Published on March 30th, 2016 | by Kyle Field17
Putting A Price On Home Energy Efficiency
March 30th, 2016 by Kyle Field
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:
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 🙂