(LOS ANGELES) Our homes produce 20 percent of all U.S. greenhouse gas emissions, and study after study finds that efficiency measures are the cheapest way to save energy. Residential upgrades would pay for themselves by reducing home energy usage by 40 percent and creating green jobs. Unfortunately, no one has figured out how to cover the costs of a nationwide retrofit.
A new report from the Milken Institute, "Financing the Residential Retrofit Revolution", finds that various government programs and private-sector financing options, if properly integrated, can jumpstart the transition to a cleaner, more efficient use of energy in houses.
"The federal stimulus package included a record level of public funding for energy efficiency, but it′s still not enough to do the job. No public agency can bring retrofitting to an effective scale on its own," said Martha Amram, Senior Fellow at the Milken Institute. "Overcoming the obstacles, such as consumer reluctance to the up-front costs, requires coordination between the public and private sectors at the national level to create scalable financial resources. This will have a real impact and change the way our homes consume energy."
"Financing the Residential Retrofit Revolution" reviews the patchwork quilt of state-level financing options and existing programs, as well as solutions that can help build a sustainable national market for energy efficiency. The report also lays out a role for the federal government in scaling up the retrofit market.
The suggested financing solutions include:
- Energy efficient mortgages: These mortgages allow homeowners to pay for the cost of energy efficiency upgrades with tax-advantaged interest rates, while avoiding large up-front out-of-pocket costs and aligning payment terms with the long periods it may take for some of the upgrades to pay off.
- Unsecured home improvement loans: Often used by homeowners to replace failed heating and cooling systems, these loans are obtained through contractors. Several existing pilot programs build on this concept with interest rate buy-downs, revolving loan funds and credit enhancements.
- Property tax-based financing: Property Assessed Clean Energy (PACE) programs are structured similar to local bond mechanisms, but are taxable at the federal level, and provide homeowners with funding for selected energy efficiency home improvements and solar installations. Homeowners repay the loan through a voluntary property tax increase, instead of an upfront lump sum.
- On-bill payment through utilities: Utilities have managed small-scale energy efficiency programs for more than two decades, but the programs can be expanded through partnership with a financing provider that provides capital and loan administration.
Some of the suggested program solutions are:
- Creating uniform national program standards to create homogeneous loan pools that are large enough to attract investors and private capital when the securitization market recovers.
- Engaging consumers by focusing on programs that bolster consumer confidence and facilitate convenient transactions.
- Tipping replacement decisions toward energy efficiency when a failed appliance, such as a water heater, needs an immediate replacement.
The current economic climate poses significant challenges to making progress on this issue. Homeowners are intent on reducing their debt load; state and local governments are facing budget crises; and the mortgage meltdown has all but crushed the securitization market. However, the report states that a combination of public programs and private financing can overcome these hurdles by building on existing successes, looking for best practices and carefully identifying mission-oriented investors who will be willing to act as first movers in the private sector.
The report is the result of a Financial Innovations LabTM led by the Milken Institute in conjunction with the Energy Programs Consortium and with the support of the Ford Foundation. This first-of-its kind gathering of investors, lenders, federal and state energy officials, energy efficiency experts, and leaders from utilities, clean tech companies, foundations and community organizations was held in November 2009.
Financial Innovations LabsTM are part of the Milken Institute′s continuing leadership in promoting financial innovations to help solve ongoing social, economic and environmental challenges.