods are equity, home impr ovement loans, second mortgages, or refinancing, essentially drawing equity out of your home. Each of these methods has an associated cost depending upon the amount that you are borrowing, the length of the loan, the desired monthly payment, and most impo rtantly current interest rates. In addition there are fees associated with processing the loan such as application fees, appraisal fees, credit reports fees, processing fees, document preparation fees, and sometimes a flood certification fee. These fees ca n range in price from $500 to $1000 dollars or more depending upon the lender. A brief review of interest rates gathered in May 2009 from several banks for various loan products is listed in the Table 2 1. At the time of this writing, interest rates are c onsidered to be very low and are expected to climb higher as the economy begins to pick up. When interest rates are low is a good time to borrow money for home improvements in order to take advantage of the low cost of financing and maximize the return on investment that can be achieved through home energy upgrades.

PAGE 29

29 Funding Products Aimed at Energy Efficient Homes and Green Building Fannie Mae g reen m ortgages: In late 1999 and early 2000, Fannie Mae partnered with the National Association of Homebuilders (NAHB) to develop an updated version of their Energy Efficient Mortgage package (EBN 2000) This new, Green Mortgage aims to recognize the tangible value in efficiency upgrades to a home. According to an article in Environmental Building News, Fannie Mae equates these upgrades with reduced monthly utility costs, resulting in a more valuable home and less risky investment from the lenders perspective. Fannie Mae recognizes that an efficient home also has to do with a homeowners lifestyle and habits. In response they have worked to develop an information booklet for homeowners purchasing one of these high performance homes. They have also considered a mandatory homeowner education class as part of the requirements for qualifying for one of these green mortgages in order to further train homeow ners on the features of high performance houses and proper maintenance techniques. Other Finance Strategies Related to Building Efficiency. Portlands feebates In February of 2009, the City of Portland, Oregon announced that it was considering a fee and rebate program aimed at promoting energy efficiency in new buildings. While aimed mostly at commercial buildings, this new program would charge a fee to projects that only meet the building code requirements. Buildings that meet the LEED Silver certification levels will not be charged a fee while buildings that exceed the Silver level will be eligible for a sliding scale rebate. The program came about because the city cannot impose a building code that is stricter than the state wide building code, but can use its power through the levying of fees. So far the response has been positive from the public comments and fits well with other statewide

PAGE 30

30 incentives such as the Business Energy Tax credit, which aids businesses with the initial costs of projects such a s efficiency upgrades or renewable energy projects. This type of incentive is significant because it shows how one region is aiming to raise the bar on energy efficiency in their community and using financing incentives to promote this end. This begins to change the paradigm of fast and cheap building construction as a more profitable business in the short term and levels the financial playing field for high efficiency project developers. While this is good news for high efficiency developers, it is also good news for the tenants that will ultimately occupy those buildings and pay the utility bills. Harvards green building loan fund Harvard has implemented a Green Loan Fund that they use to fund energy efficiency upgrades and maintenance projects (Malin 2005) The fund was originally established with 3 million dollars and operates as a revolving loan fund. The fund retains some of the profits from the saved energy expenses to cover their operating costs. This fund was established to bridge the gaps of typical capital improvement budgets, which often times make initially higher cost upgrades difficult. While the fund managers are not able to directly meter the energy savings from specific upgrades because the of variation in building e nergy use, using peer reviewed engineering calculations and usage assumptions they have estimated returns on investment of 28%. They have seen their greatest returns from lighting upgrades and programs aimed at changing student behavior. This type of prog ram is interesting because it essentially mimics a low interest loan program where the funding agency is repaid through the savings generated by the upgrade project. This type of arrangement seems ideally suited for an institution -sized entity that has dir ect access to the same billing department that the borrower does.

PAGE 31

31 Rooftop leases for distributed energy generation In January of 2009 ReCurrent Energy of San Francisco was awarded a contract to build a 5 MegaWatt so lar photovoltaic generating facility on top of one of the cities covered reservoirs (McConnell 2009) ReCurrent Energy leases rooftop space from businesses and installs solar systems to generate electricity, which they then sell back to the business. Recurrent is able to take advantage of the 30 perce nt government tax credit for the installation of the panels and is thus able to generate energy at a better price than if the city were to install the system themselves. ReCurrent will sell the power back to the city at a rate of 23.5 cents per kiloWatt hour for the entire duration of the contract. This rate is similar to Gainesville Regional Utilitys feed -in tariff (FIT) rate for homeowners who install solar panels on their roofs as part of GRUs push to develop solar power and increase local generating c apacity. The main difference here is that the customer pays to own, install, and maintain the solar panels rather than a third party. In both cases the utility benefits by avoiding the need to develop costly additional fossil fuel based generating capacity This type of program is relevant because it demonstrates that an independent company can be profitable from making electricity while paying to lease roof top space and financing the cost of their solar equipment. This framework creates an interesting mo del, and sets the stage for a similar scenario using demand side management and saved electricity instead of generated electricity. These issues of course tie back into the questions of how much does it cost to finance an upgrade, how much do you save from that upgrade, and are the savings enough even without the 30 percent federal tax credit. These questions will be explored further later in this paper. Berkeley FIRST and Berkeley RECO In September of 2008, Berkley California approved a measure for the ci ty to help finance solar electric systems for homeowners. This Financing Initiative for Renewable and Solar

PAGE 32

32 Technology, know as the FIRST program, allows homeowners to borrow money from the city to finance a photovoltaic system on their property and repay the cost of the system through a biannual assessment on their property bill. There is a one time fee for initiating the borrowing process, essentially an application and assessment fee, and an interest rate of 7.75% on the loan. The loan is repaid over a 2 0 -year term. Should the homeowner sell the home and move before the end of the 20-year period, the loan transfers to the new owners property tax bill as the system belongs to the property. This program is interesting because it removes the speculative natu re of the energy efficiency upgrade. Usually a homeowner that chooses to install such a system risks loosing money if they choose to sell their home because of the objective nature of real estate pricing. An owner typically assumes the risk that they will be able to fully recover the cost of their system when they sell their home, making this a more risky investment. With the FIRST program, the balance of the cost of the system simply transfers to the new owner, essentially removing all risk to the installi ng homeowner. A basic assumption that underlies this program is that even with financing a system for 20 years at 7.75% interest that the homeowner will still save money. A detailed analysis of home energy use and energy costs would be required to validate this assumption and is outside the scope of this paper. Another one of Berkeleys progressive programs is the Residential Energy Conservation Ordinance or RECO. This program requires homeowners to make basic energy improvement upgrades as part of a home sale. Provisions can be made for these upgrades to be performed by the seller or the buyer. This is an interesting program because it standardizes the need for homes to be continually upgraded to at least a basic level, making home improvement more of a st andard than a speculative proposition.

PAGE 33

33 Basis for Investigation into Energy Savings Versus Financing From the articles reviewed, it can be seen that home ownership is on the rise and energy use and prices are on the rise, thus promoting an ongoing effort t o make demand side management programs more effective. Previous efforts (Taylor and Locke) have been made to reach low -income groups because of their greater need for monetary savings and their relatively high -energy use intensity. Other efforts have been focused on implementing efficiency upgrades into new home construction (Hudson and Grosskopf) and rolling the costs into the original mortgage. One major issue that Fuller identified is the uncertainty of energy efficiency upgrade savings versus the costs that it takes to implement those savings. This research will aim to explore the relationship between home energy upgrade savings and the interest rates at which those upgrades are purchased. This is a critical issue for homeowners w ho may not fit the low income criteria and are subsequently not eligible for some of the lower interest rate loans or free services. Consequently, most homeowners face the decision to spend money they have in savings on upgrading their homes or borrowing m oney to implement the upgrades. As discussed earlier, financing can come in many forms and at many interest rates, depending upon items such as the borrowers credit history, the lending institution, and the general state of the economy. This raises two que stions: 1 What is a reasonable rate to finance home energy improvements? 2 What level of energy efficiency improvement must an investment generate to make the investment produce a net savings? The balance of this research will strive to address these two que stions and present results in a generalized and easy to understand format that could be used by a home owner or energy auditor when looking to set parameters on a set of upgrades for a particular home. The goal is to offer an easy look up table for parties looking to maximize efficiency gain per dollar spent on

PAGE 34

34 upgrades and to make the case for expanding low interest loan programs to more home owners based on the cash flow scenarios explored in this research. Table 2 1. Typical Interest Rates Loan Type Ave rage Rate offered Source Mortgage 15yr fixed rate 4.5% 30yr fixed rate 4.875% Wells Fargo Home Equity Loan fixed rate 6.99% variable rate 4.99% USAA FSB Personal Loan 11.25% USAA FSB Figure 2 1. Percentage of homeowners from 1900 to 2000.

PAGE 35

35 Figure 2 2. Energy consumption by sector overview 1950 to 2009. (Ene rgy Information Administration 2007c)

PAGE 36

36 Figure 2 3. Average retail prices of electricity from 1960 to 2009. (Energy Information Administration 2007b)

PAGE 37

37 Table 2 2. Energy inflation rates 1995 to present Year Average cost in cents Change from previous year % Change from previous year Average % change 1995 8.40 1996 8.36 0.04 0.48% 15ye ar 2.10% 1997 8.43 0.07 0.84% 1998 8.26 0.17 2.02% 1999 8.16 0.10 1.21% 2000 8.24 0.08 0.98% 10 year 3.22% 2001 8.58 0.34 4.13% 2002 8.44 0.14 1.63% 2003 8.72 0.28 3.32% 2004 8.95 0.23 2.64% 2005 9.45 0.50 5. 59% 5 year 4.56% 2006 10.40 0.95 10.05% 2007 9.98 0.42 4.04% 2008 10.26 0.28 2.81% 2009 to date 11.12 0.86 8.38% Data from the Energy Information Administration

PAGE 38

38 Figure 2 4. Natural gas prices by sector from 1967 to 2009. (Energy Information Administration 2007a)

PAGE 39

39 CHAPTER 3 METHODOLOGY During the literature review parameters for various funding models were identified. These parameters included typical loan amounts, payback periods, and interest rates. Using these parameters, twenty -four cash flow calculations were performed to get a better understanding of the cash flow scenarios for various upgrade levels and costs. Scenarios were generalized and run using the following parameters: 1 Average home energy use of 12,000 kilowatt hours per year (based on the Energy Information Administrations national average) 2 Electricity costs of $0. 11 per kilowatt hour (based on Gainesville Regional Utility usage rate of 12,000 kilowatt hours per year) 3 20 year loan period 4 Interest rates ranging from 3% 6% 5 Estimated energy savings from upgrades of 30% to 50% 6 Energy inflation rate of 4% (based on the Energy Information Administrations 5 and 10 year averages) 7 Discount Rate of 5% (based on Federal Reserve Bank historical discount rates) 8 Maintenance was not considered in the calculations because of the generalized approach The first set of scenarios look ed at hypothetical upgrades costing $5,000 or $10,000 that produced an estimated energy savings rate of 30%, 40%, or 50% and were financed at interest rates ranging from 3% to 6%. The results were then grouped by loan amount, $5,000 or $10,000, and graphed showing the cash flows by year for the four different interest rates at the three different energy upgrade savings level (30%, 40%, or 50%) over a twenty year period. A second set of twelve additional scenarios looked at hypothetical upgrades whose costs (in this case the loan amount) were matched to the first year energy savings rates of 30%, 40%, or 50% and were financed at interest rates ranging from 2% to 10%. This was done using the

PAGE 40

40 Microsoft Excel t ool Goal Seek, and setting the loan payment amount e qual to the first year energy savings while varying the loan principle amount (Figure 3 1). This produces a net savings of $0 the first year the upgrade is financed and a positive cash flow in the subsequent years. These results were put into a summary table and graph. Figure 3 1. Screen shot of cash flow parameter tool.

PAGE 41

41 CHAPTER 4 RESULTS AND ANALYSIS Cash Flow Analysis Cash flow analyses for home energy upgrades were run for twenty-four different combinations of interest r ates and efficiency upgrade levels. Table 4 1 is one example of the method used for the cash flow analyses. The results were combined into six different graphs, three for investments of $5,000 and three for investments of $10,000. These $5,000 and $10,000 amounts were chosen to represent reasonable levels of investment into home energy improvements. While one could certainly spend less than these amounts, or more, these amounts are generalized for the purpose of showing financing trends. It should be noted that these amounts are not arbitrary numbers, but represent sums that could be used for several small upgrades, one medium sized upgrade, or a single major upgrade. For example, $5,000 could buy a homeowner added attic insulation, a full line of compact fl uorescent light bulbs and general air sealing with caulking and spray foam. (An example of several smaller upgrades.) This amount would also be adequate for a homeowner to have their HVAC system replaced (not including ducting) with a more efficient system (An example of a medium sized upgrade.) An investment of $10,000 might be enough to do both of the examples listed above, or simply just pay for window replacement (Windows could be considered a major renovation because of the logistics involved, but gene rally not the best upgrade per dollar spent.) Cash flow scenarios were run to calculate net savings per year. Energy savings were assumed at the 30%, 40%, and 50% levels. By making this assumption, the researcher is implying that the hypothe tical energy efficiency upgrades were chosen, individually or as a package to produce a savings off of the existing power consumption of 30%, 40%, or 50% respectively. There are any number of possible combinations of efficiency upgrades that could be

PAGE 42

42 combi ned to produce these levels of savings. There are resources out there that can help homeowners or energy efficiency experts to estimate reasonable assumptions of savings from upgrades. It is out of the scope of this research to list the various combination s that could meet these goals. Given the variation in house types, ages, and climate, the priorities for upgrades will change. $5,000 Investment in Energy Improvement Upgrades Analysis at the 30% energy savings level (Figure 41) showed that an investment of $5,000 would provide positive cash flow at the 3%, 4%, and 5% interest rates the first year, a nd in year four at 6% interest, with all interest rates producing net savings over the 20 -year term. Further analysis at the 40% and 50% energy savings levels further reinforced this trend (Figure 4 3 and Figure 4 5). $10,000 Investment in Energy Improveme nt Upgrades Analysis at the 30% energy savings level (Figure 42) showed that an investment of $10,000 produced no net savings over the 20-year term. Cash flow remained negative until year 15 at 3% interest, year 17 at 4% interest, year 20 at 5% interest, and remained negative for the 20year term at 6% interest. Analysis at the 40% energy savings level (Figure 44) showed that an investment of $10,000 produced net savings at lower interest rates over the 20 year term. Cash flow remained negative until yea r 8 at 3% interest, year 10 at 4% interest, year 12 at 5% interest, and year 14 at 6% interest. Investment at 3% and 4% interest produced net savings of $2,279 and $1,006 respectively. Investment at 5% and 6% interest produced net losses of $325 and $1,714 respectively. Analysis at the 50% energy savings level (Figure 46) showed that an investment of $10,000 produced net savings at all interest rates over the 20-year term. Cash flow remained

PAGE 43

43 negative until year 2 at 3% interest, year 4 at 4% interest, yea r 7 at 5% interest, and year 9 at 6% interest. Investment at 3% and 4% interest produced net savings of $6,210 and $4,937 respectively. Investment at 5% and 6% interest produced net savings of $3,605 and $2,216 respectively. Matching Loan Payments to Expec ted First Year Energy Savings The next step in the analysis was to use the Goal Seek Tool in Microsoft Excel to match the loan payment for a financed energy upgrade to the first year expected energy savings. The intended result of this calculation is to m atch the loan amount (which would be the amount spent on upgrades) to the first year energy savings amount generated by those upgrades so that all investments produce a $0 net savings on year 1 (neutral cash flow) and a positive cash flow beginning on year 2(Table 4 1). The amounts calculated in this table are specific to the parameters entered into the equation: Energy use of 12,000 kWh per year at a cost of $0.11 per kWh. (While not done in this analysis, a spreadsheet tool could be developed to allow the user to enter in their actual energy use per year and cost per kilowatt -hour to more accurately reflect their funding needs.) Table 4 1 is read by selecting an expected energy savings level on the top row of 20%, 30%, 40%, or 50% which correspond to the dollar amounts listed below the percentage. (In a more advanced tool, these dollar amounts would change based up the average energy use entered by the user.) Next, the expected rate at which the upgrades will be financed is chosen on the left side of the t able. A loan amount is selected by moving down vertically for the percentages and across horizontally from the interest rate to the intersection of the column and row. This amount represent the maximum loan possible at this interest rate and energy savings level to ensure that this investment will produce only positive cash flow.

PAGE 44

44 The final column of Table 4 1 is the percentage decrease from a base level of 2% interest rate that each subsequent increase in interest has on the principle balance. For example, it can be seen that a loan at 6% interest has roughly 30% less principle available for upgrades than a loan at 2% interest. Said another way, 30% of the loan payment is going to simply finance the upgrade, rather than produce any tangible additional savin gs The total amount going towards interest payments as the rates rise is not an insignificant amount and further serves to limit the actual amount of tangible improvements that can be implement into homes, that can then generate higher levels of savings. Figure 4 7 is a graphic representation of Table 4 1 with interest rates on the horizontal axis, initial loan amou nts on the vertical axis and the energy efficiency savings denoted by the various shades denoted in the legend.

PAGE 45

45 Table 4 1. Example cash flow analysis. kWh/year used 12,000 Loan amount $10,000 Electricity cost $0.11 /kWh Loan interest rate 3% Avg. yearly cost $1,320 Discount rate 5% Energy reduction 30% Fuel inflation 4% 1st year savings $396 Analysis period 20 Year Loan Payment Interest Principal Principal Bal ance Energy Savings Net Savings Present Value of Net Savings 0 $10,000 1 $672 $300 $372 $9,628 $396 $276 $263 2 $672 $289 $383 $9,245 $412 $260 $236 3 $672 $277 $395 $8,850 $428 $244 $211 4 $672 $265 $407 $8,443 $445 $227 $187 5 $672 $253 $419 $8,024 $463 $209 $164 6 $672 $241 $431 $7,593 $4 82 $190 $142 7 $672 $228 $444 $7,148 $501 $171 $122 8 $672 $214 $458 $6,691 $521 $151 $102 9 $672 $201 $471 $6,219 $542 $130 $84 10 $672 $187 $486 $5,734 $564 $109 $67 11 $672 $172 $500 $5,233 $586 $86 $50 12 $672 $157 $ 515 $4,718 $610 $63 $35 13 $672 $142 $531 $4,188 $634 $38 $20 14 $672 $126 $547 $3,641 $659 $13 $6 15 $672 $109 $563 $3,078 $686 $14 $7 16 $672 $92 $580 $2,498 $713 $41 $19 17 $672 $75 $597 $1,901 $742 $70 $30 18 $672 $57 $615 $1,286 $771 $99 $41 19 $672 $39 $634 $653 $802 $130 $51 20 $672 $20 $653 $0 $834 $162 $61 Totals $13,443 $3,443 $10,000 $11,792 $1,651 $1,479 Note: The variables used to create the remaining analyses are loan amount, energy reduction, and loan interest rate

PAGE 46

46 Figure 4 1. Cash flow for 30% energy savings versus interest rate for $5,000 investment

PAGE 47

47 Figure 4 2. Cash flow for 30% energy savings versus interest rate for $10,000 investment

PAGE 48

48 Figure 4 3. Cash flow for 40% energy savings versu s interest rate for a $5,000 investment

PAGE 49

49 Figure 4 4. Cash flow for 40% energy savings versus interest rate for a $10,000 investment

PAGE 50

50 Figure 4 5. Cash flow for 50% energy savings versus interest rate for a $5,000 investment

PAGE 51

51 Figure 4 6. Cash flow for 50% energy savings versus interest rate for a $10,000 investment

PAGE 52

52 Table 4 2. Maximum loan amounts to produce positive cash flow after year one based on neutral cash flow on year one Estimated target energy reduction 20% 30% 40% 50% Estimated savings on energy per year $264 $396 $528 $660 Interest rate for financed upgrades Max. Loan Amounts Percentage Reduction from 2% Interest Rate 2% $4,317 $6,475 $8,634 $10,792 3% $3,928 $5,891 $7,855 $9,819 9.01% 4% $3,588 $5,382 $7,176 $8,970 16.89% 5% $3 ,290 $4,935 $6,580 $8,225 23.79% 6% $3,028 $4,542 $6,056 $7,570 29.85% 7% $2,797 $4,195 $5,594 $6,992 35.21% 8% $2,592 $3,888 $5,184 $6,480 39.96% 9% $2,410 $3,615 $4,820 $6,025 44.17% 10% $2,248 $3,371 $4,495 $5,619 47.93% Based on 20 year loan term and annual energy bill of $1,320

PAGE 53

53 Figure 4 7. Interest rate effects on initial loan amounts. Based on 20 -year loan term and annual energy bill of $1,320

PAGE 54

54 CHAPTER 5 CONCLUSIONS AND DISC USSION This research aimed to investigate the questions: 1 ) What is the current state of home energy improvement programs in the United States ? 2) What is the relationship between monetary savings from these home energy upgrades and the loan interest rates at which they are financed ? In addition to investigating the questions above, t his research has generated an approach to define parameters for matching upgrade expenditures with expected/needed efficiency gains to create positive cash flows. By matching upgrade expenses to efficiency gains, some of the guesswork can be taken out of the fear of spending money on energy conservation measures for the home. A Need for Low Interest Loan Program Expansion From the literature reviewed it was shown that homeownership is on the rise, household size has been growing, and energy use continues to rise despite rising energy costs. It was seen from Fullers work that interest rates for demand side management programs are generally 4% or higher. The negative effects of these interest rates on the savings from efficiency gains h as been demonstrated using cash flow analysis and presented in Figures 4 1 to 47 and Ta b le s 4 2 From Grosskopfs work it has been shown that people are generally willing to pay for energy efficiency upgrades that generate net savings. Gardner and Stern m ake a compelling argument for the need to improve efficiency in addition to promoting curtailment. From these results, it can be concluded that homeowners would be willing to pay for home energy upgrade retrofits that would generate net savings. The key point is making sure that installed retrofits are priced accordingly and are capable of generating net savings given the factors of interest rates and current home energy use. This research has shown that by matching

PAGE 55

55 upgrade costs to efficiency savings, posi tive cash flows can be assured. A major component of assuring positive cash flows and attractive savings to homeowners is matching initial monetary investment in system upgrades with expected monetary savings from reduced energy u se and financing loans at lower interest rates Discussion A popular form of energy efficiency subsidies offered today are rebates for installed equipment to lower the initial costs of the upgrades, effectively lowering the amount that homeowners would pa y in interest. Manufacturers, utilities federal and state governments offer rebates for a variety of reasons. These reasons change continually and do not no necessarily offer the best way to promote long term sustainable implementation of home energy upgra des for homeowners. Despite the prevalence of rebate initiatives, according to Fuller, low participation rates in these programs continue. Rebates lower the initial cost of the upgrade and may serve to attract some homeowners to act on efficiency upgrades. For many homeowners though, especially those considering larger efficiency upgrades for which a cash payment may not be realistic, even after rebates, interest rates on borrowed money still play an important role in determining net savings and cash flows. By expanding low interest loan programs and matching of efficiency upgrades with upgrade costs, the need for utilities and the federal/state governments to offer rebates to promote energy efficiency programs would be reduced without negatively affecting the homeowner. This would have the added advantage of freeing up the cash that utilities and governments (state or federal) are having to payout to homeowners to lower the initial costs in the first place so that the interest costs do not outstrip the effi ciency savings. This cash could then be used to expand programs for low -income qualified individuals who cannot afford to install improvements, regardless of rebates or low financing costs. As Taylor has shown, these are the populations that

PAGE 56

56 have the highe st energy intensities per household and are least likely to install upgrades because of lack of resources. An expanded low interest loan program that was structured to ensure that homeowners would realize tangible savings could then operate as a revolving loan fund, much like the Harvard case discussed above. Fuller details in her work a number of successful programs that have operated with similar models, but continue to suffer from relatively low participation rates. Adjusting some of the interest rate t erms for these programs may help to eliminate two of the problems that she points out in her work: Unpredictable savings and first costs of improvements. Adding in the ease of on bill financing that Fuller discusses could help to streamline the process for homeowners, a benefit according to Gardner and Stern. One energy bill showing current use, savings compared to previous years, and a payment for your upgrade that is less than the savings amount could go a long way towards popularizing this type of progra m. Efficiency upgrades in new homes should be continued to be encouraged through programs such as Green Mortgages that get better loan rates for customers in order to offset the additional costs of upgrades and/or expedited building permits or reduced cos ts for building permits. Building codes for new homes are being improved as are the systems going into these homes. Portlands Feebate system is an example of a community pushing energy efficiency past the typical building code prescription in order to acc elerate the adoption of new t echnologies and research. Financing products such as Berkeleys FIRST program, are being continually stepped up to encourage high efficiency construction techniques and lower the first costs of these upgrades. Companies such a s ReCurrent Energy have shown that smart implementation of renewable energy production systems leading to overall lower energy demand can have a viable business model. Further research on the idea of a business model for home energy upgrade

PAGE 57

57 implementation would be interesting and valuable research. As discussed by Bass, an added benefit to the lender or the utility are new regulations promoting cap and trade for carbon credits that can be sold to help generate additional funds that could be used for the ene rgy efficiency loan pool, expanding low income services for efficiency upgrades, or promoting investment in renewable energy research and development.

PAGE 58

58 APPENDIX A PROGRAM OVERVIEW SUM MARY -FULLER

PAGE 59

59 Figure A 1. Program Results Summary 1 (Fuller 2008)

PAGE 60

60 Figu re A 2. Program Results Summary 2 (Fuller 2008)

PAGE 61

61 APPENDIX B UPGRADE RANKING BY E FFICIENCY GARDNER AND STERN Figure B 1. Household energy end use ranked by magnitude ( Gardner and Stern 2008)

PAGE 62

62 Figure B 2. Energy saved by 27 household actions ( (Gardner and Stern 2008)

PAGE 63

63 Figure B 3. The short list (Gardner and Stern 2008)

PAGE 64

64 LIST OF REFERENCES Bass, D. (2007). "Carbon Credits: A catalyst for energy efficient residential construction," Masters Thesis University of Florida, Gainesville, FL. EBN. (2000). "Green mortgages from Fannie Mae." Environmental Building News, Buildinggreen LLC, Brattleboro, VT. < http://www.buildinggreen.com/auth/article.cfm/2000/4/1/Green Mortgages -from -Fannie Mae/?&printable=yes > (May 7, 2009) Energy Information Administration. (2007a). "Figure 6.8 Natural gas prices by sector. Annual Energy Review 2008." Energy Information Administration, Washington, DC. pp 200. < http://www.eia.doe.gov/emeu/aer/pdf/pages/sec6_18.pdf > (May 23, 2009) Energy Information Administration. (2007b). "Figure 8.10 Average retail prices of electricity. Annual Energy Review 2008." Energy Information Administration, Washington, DC. pp 260. < http://www.eia.doe.gov/emeu/aer/pdf/pages/sec8_38.pdf > (May 23, 2009) Energy Information Administration. (2007c). "Table 2.1a Energy consumption by sector, selected years, 19492007. Annual Energy Review 2008." Energy Information Administration, Washington, DC. pp 38. < http://www.eia.doe.gov/emeu/aer/pdf/pages/sec2_4.pdf > (May 23, 2009) Fuller, M. (2008). "Enabling investments in energy efficiency: A study of energy efficiency programs that reduce first -cost barriers in the residential sector." UC Berkeley Berkeley, CA. Gardner, G. T., and Stern, P. C. (2008). "The Short List: The most effective actions U.S. households can take to curb climate change." Environment, Heldref Publications, Washinton, D.C. < http://www.environmentmagazine.org/Archives/Back%20Issues/September October%202008/gardner -stern -full.html > (May 28, 2009) Grosskopf, K. R. (1998). "Operationalizing sustainable residenti al development," Doctoral Dissertation, University of Florida, Gainesville, FL. Hudson, C. S. (2008). "Affordable energy efficiency practices for new single family homes in Alachua County," Masters Thesis, University of Florida, Gainesville, FL. International Code Council. (2009). "About ICC: Introduction to the ICC." < http://www.iccsafe.org/news/about/ > (May 15, 2009) Locke, F. C. (2006). "The role of occupant behavior in low -income high energy intensity households," Masters Thesis, University of Florida, Gainesville, FL. Malin, N. (2005). "Harvard bridges the gap between capital and operations budgets." Environmental Building News, Buildinggreen LLC, Brattleboro, VT. < http://www.buildinggreen.com/auth/article.cfm/2005/5/1/Harvard -Bridges -the Gap -Between Capital and -Operations Budgets/?&printable=yes > (May 8, 2 009)

PAGE 65

65 McConnell, G. (2009). "Sunset solar project is city's largest The Sunset Beacon, San Francisco, pp 1 2. National Association of Home Builders. (2007). "Median and average square feet of floor area in new one -family houses sold by location." < http://www.nahb.org/category.aspx?sectionID=819&channelID=311 > (May 23, 2009) Taylor, N. W. (2007). "Housing energy efficiency and affordability issues affecting low income residents in Gainesville, Florida," Masters Thesis, University of Florida, Gainesville, FL. Toolbase Services. (2008). "Seven steps to a ZEH." < http://www.toolbase.org/Home -Bu ilding Topics/zero -energy-homes/seven -steps -zeh. > (Sep. 20, 2008). U.S. Census Bureau. (2000). "Historical census of housing tables: Homeownership." < http://www.census.gov/hhe s/www/housing/census/historic/owner.html > (May 20, 2009) U.S. Census Bureau. (2008a). "Nation's housing stock reaches 128 million." < http://www.census.gov/Press Re lease/www/releases/archives/housing/012760.html > (May 23, 2009) U.S. Census Bureau. (2008b). "Table 1: Annual estimates of housing units for the United States and States: April 1, 2000 to July 1, 2007." < http://www.census.gov/popest/housing/HU EST2007.html > (May 25, 2009) U.S. Department of Housing and Urban Development. (2008). "State of the cities data systems (SOCDS)." < http://socds.huduser.org > ( Sep. 20, 2008)

PAGE 66

66 BIOGRAPHICAL SKETCH Brooke Denegre completed his undergraduate degree at Lewis and Clark College in Portland, Oregon in December 1999. He double majored in biology and environmental studies. Brooke subsequently worked as a Course Director for Outward Bound, a Logistics Manager for Lewis and Clark College Outdoors, a Wildland Firefighter for the United States Forest Service, and a Residential Carpenter for a variety of companies. He came to the M.E. Rinker Sr., School of Building Constructio n in the spring of 2007 to pursue his interest in green building and learn more about the relationship between the built environment and environmental protection.