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February 8, 2018
The following article is part 2 of an article about changing building codes and non-energy benefits.
Click here to read Part 1.
Code changes to include energy efficiency measures in construction come with a cost. While there are quantifiable financial benefits to these upgrades in terms of energy savings, there are also three general areas of non-energy benefits – economic, social, and environmental. And NEBs that accrue in these areas can have an impact at three different levels: homeowner/ratepayer, utility and society. Wouldn't it be better if we could analyse the cost of an energy saving project with a more inclusive list of benefits?
Payback is a Red Herring Being Eaten by a Straw Man
Payback makes some sense, in some cases. Here’s one: when you’re pitching a high-efficiency boiler to your client who has a 1946 coal boiler converted to burn oil and it sucks back fuel at 26 percent efficiency (true story). But it doesn’t make as much sense at all when you start talking about a more comprehensive series of improvements, because many NEBs that have a discernible value (improved air quality, extended lifespan of house, lower maintenance costs) are left out of the equation.
Confounding the situation are misconceptions about the value of existing houses in existing neighbourhoods. I’ve been in a situation where, after working with a homeowner over the course of a few weeks, developing a plan for a deep energy retrofit, we had contractors to come in and bid. Without considering the homeowners priorities or gathering any information, one contractor said: ‘Ya know, this renovation is gonna cost you more than 30% of the value of the house, it’s not worth it. You’ll do better to raze it and build new on the same site, or sell it and I’ll build you a brand new house in a brand new subdivision clear on the other side of town.’
But what the client wanted was there, on that exact site.
They adored their funky old house, and the neighbourhood had all local amenities they so highly prized. They just didn’t want to use so much energy.
NEBs and the Value of Existing Houses
I can see where there could be greater potential value in NEBs where a community experiences little or restricted growth in terms of new housing versus an area with booming housing starts. For example, there are small towns throughout Atlantic Canada and the New England states where there is minimal new construction happening and there are 100 year old houses, some of which have interesting heritage value, all of which have significant resources tied up in them. These houses have intrinsic value to the community that doesn’t relate to energy use, but most of them are energy hogs.
In contrast, in areas where there is lots of growth we need to calculate the real cost, over the life of the house, of greenfield development. Land prices are going up. New construction costs are going up, for labour but especially for materials. Some communities have finite land resources (ie, coastal cities built on peninsulas or hard up against an agricultural buffer or a geological feature). They can’t do anything but build out and expand, which means new subdivisions, new roads, new schools, new highways, new water and sewer services. All of which spell growth and jobs, but the unfettered growth does not anticipate the tipping point where fuel costs, material and labour costs outpace the value of a new build.
The key point is that houses don’t exist in a little microcosm of their own. They exist in a community, and the value of the resources that are bound up in established neighbourhoods needs to be addressed and calculated into the decision between making a renovation or building a new house on the same site, or in a new greenfield development.
NEBs Look Great on a Fixed Income
As the population ages, more households will be managing budgets based on fixed incomes. For homeowners with young children, future energy costs collide with future education costs – both guaranteed to continue to increase. Whether or not they can afford the energy costs of their existing home will be one of the main deciding factors in a stay-or-sell decision. Energy security, predictable energy costs and increased value in existing homes translates into more stability for homeowners.
What happens when the owners can’t afford the fuel bills and the ongoing and increasing cost of heating the house drives down the asking price as it drives away potential buyers when it goes up on the market? Long-term private ownership of housing translates into a solid tax base for municipalities, who can be confident of their long-term plans, policies and budgets for school districts, community centres, and other good things that make communities desirable to those who live there and those who don’t…yet.
How To Value NEBs?
There are some reference tools developed for NEBs in institutional/commercial high-performance building settings, but again, quantifying things like reduced absenteeism, health care claims and improved productivity are much more straightforward than figuring out how much value there is in making a living room more comfortable to watch TV in.
We’ve played a little bit with coming up with a way to help our homeowners determine for themselves what NEBs are important to them and what kind of value they attribute to each one for a specific measure. When I was struggling to articulate this concept to my biz partner, Hal Richman, he snapped his fingers and said: “Oh, ya. Utility theory. I studied it with one of the leading experts. We can work this.” Huh, I thought, how fortuitous…
We laid out the design for a NEB calculator for homeowners that could be expanded to include much broader societal benefits. As valuation of existing homes, and the fabric in which they are woven becomes more important than the single bottom line, we could see using such a calculator to help enact changes to consumer lending policies, the ability of municipal units to fund or promote PACE-like bond programs, and how we view our investment in our house and our communities.
Here’s a theoretical example of the NEBs I would choose for a combination solar thermal system for my house. The left column in the table below lists out some NEBs. The next three columns show how I rate the NEBs that are important to me. And I need to decide: is each NEB more valuable, less valuable, or as valuable as the energy savings expected from the contribution my solar thermal system will make to space and water heating? The next column, the multiplier, eventually gets tied into some invisible magic that Hal and our economist build based on utility theory and stochastic modeling. Don’t ask. In a nutshell, it’s all groovy probability and statistics. They have fun with it, and they leave me out. I’m OK with that.
So, when I, the user of this tool, click on more, less, or as valuable, the appropriate multiplier will automatically calculate the value of the NEB using the estimated energy production of my solar thermal system over a period of time. Let’s use 1 year in our example. The time frame could be the duration of a lease-to-buy scheme, or a time frame determined by my utility’s DSM program. It could also be over the expected lifespan of the equipment (in this case 20 years) if I’m purchasing it myself or putting it on a mortgage.
Let’s say my solar thermal combination system contributes 30 percent of my space heating and 70 percent of my domestic hot water here in Nova Scotia. And let’s say my annual savings in fuel oil are estimated to be $1000. And I think that using solar energy is more valuable to me than saving energy in general. I also think that this solar thermal system will increase the value of my home and that is just as valuable to me as the energy savings. So I can add $2090 to my annual energy savings to truly represent the value that I see in a combination solar thermal system. The multiplier and the values shown are just by way of example.
Even if we had real numbers in there, it’s all theoretical, because the bank most likely won’t accept this analysis as the basis to loan me money to put the system on my house, as they can’t put a lien on my personal value system. But, really, what I’ve just presented is exactly the same as a business plan that includes projections on sales and the value of goodwill to the business.
Code changes in Canada and the US are increasing the cost of building and renovating houses, but the most expensive upgrades are going to provide the longest and greatest return when we look at both energy and non-energy benefits. The payback might not be immediate, but in the long run it could mean a higher number of better performing buildings in established neighborhoods, lived in by healthier, happier people.