Policies to Encourage Home Energy Retrofits: Comparing Loans and Subsidies Margaret Walls Resources for the Future 30 th USAEE/IAEE North American Conference, October 11, 2011

Potential Retrofit Market 130 million houses in U.S million built before 1990 Source: American Housing Survey

Energy Use in Older Homes Energy use today for average single-family home built in 1960s/70s: 46.1 mbtu/sq ft 2000s: 34.5 mbtu/sq ft Energy use today for average single-family home built in 1960s/70s: 46.1 mbtu/sq ft 2000s: 34.5 mbtu/sq ft Natural gas furnace from 1990s average efficiency = 65% New Energy Star gas furnace > 90% Older central AC systems SEER = 6 New Energy Star AC SEER > 13 Natural gas furnace from 1990s average efficiency = 65% New Energy Star gas furnace > 90% Older central AC systems SEER = 6 New Energy Star AC SEER > 13

Residential Energy Efficiency Financing 223 government and utility financing programs in operation in U.S. ▫Types of programs:  Revolving loan funds  Interest rate buydowns  Loan loss reserve funds  On-bill financing (utilities)  Property Assessed Clean Energy (PACE) programs

Why Financing? Overcome first-cost hurdle for homeowner Less costly than subsidies Leverage private capital Kick start private market with govt money/programs Market failures in credit markets But many issues and questions What is the cost-effectiveness of the financing approach vis-à-vis other policy options? Virtually no evaluation of current programs

NEMS

Residential Module of NEMS Starts with housing stock forecast Forecasts energy demand for 21 end uses Equipment classes for each end use (e.g., natural gas furnace, electric heat pump, etc, for space heating) Equipment type within class – efficiency and cost Benchmarked to actual market shares Future choices based on capital and operating (energy) costs Assumptions built in about equipment lifetime, costs associated w/switching equipment classes

Policies Modeled Subsidies and loans for high efficiency HVAC equipment and water heaters 50% reduction in purchase cost of high efficiency furnaces, electric heat pumps, central ACs, geothermal heat pumps, natural gas and solar water heaters ▫Direct subsidy ▫Loan: 7-year loan, 0% interest HVAC & water heating account for 56% of residential energy use

Results: Market Penetration

Residential Energy Consumption

Residential Energy Consumption (cont.) Trends in Delivered Energy Use Percentage Difference Between 2035 & 2011 Per HouseholdTotal Baseline-16.77%5.21% Subsidy-21.02%-0.16% Loan-17.39%4.42%

Residential Energy Consumption (cont.) Reduction in Cumulative ( ) Delivered Energy Use from Baseline Subsidy3.61% Loan0.52%

CO2 Emissions Reduction in Cumulative CO2 Emissions from Baseline Residential Sector* Total Subsidy 1.92%0.44% Loan0.34%0.06% *Accounts for electricity-related losses

Comparison with Other Policies From 2010 RFF Study Toward a New National Energy Policy: Assessing the Options Residential CO2 Reductions Total CO2 Reductions Building codes (Waxman- Markey) 0.69%0.14% Full Waxman-Markey EE provisions 0.97%0.19% Renewable Portfolio Std --2.7% Clean Energy Portfolio Std --2.2% Cap & Trade --10% Building policies have relatively small impact

Welfare Costs Harberger DWL triangle in equipment market (due to subsidy/loan) in each period ▫Calculate PDV ( ) Energy cost savings in each period ▫Calculate PDV ( ) Net cost is the welfare cost of the policy For loan, add cost of expected defaults What discount rate should be used for energy savings? Depends on the extent of the “energy efficiency gap.”

Welfare Costs (cont.) Assuming 0% default rate

Welfare Costs (cont.) $89/to n $50/ton Assuming 0% default rate

Comparison with Other Policies From 2010 RFF Study Toward a New National Energy Policy: Assessing the Options Cost Per Ton of CO2 Reduced * Building codes (Waxman-Markey) $25 Full Waxman-Markey EE provisions $34 Renewable Portfolio Std $14 Clean Energy Portfolio Std $14 Cap & Trade $12 *With energy savings calculated at 10% discount rate.

Considering Loan Default Risks Default rate Welfare cost of loan policy per ton of CO2 reduced 0% $89 1% $102 2% $125 5% $155 Evidence on default rates from existing programs… Pennsylvania program: 0.6% but FICOs very high (84% >700) 1.5% for FICOs

Conclusions Subsidies more cost-effective than loans ▫Arguments in favor of loans may be flawed  Lower costs but far lower reductions in energy and CO2  Default risks could be important ▫Caveat: need evaluations of broader loan/subsidy policies and/or more targeted policies

Conclusions (cont.) Any policy aimed at HVAC and water heaters (and appliances, etc) will have small impact ▫All new equipment is more efficient than old so marginal energy/CO2 payoff from policy is small Any retrofit policy may be less cost- effective than other carbon policy options ▫Stock turnover takes time

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