Value Energy Efficiency Beyond Cost Savings by Distilling the “Diffuse Benefits”

Interesting ideas emerge from studying the value of energy efficiency beyond the financial return on individual measures from utility cost savings.


nebc-fec-2013-logo-stack-medThree people, three perspectives on measuring the non-utility and non-financial benefits of energy efficiency:

Fiona Douglas-Hamilton, founder of SEEC LLC (Social, Environmental & Economic Consulting), wants us to recall how value is determined in our economy: supply, demand, and price. She translates that to the residential real estate market, where her organization works to accurately record the value of green building.

She says the old formula for evaluating energy efficiency – preferring it only if it is the lowest-cost energy resource – is not reflective of our times. Energy efficiency enters into every aspect of the value formula; it enhances residential value far beyond utility cost reductions.

Home appraisers are starting to recognize that value. Unlike a few years ago, they can now apply a capital approach to non-revenue-generating properties. Appraisers need data to back their appraisals. SEEC works with the Multiple Listing Service, a relationship that allows SEEC to track the market value of green homes over time.

Energy Star homes, for example, sell for 9 percent more, nationally, than comparable homes without the green label. In the Pacific Northwest, where electricity is cheap, Energy Star homes still sell for an 8 percent premium. Ms. Douglas-Hamilton cites a recent study that revealed that people who already live in efficient homes would willingly pay 10 percent more for them the next time they buy.

But Energy Star ratings, like stricter building energy codes, meet continuing opposition.

“The building industry will always push back because their business model depends on the status quo,” Ms. Douglas-Hamilton says.

Another barrier to more efficient homes is cost, but she says it could be easily offset with a portfolio of on-bill financing, low-interest lending, rebates and incentives. She implied that creditors should loosen up when it comes to financing energy efficiency.

“We know we can lend unsecured,” Ms. Douglas-Hamilton says, “just look at the credit card industry, where trillions are lent unsecured.”

Patrick Leonard, Paladino and Company, cites examples of building projects where the efficiency measures were justified by their value above and beyond financial cost savings.

PNC Financial started building green bank branches in Pittsburgh in 2006. At those branches, PNC found that bank deposits were about $3 million higher than comparable branches without energy efficiency features. Sales per employee were higher — and, yes, energy costs were lower.

PNC Place, an office building built on spec, is where “the energy efficiency was all about tenant amenities,” Mr. Leonard says. A green lobby appeals to prospective tenants more than does a highly efficient HVAC system, and PNC Place has both.

Beyond the perceptions of potential tenants, there were direct financial advantages. A more efficient building meant smaller mechanical systems, which freed up more rentable square footage. It also allowed each floor to have higher ceilings, which helped the building lease at a premium. When the building sold, its selling price set a record for the city.

Vince Schueler, Energy Program Coordinator at Washington State University, has been studying the “diffuse benefits” of energy efficiency – what insiders know as non-financial and non-energy benefits. Unlike “distilled benefits” (measurable, immediate benefits), diffuse benefits are difficult to measure and even more difficult to attribute with certainty.

That difficulty stands in the way of attracting the needed capital to achieve energy efficiency on a larger scale. Getting to the next level will require long-term investments if we are to achieve whole house retrofits and deploy efficiency in hard-to-reach market segments like rentals, small businesses and low-income households.

“Energy efficiency has a surplus of value but a shortage of willingness to pay,” Mr. Schueler says. Diffuse benefits generate value; but only distilled benefits generate capital.

He identified several potential sources of funding for energy efficiency and ranked them by their current levels of investment. At the top of the list are those who already provide considerable funding, but place little emphasis on diffuse values.

Utilities, for example, invested $300 million in energy efficiency in 2013, according to ACEEE’s recent scorecard. If utilities shared common criteria for deciding whether to invest in energy efficiency, and how much to pay, they could invest much more.

Governments at the federal, state and local levels are better able to pay for diffuse benefits. Government investment is about half of what utilities invest. But government funding is episodic and political; it suffers from occasional breaks in funding.

At the bottom of the list of potential funding sources are private sector interests, such as healthcare and insurance companies, who value diffuse benefits but are the least active investors in energy efficiency. If the efficiency industry could find better ways to quantify the value of diffuse benefits, the private sector could invest much more in energy efficiency.

“If valuing diffuse benefits were easy, the markets would already have done it,” Mr. Schueler says.

Fiona Douglas-Hamilton, Patrick Leonard and Vince Schueler spoke at the Washington Future Energy Conference last week. Patrick Leonard and Vince Schueler also were panelists for “Energy Efficiency Roundtable: Building the Business Case” which the author facilitated.

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About the Author:
http://energypriorities.com
Denis founded Energy Priorities Magazine on Earth Day 2004 and hosts the radio program by the same name distributed by NPR. He has authored hundreds of cleantech articles for a variety of publications, ranging from Sustainable Industries Journal to the New York Times, and he has been interviewed by major news outlets, including FORTUNE and MSNBC. He lives in the Seattle, WA area. Follow him on Twitter: @Cleantech. Contact him here. Disclosure information.
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