Rethink

In my post of two weeks ago, I described some of the issues with past residential energy efficiency incentive programs, particularly EcoEnergy for Homes. I promised more info about a program Guelph is devising to address those issues. After a one-week delay to trumpet a good news story (and after resisting the temptation to devote this week’s post to celebrating recent accolades from the Toronto Star), here are the goods on GEERS – Guelph Energy Effficiency Retrofit Strategy.

Nearly a year ago, we commissioned Garforth International Inc. to create a plan to tackle the problem of energy efficiency in Guelph. This plan would rethink past incentive programs and create an entity that would address their shortcomings. The plan would be tied directly into the targets for residential energy efficiency that were set in the Community Energy Initiative. That plan is now complete and we’re working through the process of implementing it.

The two key issues with EcoEnergy for Homes were economics and complexity, so today I’ll look at how GEERS will address the first of these.

Homeowners are reluctant to invest in energy efficiency because the payback period may be longer than the length of time they expect to stay in the house. The first of the two houses I retrofitted under EcoEnergy for Homes had a project payback of eight years. Had I known that I would be moving out of there in a few short years, I wouldn’t have gone ahead with the project. When I sold the place, I had to pay off the home equity line of credit I’d used to pay for the project. I have no idea what the value of the house would have been absent the retrofit, but my best guess is that I wound up short a few thousand dollars.

GEERS will likely take advantage of a financing mechanism called Local Improvement Charges (LICs). This tool has been used to facilitate a user-pay model for municipal infrastructure. If a street requires new pavement, water mains, and sewers, LICs can be used to have the property owners on that street pay for the project, rather than every citizen in the entire municipality. I moved into a new house back in ’99, and shortly afterwards my street was torn up, new water mains were installed, new sewers went in, and new asphalt and sidewalks were laid down. My next property tax bill had a new line item: A Local Improvement Charge to cover the cost of these improvements. At that time, LICs were mandatory, and could only be applied to traditional municipal infrastructure.

The scope of LICs changed in 2012, allowing them to be used on a voluntary basis for energy projects. A property owner could, if the municipality permitted LICs for this purpose, request permission to undertake an energy project – a major energy efficiency retrofit including insulation, triple-glazed windows, and a high-efficiency furnace, say – and pay for it on their tax bill.

The amortization period would be matched to the usable life of the asset, so twenty years or so. The interest rate would be somewhere around what the municipality pays for debt. That’s a way better deal than you would get on a home equity line of credit. Also, in the case of energy efficiency retrofits, the payments match up much more nicely with the savings on utility bills.

Another advantage for the LIC – and probably the post important one – is that the financing is attached not to the property owner, but the property. The significance of this may not be evident at first, but it becomes clear when you think of what happens when the property is sold. With traditional bank financing, like my home equity line of credit, the debt must be completely repaid when the property changes hands. With the LIC, the financing is transferred automatically to the new owner when the property tax roll is updated to reflect the new ownership.

This completely changes the decision process for the property owner, Now, I no longer have to worry about whether the retrofit project will pay for itself before I choose to pull up stakes. I complete my project in year one, the savings on my energy bills start right away, as does the charge on my tax bill. If everything works out properly, the savings are bigger than the LIC payment and I wind up ahead – all without paying anything out of my own pocket. I don’t have anything to do with the initial sticker price of the retrofit project, so payback period no longer means anything to me. I get a more comfortable home, a more valuable home, lower utility bills, all for a modest ongoing charge on my property tax bill.

Here’s the kicker. The LIC is fixed – it will never increase. However, my savings stream will grow over time since energy costs are rising – faster than inflation. That means that every year, my project – I hesitate to call it an investment, since I didn’t actually invest any money – is worth more. If you look at page 18 of Ontario’s Long Term Energy Plan, you’ll see that the average monthly household electricity bill will rise by nearly two thirds, from $137 to $210, over the 18-year period from 2014 to 2032. And that’s just electricity – we haven’t even talked about the savings on natural gas bills. The value of the project just keeps going up and up.

LICs have their detractors. Mortgage providers have expressed concern over the fact that they represent a senior debt obligation, meaning that a homeowner in financial trouble would have to pay off the LIC before tackling the mortgage. That is true. However, the LIC reduces household energy costs and so actually reduces the risk of the mortgage, since the homeowner now has lower utility bills. That means that every year, the homeowner has more money, not less, in their pocket than their less forward-thinking neighbour that decided to give the LIC retrofit project a miss. More money makes them less likely to run into financial trouble, so they’re a better credit risk with each passing year. Mortgage lenders should cheer, not jeer.

Next week I’ll delve into the way GEERS will make the energy retrofit process much simpler. Stay tuned.