Affordable Housing with Unaffordable Energy Bills

U.S. public housing uses almost 40 percent more energy per square foot than privately owned housing. Moreover, as a nation, we spend a total of ten times more on utility bills for affordable housing than we do on total government investments in energy efficiency that could aggressively lower those utility bills. The result is a terrible irony: affordable housing saddled with unaffordable energy bills that burden low-income families and the public housing agencies that assist them.

Driving greater energy efficiency into our affordable housing stock is an opportunity for a win-win, with the potential to lower this bill in the short run and hedge against future rises in energy prices in the long run. The current stock of public housing has plenty of low-hanging-fruit to gain from efficiency retrofits. However, there are many hurdles that stand in the way of increased energy efficiency in our affordable housing stock, including constrained budgets. PHAs have said they need to spend the majority of their retrofit dollars on life-safety issues. So what is to be done to capture all those cost-effective efficiency upgrade energy savings?

RMI’s Solutions to Hurdles white paper offers some insights.

Whole-Systems Design

Perhaps the biggest hurdle is budgeting for whole-building efficiency in both new construction and renovation projects. Historically, PHAs built as much housing as possible as inexpensively as possible, and suffered high operating expenses as a result. Solving the problem later wasn’t easy either, as energy-efficiency retrofits had to compete with life-safety issues for scarce dollars.

The best and most cost-effective approach is to build superefficient housing from the get-go, using a whole-system design approach, where the combination of higher-upfront-cost individual energy efficiency features (adding insulation, high-performance windows, etc.) can dramatically reduce overall mechanical and electrical systems costs, such that total first costs are comparable to the standard. For example, the Enterprise Green Communities project criteria provide a guideline to affordable housing developers for building greener buildings, which use less energy and water, have a smaller or positive impact on the environment, and offer health benefits and a better quality of life to their residents. A recently updated study by Enterprise Community Partners and Davis Langdon showed that meeting those criteria—by implementing energy efficiency and sustainability measures at the front end of a project, including achieving a Home Energy Rating System (HERS) score of 85, or 15 percent better than code—adds only 2 percent over the typical development cost.

Programs for financing whole-system efficiency in public housing: For renovation projects, the goal should be to capture the lower total cost of ownership afforded by deep, comprehensive whole-building-system retrofits. To do this, PHAs can take advantage of the U.S. Department of Housing and Urban Development’s (HUD’s) Capital Fund Financing Program (CFFP) and its Operating Fund Financing Program (OFFP), which exchange a string of utility payments for an immediate infusion of capital that reduces utility costs long term. A representative of Sacramento Housing Authority—which recently took a whole-systems design approach instead of the standard piecemeal renovation—noted in Solutions to Hurdles, “By doing a complete rehab, we’re basically providing long-term preservation; these units are preserved for the next 25 or 30 years, whereas using the piecemeal approach, it may only be a few years before you need something else.”

Programs for financing whole-system efficiency in private affordable housing: To encourage energy efficiency in new and retrofit affordable housing provided by private developers, those developers need to reap the immediate rewards of their efforts to achieve lower utility costs. Residents in government-subsidized affordable housing must not pay more than 30 percent of their income on housing, including utility costs. When these residents pay their own utilities, a preset utility allowance reduces their rent payment to the owner so that the resident’s total housing cost doesn’t exceed the threshold. But this disregards the actual energy efficiency of the housing, so developers who provide superefficient housing—which has lower utility bills—see their rent received from residents lowered by the utility allowance, which exceeds the actual lower utility bill those residents pay. Thus a housing agency sacrifices first-year savings until they generate enough energy consumption data to get a utility allowance adjustment. If the IRS and HUD were to accept an engineering-based utility allowance calculation for private affordable housing developers (which is currently accepted for PHAs), those developers could reap that first year of savings. Confidence in the engineering-based utility calculations could be increased by more transparent, consistent energy modeling.

Money Growing on Trees

One of the most cost-effective ways to save money in affordable housing is retro-commissioning, a systematic process of analyzing an existing building to improve comfort and energy efficiency by correcting for deficiencies in design, construction, equipment, and maintenance. Savings are not reaped from equipment replacements but rather by simply ensuring that existing systems are performing as designed. Meta-analyses done in 2001 and 2005 by Lawrence Berkeley National Laboratory showed that a $0.30 per square foot investment reduced energy consumption by a median of 16 percent, and had an average payback of 1.1 years, well under the two-year utility allowance adjustment period—meaning retro-commissioning can actually earn money for the PHA.

Energy Performance Contracting

HUD’s Office of Public and Indian Housing has created an energy performance contracting (EPC) program to encourage energy efficiency within the public housing stock. EPC is an innovative financing technique that uses cost savings from reduced energy consumption to repay the cost of installing energy conservation measures. Normally offered by energy service companies (ESCOs), this innovative financing technique allows building users to achieve energy savings without up front capital expenses. The costs of the energy improvements are born by the performance contractor and paid back out of the energy savings.

Although small public housing agencies (<500 units) cumulatively account for 30 percent of total public housing stock in the U.S., they often do not have enough units to make the project profitable enough to engage an ESCO. Thus, even though small PHAs can technically engage in HUD’s EPC program, it is much harder to find an ESCO with which to contract.

To solve this challenge, HUD offers EPC training for small PHAs, to teach them about the basics of energy performance contracting and the benefits of the program to the PHAs. HUD is piloting an EPC-EZ program to simplify the process. In addition, innovative small PHAs are creating consortia to pool their human and technical resources and to create a larger total building stock to be financially attractive to ESCOs.

Finding Funding

Besides the HUD programs mentioned above, other funding sources exist if people know where to look. Utility programs can be a major source of funding. For example, Sacramento Housing and Redevelopment Authority (SHRA) reaped over $1 million from Sacramento Municipal Utility District (SMUD) for reducing energy consumption in multifamily housing by 25–30 percent.

Combination financing can include federal, state, or local funding (such as the Weatherization Assistance Program and federal and state tax credits), private (such as energy performance contracting), and utility incentives. By combining a private EPC investment, utility incentives, and internal capital funds, Boston Housing Authority was able to capture 31.5 percent total energy savings, which was deeper than the savings identified in the EPC.

Finally, an emerging source of funding for residential energy efficiency upgrades are carbon offset credits—an avoidance, reduction, or sequestration of carbon dioxide—that must be measurable, permanent, additional, independently verifiable, and trackable. Maine State Housing Authority is pioneering a standard for tracking and verifying offsets associated with residential energy efficiency improvements and has contracted to sell carbon credits from home weatherization to automaker Chevrolet for $750,000. As the residential energy efficiency carbon offset market matures, PHAs can capitalize on the synergy between the measurement and verification required for energy performance contracting and carbon offsetting.

Affordable and Efficient is Possible

A recent Passive House in chilly Whistler, British Columbia shows that even a home that slashes energy use by 90 percent can be affordable housing. The prefabricated home, which meets requirements for Whistler’s Price Restricted House Initiative, uses up to 90 percent less energy for heating, cooling, and building operation than a standard house. Using the principles of whole system design for new and deeply retrofit housing, taking advantage of HUD programs and assistance, and enlisting a combination of innovative financing, public and affordable housing can be truly affordable, for the long run.