The Economic Benefits of Residential Energy Efficiency, and Policy Solutions to Improve It
A plurality (38%) of American electrical consumption is residential, surpassing both the commercial (37%) and industrial sectors (25%). While industry and business have incentives to reduce electricity usage to improve their balance sheets, individual renters and homeowners often lack the incentives or ability to address their high energy costs, resulting in impoverishment of the poor and job losses.
The Split Incentive and Energy Poverty
Roughly 34% of all American households rent. Landlords typically pay for heavy energy use appliances such as refrigerators and hot water heaters, even as renters are responsible for electricity costs, the logic being that tenant consumption habits are largely responsible for energy use, making it an unfair burden to place electricity usage on landlords. A 2009 study found that homeowners were more than three times as likely to have energy efficient washing machines and dishwashers as renters, and twice as likely to have an energy efficient refrigerator. There’s a massive incentive for landlords to maximize profits by purchasing cheap appliances, knowing they won’t be liable for its electricity costs. That gap in incentives between the landlord seeking cheap capital upgrades and the tenant wanting a cheap electricity bill is called the split incentive.
Renters rarely if ever see their unit’s electricity bills before renting, causing electricity costs to be a crapshoot, sometimes burdening low income renters with unexpectedly high electricity costs due to inefficient appliances, regardless of personal consumption habits.
Among owner-occupied properties, high energy use is often synonymous with poverty. Homes are often passed down through families. Older homes are typically less efficient than newer homes due to substandard insulation, and older appliances are less efficient than newer appliances. It is common for low income homeowners to lack access to credit to finance new HVAC systems or blown insulation, while suffering under the crushing burden of high utility bills. Not only do lower income individuals spend a higher percentage of their income on electricity, but they spend more per square foot on electricity. Those high bills not only exacerbate income inequality, but also dampen local economic activity, as money spent on electricity is money not spent at local retail stores or restaurants.
As the adage goes, “it’s expensive to be poor.” In few areas is that truer than in electricity bills.
Expenditure Shifting and Job Creation
The electricity sector has one of the lowest jobs per unit of economic output ratios of any industry. Power plants that power tens of thousands of homes can be staffed by skeleton crews of a few dozen employees, even as they sell hundreds of millions of dollars of electricity.
Long term savings and reduced spending on energy increases consumer spending in other areas of the economy that generate more jobs per dollar spent, as money spent on energy has an opportunity cost. While a $200/mo electricity bill would go towards hiring less than a hundredth of a person at a power plant, spending an extra $2,400 a year on dining or massages would go much further towards hiring a new employee in the service sector. Thus, energy efficiency create jobs outside of the construction sector that performs efficiency upgrades.
Not only do weatherized homes save money on electricity, but medical expenses fall after weatherization due to more livable indoor temperatures, creating a 2:1 economic benefit for each dollar spent on Federal weatherization programs.
Industrial Job Creation from Energy Efficiency
Lower residential electricity usage reduce upward pressure on electricity prices. Because industry relies on low input costs, increased residential energy efficiency positively impacts industrial employment, as energy intensive industries concentrate in jurisdictions with low electricity prices. Long term, comparatively lower electricity prices increase America’s industrial competitiveness.
Local Policy Solutions
Public Electricity Bills.
Not only would public electricity bills serve as a way to “out” chronic energy wasters, encouraging them to clean up their act in the face of public pressure, but it would allow consumers to see their energy costs relative to neighbors and realize their bills aren’t normal. Public bills would also allow tenants to understand the full costs of moving to a residence before they sign their lease, encouraging landlords to improve energy efficiency to attract tenants, and preventing surprise bills. New York City is considering a trial version of this, energy auditing buildings and “grading” them based on efficiency, to encourage energy wasters to clean up their act.
Said transparency would also give renewable energy companies and energy efficiency companies the ability to easily identify potential customers who could greatly save by adopting their products.
Black market marijuana production is also a notable contributor to residential electricity use. Public power bills would identify growers, forcing growers to either formalize their operations in legal states or risk police raids. It should be noted that the legal marijuana industry is considerably more efficient than the black market, as lower marijuana prices due to legalization are forcing the adoption of more efficient lighting and outdoor grows, reducing the energy consumption of the sector.
Public-Private Partnerships for Financing Low-income Improvements
Many low income homeowners cannot afford to finance energy efficiency improvements but would save massively from said improvements. Local government partnerships with financial institutions would allow for individuals with poor access to credit to access to access low interest home improvement loans to improve appliances or home insulation, saving money and improving their home value.
Building Codes
While updating building codes are the most obvious solution for improving residential energy efficiency, the energy efficiency improvements from said upgrades are long-term, and extremely slow. Only 10% of the American housing stock has been constructed since 2010, while 35% was built before 1970. Modern building codes are already massively improved relative to pre-1970s codes, and updated building codes increase the cost of constructing new housing, which in itself can deter new construction and the efficiency gains of replacing old building stock with new homes.
While the construction of new housing with modern, highly efficient building codes is important for ensuring residential energy consumption falls long term, simply improving codes does not cause significant energy consumption changes in the short term.
Federal Policy Solutions
Expand Energy Efficiency Tax Credits.
Energy efficiency tax credits in the US revolve around the EnergyStar program, and go nowhere close to offsetting the full cost of the improvement. For example, a new central air conditioning system costs $4K-$7K, but the federal tax credit for installing one is $300.
There is precedent for more generous tax credits in the tax code. As of 2020, the residential Solar Investment Tax Credit is 26% of the cost of the system, with no cap, far surpassing the capped credits for energy efficiency. Said credit has turbocharged the growth of a residential solar industry that employs over 250K Americans. A more comprehensive energy efficiency tax credit similar to the solar ITC would turbocharge investment in efficient appliances by homeowners.
Expand the Department of Energy’s Weatherization Assistance Program To Small Scale Landlords
Since 1976, the US Federal government has offered a program to improve the efficiency of owner-occupied homes owned by those under 150% of the poverty line, performing audits on usage, replacing heating and air conditioning if needed, and improving insulation. Roughly 30,000 homes across the US are weatherized using this program every year, seven million in total since the program began.
The DOE’s Weatherization Assistance Program is funded at roughly $220 million per year. It should be expanded in funding and scope to include rental properties from mom-and-pop landlords, which hold over half of the US rental homes but often cannot afford expensive capital upgrades. Over half of Americans under the nation’s median income rent and are thus unable to benefit from Federal weatherization initiatives, thus living in colder and less efficient homes. Federal weatherization assistance to small scale landlords could help improve energy efficiency in millions of rental homes.
