You might think the case for energy efficiency has been well made by now. After all, people have been talking for years about how relatively simple actions in buildings—climate controls, new windows and doors, better boilers—can produce dramatic results, and are effectively self-financing.
A 2009 McKinsey study found that efficiency measures across the U.S. economy could reduce energy consumption 23% by 2020, saving $1.2 trillion. And it said the residential sector could account for 35% of that, including both homes themselves, and the appliances and devices within them.
The problem, as McKinsey pointed out, is that those potential savings are scattered among thousands of different sites; it is hard to measure and verify savings; and you need to invest capital up front—an estimated $520 billion to achieve the $1.2 trillion bounty.
Those obstacles are the point of two new studies on energy efficiency. The first aims to dispel some of the uncertainty around energy-efficiency investments, with the hope of attracting private lenders into the market. The second lays out an alternative financing method— "on-bill financing," which could help catalyze efficiency investments at a house-to-house level.
The first report was commissioned by Deutsche Bank Americas Foundation, the charitable wing of the German bank, and Living Cities, a nonprofit alliance. It looked at 231 projects at multi-family buildings in New York, comparing their pre- and post-project energy use, and the estimates made by auditors before the work was carried out.
Cary Hirschstein, principal at HR&R Advisors, one of two consultancies that carried out the study, says a lack of certainty about energy savings has discouraged private lenders from making retrofit loans, despite the general understanding that the work delivers results.
"Despite three decades in investing in energy efficiency, there was really no comprehensive analysis of efficiency savings projections, and what really happens to buildings as retrofits are done," says Hirschstein.
By analyzing a wide range of data, the researchers were able to set thresholds for the sort of savings could be achieved given the type of building, and a particular set of efficiency approaches. Hirschstein says there are no "magical formulas." But the research helps to correct for biases, including that auditors may overestimate potential savings to make their work seem more valuable.
The McKinsey study found that multi-family buildings could yield energy savings of up to $20 billion by 2020. "All it takes is for lenders to recognize energy savings projections," says Hirschstein. "If we allow these buildings to carry more debt, it can be used as capital to undertake the work to produce the savings. There is a huge potential out there if the market picked this up."
Meanwhile, the Environmental Defense Fund has written a report for the California Public Utility Commission that aims to create the first statewide scheme for so-called "on-bill financing." Under the program, home-owners and renters would pay for energy-efficiency projects in installments on their energy bills, obviating the need to lay out cash ahead of time.
EDF proposes that a utility or contractor would identify possible energy-efficiency work, and help householders apply for a loan with a bank. A third party would assure that the potential savings from the work would be greater than the debt; the household would agree; and then the contractor would do the work. Customers then would pay off the loan, effectively as a surcharge on their normal bill.
The advantage of these programs is that they ease the repayment process, as customers already have an existing billing relationship with their energy provider, and utilities can assess customers’ energy use and payment history. EDF estimates that a 1% adoption rate in California could produce investments worth $3 billion a year, and generate thousands of jobs at the same time.
Many people think energy efficiency is a more achievable, and less contentious way, of cutting energy use and carbon emissions than switching to new forms of power production. With a bit of luck, these studies will go some way toward making energy efficiency a reality.