Putting A Price On Home Energy Efficiency

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Buying a house is an exciting part of life, the start of a new chapter, and frankly…freakin’ scary! Typically that’s not because of any spooky creatures but because of the massive mortgage that people usually take on to afford one, the number of things that can go wrong, and unforeseen financial burdens that these ‘money pits’ can become.

Many of the financial pitfalls can be identified early on in the buying process as part of a quality home inspection, but there’s one big dirty secret that many homes have that is a bit harder to wrap your head around when buying a new place – energy. I’m not talking about the qi (or ch’i) of the house or anything like that, but literally about the energy used by the house on an annual basis in all forms – electricity, natural gas, propane, heating oil, solar, wind, solar thermal, geothermal, etc

Let’s back up a bit. Pretend you’re buying a new car. Do you check the window sticker to see what options it comes with? How about the fuel efficiency? Estimated cost to operate for a year? Me too! …and it’s the same for a house. We want to know which energy options it comes with. Does it use natural gas for heating? Have a high tech heat pump in the basement that is dirt cheap to own and operate?

Fuel efficiency similarly translates into energy intensity. You thought I was going to say energy efficiency there, right? The actual metric for putting data behind this is the amount of energy used per square foot of the house. Roll that up over the size of the house and the months of the year and you get the mega-metric – the total cost of energy to operate for a year.

Before cars kept track of fuel efficiency, knowing what miles-per-gallon your car got was irrelevant to the market – you don’t care what your car gets and the market doesn’t value it…and it’s the same thing with a home. You can invest $15k in solar panels, $10k in energy efficiency improvements, and $3k in a new heat pump, but you’re not going to see much of that money rolling back into the valuation of the house because people don’t speak that language yet.

We need to retrain our brains, and the market, to accurately value not just the cost of the house but the cost to run the house month to month. For example, let’s dig in to the numbers on two houses:

  • House A is $1000/month to buy for 1700 square feet, but costs $300/month for the electricity bill and another $150/month to heat it.
  • Across the street, House B is also $1000/month to buy for the same 1700 sq ft footprint, but due to the solar panels on the roof and the extra insulation in the walls, floors, and ceiling, only costs $50/mo for the heating bill, with no electric bill to speak of.

Obviously the second house is worth more, and is a better value for the same purchase price. But just how MUCH more does an energy bill that’s $400 lower (every month!) make the house worth? Backing up a bit, how do we even quantify the monthly cost of energy for a house?

Putting a price tag on the cost of energy is the first step in getting a handle on the value of residential renewables – such as solar – into the valuation of the house. That allows homeowners to see the month-to-month cost and quickly extrapolate the cost of energy over the life of the house (the long term cost of energy).

This could be accomplished by reapplying the concept of the Energy Star label on appliances:

Screen Shot 2016-03-28 at 6.42.58 PM

Beyond just the base concept of putting a dollar value on, and an increased visibility of, the cost of energy, less efficient homes are actually more risky to banks. Think about it. In the example above, house A carries an energy bill of $450/month vs house B with just a $50/month bill. That’s an extra $400 of monthly debt on house A that will never go away for the homeowner.

That effectively takes the monthly payment for the house from $1000 to $1450 whereas House B is only going to cost $1050/month – a huge difference. One of my favorite sayings that I’ve heard about solar is that it takes a monthly liability (the monthly bill) and turns it into an asset (increased value of the house).

Homes with higher energy bills are riskier investments for banks, as the monthly energy cost is not taken into account when the home is financed. It’s essentially a highly variable chunk of debt (particularly in this era of increasing efficiency and solar) that the bank not only doesn’t know about, but doesn’t seem to care about.

In markets where the energy bill is a large percentage of the mortgage, this can play a large factor in whether a homeowner can actually afford the full cost of the home or not. Further, the variations in energy price can, and likely often do today, single-handedly sink the homeowner’s monthly budget and kick the loan into default.

Finally, these energy costs can be rolled up over the life of the loan as part of the purchasing process. House B might only cost $18k in energy costs over 30 years whereas house A would tip the scales at $162k!! Granted, not many people are interested in stepping back and looking at the total cost of energy over 30 years, but lifetime costs often paint a picture compelling enough to trigger small changes.

If we looked at energy costs this way more often, solar and energy efficiency would be much more likely to have increased value when the house hits the market. Markets value what is measured. We need to measure energy use and turn consumption into an easy to understand comparable metric – like MPG is for fuel efficiency.

Doing that will trigger banks and financial institutions to dig a bit deeper into the value of energy efficiency and residential power generation as a part of the lending process and overall risk assessment. If Energy Use Intensity is being looked at by financial institutions, services like Zillow will start reporting EUI, which completes the cycle back to the consumers.

Homeowners would have more incentive to invest in technologies that are better over the long run and often for the planet, such as making that $5k investment in more insulation, spending $300 on LED light bulbs, or $15k on solar. Homeowners can have the confidence that they are making an investment in the house and in a reduction in monthly operating costs over the life of the home, or at least of the product being installed. For LEDs, that’s just 22.6 years…what a ripoff 🙂

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Kyle Field

I'm a tech geek passionately in search of actionable ways to reduce the negative impact my life has on the planet, save money and reduce stress. Live intentionally, make conscious decisions, love more, act responsibly, play. The more you know, the less you need. As an activist investor, Kyle owns long term holdings in Tesla, Lightning eMotors, Arcimoto, and SolarEdge.

Kyle Field has 1638 posts and counting. See all posts by Kyle Field

17 thoughts on “Putting A Price On Home Energy Efficiency

  • Exactly!! Homes, including all rental units and multifamily, should come with an “MPG” sticker. How to do this? Some jurisdictions like Austin already require it. Prior to selling it renting, have a certified home energy audit the must be disclosed to the bank and the buyer/ renter. And required on all mls listings.

    The economic leverage of making this information available would pour hundreds of billions into the economy because the market would see the inefficiencies and correct them, saving consumers money and creating jobs.

    • The government is considering efficiency rating requirements when selling homes here in Ontario Canada. I hope they do it, it would really help people understand efficiency.

      I am always amazed when I see a home beautifully renovated, kitchen, bathrooms, flooring, then whoa… old windows, really old in some cases. I know windows aren’t “sexy” but they are one of the first things I replace in a home purchase…if needed of course.

      • Same here! Windows are key. LED lights usually come first…but windows are right after that 🙂

        • Be careful with blanket statements, down south windows are a big deal because of solar load. Up north, it’s not as big of a deal. I have yet to recommend windows. Air leakage is often the number one source of energy loss, it causes moisture problems too many times. It depends on the house, though. EUI is not granular enough to diagnose a house, but it is an excellent first step to understanding a home and its value.

        • For structures, heavy hitter is the insulation and air tightness of the overall structure. lighting is pretty small to start with and LEDs are quickly taking it to a negligible part of the energy consumption mix overall.

          Another aspect of good insulation: it’s FAR cheaper than storing energy. An thermally tight structure holds heat in/out around the clock. Doesn’t matter then what time of day the heat /AC is run, except of course for commercial which lines up nicely with solar generation anyway.

      • As a general building contractor that learned the biz in Canada from the late ’70’s until 2000, when I moved to the USA, I can say that the Canadian building code is generally 10 to 25 years ahead of anything I’ve seen in the US, when it comes to energy efficiency. We were taping screwheads that penetrated the vapor barrier, and adding class II or III wind barriers to the exterior, and performing pressure tests in the ’80s. Heat recovery systems were (almost) invented after the Cdn Feds built some super insulated, passive solar houses that were too tight. We don’t put outlets on exterior walls, the ceilings are lower, much of the framing was replaced with insulation systems, and the houses were made ‘air-tight’ thru two or three methodologies. (R2000)
        I can never understand what goes on in someone’s mind when buying or assessing a house for it’s cosmetics, which is what 90% of people do. If you discount the token attention they pay to things like “EnergySaver” stickers and such.

    • I sympathize, but….Problem is people can have such a huge effect on home energy – running heat high in winter, A/C freezing cold in summer. I had a roommate in a 3 bedroom rental who would keep heat at 80 in winter and 72 in summer. Or the kids leave doors open, lights on, 3 showers a day, etc. And especially older homes vary widely in leakiness, etc.

  • I’m not alone anymore! Yay! Until efficiency has real value, it’s not going to be paid for. EUI and cost are good initial metrics to check, like MPG. You’ll need more granular data to truly understand how the house and occupants work, but it’s enough to decide if you want to dig deeper or not.

    @fr@disqus_rkWUn9Hxhy:disqus The energy audits sound like a good idea at first, the trouble is they cost something, who’s going to pay for it? Finger pointing ensues. HERS ratings would have taken off better if this was a good initial step. EUI is good because all you need are a gas and electric bill. What’s the annual usage divided by square footage? Boom, EUI.

    If you want to understand the home better, sure, get an audit. Since I do them for a living, though, I can tell you they are far more valuable when you have experience with the house. Which rooms are hot and cold? Where is the moisture issue? Where do ice dams form (for northerners like me)? The seller is NOT going to disclose these, it will cost them money. Only occupants are likely to find many issues. I’m not psychic, I can’t predict where many problems will form.

    Another thought on valuation, in my experience efficient homes are typically very well cared for homes. Well cared for homes typically have fewer expensive surprises lurking. Therefore efficient homes are likely to have fewer issues, carry less risk, and possibly carry more value if the market begins to value EUI. Say a reduced energy bill vs. comps increases the value of the house by $10K. The house may actually increase by $15K because risk is reduced.

    Kyle, thanks so much for writing this. I have a similar article sitting 90% complete, but it’s so good to see others are thinking the same way, and more specifically others outside of my occupation.

  • Great Job Kyle!!!

    “Markets value what is measured. We need to measure energy use and turn consumption into an easy to understand comparable metric – like MPG is for fuel efficiency.”

    Yes!! EUI per sf/year is a fantastic, simple comparable we need banks and real estate firms to adopt!

  • You can invest $15k in solar panels […] but you’re not going to see much of that money rolling back into the valuation of the house

    Buyers overall are more informed than you think: http://cleantechnica.com/2013/12/17/study-shows-rooftop-solar-adds-thousands-to-home-resale-values/

    That said, yes of course it’d be great to know more about the energy “footprint” of a home, so efficient ones get more consistently rewarded with higher values, but the huge challenge would be to come up with ratings which could remain meaningful across widely different dwellings and lifestyles.
    A simple sticker like the one imagined above conveys far too little information.

    For example, the PV array on my roof nicely offsets my family’s usage, but would be twice too big if I didn’t have an EV (or drove less). And that same array would still not be sufficient for the average US household. One size fits almost none.

    More fine-grained disclosures, like the insulation ratings of walls/windows/roof/floor, or at least the expected energy requirements to keep the home at certain temperature(s), the efficiency of appliances, annual output of PV system if any, those sort of things, would be much more informative — and less likely to be gamed — than some overly simplistic “energyguide”-style sticker.

    • I agree that more data to support the “headline” is important – especially for something as complex as a house with multiple sources of energy. It was an example of simplifying…creating a new language for communicating this opportunity.

      About the panels…I saw the study you referenced but many consumers are still uneducated about solar panels or even afraid of them (I don’t get this one). Putting the numbers on paper neutralizes this bias and puts data behind the panels which helps drive more accurate valuations.

    • @GCO We both agree and disagree. The idea Kyle is talking about is a high level number. Then we can dig deeper.

      An MPG sticker on a car shows an overall mixed rating, and the city/highway numbers have a 2-4 MPG fudge factor if you look at them. Results may vary. Measuring mileage from the actual car from tank to tank knowing how you drove for that tank is better info still. More granularity. But at the beginning you just want MPG.

      EUI and annual energy cost are good metrics for that goal IMHO. Then we can get into disaggregation, energy monitoring, HERS ratings, energy modeling, and so forth.

      At the beginning, though, a rating needs to be free, have as little chance of gaming as possible (as you mentioned), and be based on easily obtained information. For EUI you just need total energy use and square footage. Those are obtainable from bills and country records. For annual energy cost you need a year’s worth of gas and electric bills.

      To me, EUI passes the sniff test. We’re collecting data with a free tool, BTW, you can sign your house up and when your utility is added see how you compare. http://bit.ly/ResiSpeakOneKnob It’s not perfect, but it’s a good first iteration.

      • A single MPG number may be fine for gas-only cars, but is already close to meaningless for plug-ins. And a house is a vastly more complex system.
        How would you rate e.g. a Chevy Volt? 37 MPG on gas? 93 MPGe on electricity? That’s an almost 3× spread. Pick some random number in between?

        See its EPA/DOT sticker, it mentions both values plus the expected electric range. I think that those 3 numbers are necessary for someone to figure out how the car will actually work for them.

        The aggregate annual power consumption of a home should give you, roughly in order:
        – How many days was the home left unoccupied (holidays, remodeling…).
        – How many people lived there
        – How hot/cold did they like it inside
        – How often were they at home (heat/cool off during week-days?)
        – Was/were plug-in vehicle(s) charged there
        – If so, how much was it/them driven
        – Did occupant(s) eat out a lot (less cooking/dishwashing)
        – Whether they preferred baths to showers; how hot/long
        – How frequently they washed their clothes
        – Did they sleep with window(s) cracked open
        – Were computers, set-top boxes etc powered up 24×7
        etc etc…

        My utility had a portal with statistics showing how neighbors are doing. Even though we almost all have the same houses, built at the same time, discrepancies are huge.
        The energy usage of a household reflects primarily its composition and lifestyle, and I think it’d be very dishonest to present it as representative of the characteristics of the home itself.

  • This is an observation I have had for several years which bugs the hell out of me. I live in a colder climate. In our outer tier suburbs there is some sprawl and new houses. They are even typically built on old farmland. If you believe passivhaus estimates a house could have that level of energy efficiency for 15% of a non-passiv house.

    Even if you ignore a house as extreme as a passive house you could easily install geothermal (old farmland) and solar (easy to design for optimal panel hanging) for a fairly small percentage of the overall house’s cost. The difference in mortgage payment would be very small but the energy impact would be massive. Seems crazy new home efficiency is not a huge market driver.

    As for older homes, I think the problem is more difficult. My house is >100 years old and I reduced air exchanges an hour by 40% but improving that more would require lots of extensive and invasive work. A government policy (and tax credit) I suspect is our best path forward on the old house front.

  • Much needed. Thanks Kyle.

  • Where can I “like” this page? Lol

  • In California, all new construction (residential at least, not sure about commercial) has to be “Net Zero” by 2020. Like Plug-in Electric cars, that’s a half way measure which represents terrific progress, but has a ways to go. It doesn’t mandate energy efficiency in design, in mandates being able to produce enough power onsite to meet it. Theoretically you could hook up some ICE generators to a motorhome and get a “Net Zero” house.
    All this cost calculation is what my wife and I are in the midst of when determining how we’re going to retire. When incomes are fixed, you want to be certain of your creature comforts more than ever. We’re spending a few thousands now, to limit increased costs when we’re too old to do anything about it, the car is as important as the house. Self-driving will coincide nicely with ending driving because we’re too old to do it safely. By 2020 or so, we should have roads filled with electric cars whose drivers are asleep.
    Insurance cost (should) will plummet with no collisions but every highway charging station will have to come with a bathroom.

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