Babylon, N.Y., has introduced the Long Island Green Homes program to provide low-cost loans for home energy efficiency projects. In Austin, Tex., and Boulder, Colo., community energy demonstration projects aimed at deploying new smart-grid technologies have been developed. And similar initiatives are under way in Vermont and Connecticut.Why are these a good idea?
Portland is proposing a new $5 million to $10 million pilot project that will loan about $6,000 to every property owner within a designated neighborhood. The money will pay for home energy audits, heating, air conditioning and ventilation system upgrades, and weatherization in 500 to 1,000 homes a year. Borrowers will then repay the loan over 20 to 30 years through a monthly charge added to their utility bill.
One challenge to getting energy-saving initiatives off the ground is that the presumed social benefits arising from improved energy efficiency (fewer greenhouse gases, for instance) are often at odds with the rational economic calculus of homeowners on the ground.Actually, I disagree with that statement. As I see it, the problem isn't that homeowners are being rational and there are external benefits to society that they don't take into account, but rather that they aren't doing the financial calculus correctly.
Every month the homeowner must pay both a mortgage and an energy bill, but rarely does a homeowner (or the bank issuing the mortgage) take into account energy costs of a home when buying. Most homeowners want a 2 year payback on projects (or a 50% rate of return) while they are happy with 5% rate of return on their investments. They are willing to get a 5% return investing in an electric utility that wants to build a new energy plant and yet won't invest in home improvements that reduce energy and get greater than a 5% return.
Until homeowners take energy costs into account when buying a home, there is value in cities attaching loans to property titles, and utility companies attaching loans to monthly utility bills in order to fund these energy upgrades that have a good rate of return. Hopefully in the future homeowners will actually do the correct rational economic calculus and include energy costs into account when purchasing homes and banks will be willing to add the cost of energy renovations into mortgages and then these measures by local governments will be unnecessary.