Best of both worlds

Canada vs Germany: Energy efficiency

According to the World Energy Council, the average Canadian uses more than twice the energy of the average German. You read that right. Twice.

Guelph’s Community Energy Initiative aims to cut per-capita energy consumption by 50% from 2006 levels by 2031. Sounds ambitious, doesn’t it? However, you could rephrase that to say that Guelph is on a journey so that by 2031, it will arrive at the place that Germany occupied two decades before.

That sounds a lot less ambitious.

As I’ve explained in three of my last four posts (this one, this one, and this one), Guelph is embarking on a program called GEERS – Guelph Energy Efficiency Retrofit Strategy – to ensure that, despite an anticipated 50% increase in population, our overall energy consumption will actually drop from 2006 to 2031. GEERS will start by overhauling our residential buildings, yielding 20-40% decreases in energy use, and move on to the ICI (Industrial, Commercial, and Institutional) building segments after that. GEERS aims to retrofit between 2,000 and 3,000 homes per year between now and 2031. By the end of that time, Guelph will start looking a lot more like Germany as far as building energy efficiency goes. Over 38,000 dwellings will have been touched, and the sustained annual energy savings will be $120 million.

That’s a huge boost for an economy the size of Guelph’s. However, that doesn’t even speak to the direct and indirect benefits of the program itself. During the course of the 16 years that the program runs, it will result in over $30 million per year of spending, most of which will stay in the local economy. That’s a total of about half a billion dollars invested in Guelph, all in the name of keeping more energy dollars in the city.

The first beneficiary will be construction contractors. Based on what Guelph’s building department has told me about the volume of building permits for renovation work, GEERS could increase the size of this market by a factor of ten. If we assume it takes a team of three labourers one week to complete a retrofit project, the volume I mentioned above will yield somewhere between 120 and 180 full-time labourer jobs. Supervisor jobs will be over and above that amount, probably 30-45 jobs, to say nothing of management and back office positions.

Construction contractors will also see a profitability boost, since they won’t need to incur sales and marketing costs to win jobs – they’ll see a steady stream of projects from GEERS just for signing up, as long as they maintain quality standards. They will also see better utilization of human resources and equipment since there won’t be any staff sitting idle waiting for deals to close, giving another profitability fillip.

Contractors will also see a boost to their current, non-retrofit business. Homeowners that have been putting off a major renovation will likely decide to jump, once they can get a contractor mobilized to their home for GEERS. Let’s face it – most folks don’t get excited about the prospect of better insulation, weather stripping, furnace, water heater, thermostat, and (to a lesser extent) windows. However, if you already have a contractor on site, you can save big on extending the project scope to include stuff that GEERS won’t cover – granite countertops, new kitchen cabinetry, and a bathroom makeover. GEERS will provide a direct stimulus for work like this.

Along the same lines, financial institutions will see benefits. Since GEERS won’t cover this extra work, homeowners will use traditional methods of financing home renovations. This means that the big banks will see more home equity line of credit business.

Suppliers will see a boost as well. GEERS will cut deals for bulk pricing, and will likely mandate local warehousing operations to ensure reliable supply of product. Such operations will bring more jobs to Guelph. Some suppliers may even need to set up manufacturing facilities – a Euro-spec window producer is the most likely of these – bringing even more jobs.

GEERS will also help out the utilities with their Conservation and Demand Management (also called “Demand-Side Management”) programs, which some prefer to call “negawatts”. Paradoxically, it costs the utilities less to accommodate new demand not by bringing new energy supply online, but by reducing consumption. (More on that voodoo in a future post.) At any rate, the utilities have incentives available for many energy-saving measures, and GEERS will be implementing some of these exact measures. That means more dollars injected into the program, lower costs for the property owner, and a big fat check mark beside utility energy efficiency targets.

Contractors, banks, suppliers, and utilities – not coincidentally, the same cast of characters that I spoke about previously in the context of the EcoEnergy for Homes program – should all rejoice when GEERS hits the streets. But wait, there’s more.

GEERS may well stimulate the local real estate market as well. If a seller can give their home a boost in value which is effectively free, why wouldn’t they? We may even see people making a habit of buying a home, doing a GEERS retrofit and other quick face-lift measures, and flipping it again for a tidy profit. The market may take some time to adjust to the idea of the extra ongoing cost of the LIC, but soon it will become as pervasive as water heater rental.

Prevailing wisdom is that being green comes only at a significant cost, either in dollars, lifestyle, or comfort. GEERS gives the lie to that idea. It will deliver a stronger economy by cutting the flow of dollars bleeding out of the city to pay for imported energy, and it will deliver a stronger economy by creating well-paying, long-term employment for the energy efficiency industry. It will also take a big bite out of our collective greenhouse gas emissions. The best of all possible worlds.

 

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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.