Financing Energy Efficiency

The challenge with energy efficiency is finding the capital to build in the features that will make a home perform, when the payback is spread over decades.  Add to that appraisal standards that don’t consider energy efficiency enough, and it is hard to green light an energy efficiency project — especially when the average time a family owns a home is about 7 years.  But it’s got to be done if we’re going to use today’s technology to reduce residential GHG emissions.

Take a renovation project.  Purchase price $500,000.  Maybe the functional renovations you need are $20K for a kitchen and $40K for an addition.  Those renovations would reflect in an appraisal when complete.  If at the same time you wanted to fully insulate the home, replace the leaky windows, and upgrade HVAC and hot water heating systems, you could easily spend another $60K and see little effect on an appraisal.  If annual utilities at the home are $600 a month, and you cut those in half, your payback is $3,600 a year, which would take 4 decades to pay off.  So many families today make the decision that green doesn’t pay and keep building the same way as their parents.  Let’s take a look at financing instruments that are changing the calculation for today’s green building projects.

What are Governments Doing to Encourage Green Building?

Every local government has its own set of incentives, with a wide variation in what they offer.  As an example, Cincinnati offers 100% property tax abatement for residential renovations, so that the value of renovations do not trigger higher property taxes.  Long Beach, California offers up to $2,000 to replace a water-intensive lawn with drought tolerant landscapes.  The Energy Upgrade California program offers up to $4,500 for qualified renovations when using an approved contractor.

The one incentive that every homeowner can access is the 30% federal tax credit for certain improvements.  This includes photovoltaic panels for generating electricity, geothermal heat pumps, and wind turbines.  Smaller incentives are available for fuel cells, biomass stoves, HVAC systems, insulation, metal and asphalt roofs, water heaters, and windows and doors.  This is slated to be available through the end of 2016.

Many utilities have incentives targeted at regional areas.  The Southern California Edison service area, for instance, offered rebates for photovoltaic panels that started out quite significant, then disappeared over time as the money was used up.  Solar water heaters are eligible for the same type of rebate, and they are quite significant at this stage, and set to phase out as they are paid out.  In Long Beach, though, there is not solar water heater incentive, because the city owns its own gas utility that does not participate.  So check with your local electric and gas companies to see what they offer to encourage green building, but realize that they reward the early adopters and typically phase out over time.

Perhaps the most novel financing program is the PACE program, offered in very limited areas.  These programs aim to solve the mismatch between investment period (now) and payback period (decades later).  Local entities finance the green building project through a bond measure, and then add the financed amounts to property tax liabilities.  This spreads out the payments over a long period, and allows the improvements to be paid for by multiple owners, not just the one who did the project.  Fannie and Freddie took exception to these programs, worried that their loans may be subordinate to these PACE liabilities and thus more risky.  So local governments have had to sponsor these plans alone without federal support.  The most successful programs so far have been in Sonoma County (CA) and Riverside County (CA).  Unless you live in a PACE zone, you’ll have to lobby your local government for a program, or finance your green building project another way.

 What is the mortgage industry doing?

 The mortgage industry has a class of loans called Renovation Loans, which allow for a home purchase/refinance with green improvements paid for by an escrow account above and beyond the mortgage amount.  These loans are not well known, but can be of great utility in financing the renovation of a fixer-upper, or a primary residence in need of improvements.  And the green features are paid for over the life of the mortgage.

These programs have great promise, especially for the first companies to the market.  Green homeowners have been shown to be better credit risks, so by offering these loans, mortgage companies can select better risks.  These same homeowners have lower utility payments after completion of the renovations, which makes them less likely to default on their mortgages.  For an example, visit our partner website,

 What can all of us do?

Besides making use of the government and mortgage programs available to us to pay for green improvements, we have to be the main driver of building green, or it won’t happen on a scale to move the needle on energy use and GHG emissions.

First of all, when we’re renovating, the cost of green is low to zero, so that’s the time to do it.  When you’re replacing the old windows in your house, take a look at insulating the walls while they are torn apart.  When building an addition, consider overhauling the HVAC and hot water systems.  If replacing flooring, consider insulating the crawl space.  If building up, make sure you plan on insulating the attic beyond code.

Each of these possible green improvements must be evaluated as its own project, with a cost and a return.  Choose the ones with quick payback periods, hopefully within the expected time you will occupy the house.  Don’t ignore higher resale value if you think you can market the green aspects of the home to a buyer.  Evaluate also the projects that are important to your quality of life, even if they might not pencil out as profitable in a short time period.  Families with asthma issues should look hard at indoor air quality.  People on fixed income get a lot of security out of low utility bills.  Energy consultants can model the paybacks of various improvements to your house and help you get the most out of your project.

Making these projects more difficult is the fact that there are no shortcuts to green building projects.  Every home and family is different, in terms of climate, sun exposure, architecture, and function, so no one solution fits all.  This is where a sharp design team comes in; an architect, builder, and energy consultant can more than cover their fees with good advice.

Let’s return to the previous example, where the project was evaluated without incentives and resale in the calculation.  We had a $500K purchase price, but with the Renovation loan we take out a $600K mortgage and have a $100K escrow account to fund renovations, financed over the 30-year life of the mortgage.  Add to that 30% federal tax credits on PV panels and local incentives for another $15K, and our cash required to do the $120K in renovations is only $5K.  And $60K of that at least is reflected in resale value.  So maybe we come out ahead by the time we sell the house.  Throw in the utility savings and improved living experience, and the green building movement just started making a whole lot more sense.

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