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Can Massachusetts Correct a Market Failure by Making Home Energy Use More Transparent?

Massachusetts Governor Charlie Baker (R) is leading a new effort that could benefit Massachusetts’ homeowners and the US real estate sector as a whole. Yesterday, he introduced An Act Relative to Consumer Access to Residential Energy Information, which has the potential to simultaneously improve the quality and energy performance of all residences in the state, correct a national market failure, and meet energy efficiency goals. It will do this by making home energy performance much more transparent statewide through a certificate program. This is not only good for homeowners and the state’s economy, but also for the real estate community because good energy performance can boost a home’s comfort, affordability, and value. As the first statewide program of its kind, it can serve as a model for the country. And with the potential to help 1.8 million residences in the state become more energy efficient, it will also reinforce Massachusetts as a national leader in the energy transition.

About the Program

Improving the transparency of home energy performance is a critical part of the effort to accelerate home energy upgrades. As we’ve discussed before, the lack of transparency is a huge market failure in today’s US residential market that influences homeowners’ decisions, how homes are sold and property values are assessed, and the mortgage underwriting process.

This initiative is the first at a state level to address the problems caused by the lack of performance transparency. The governor’s plan is based on a similar program recently launched in Portland, Oregon, and on pilots in Massachusetts, and builds upon a strong foundation set by the state’s Three-Year Energy Efficiency Plan.

 

The first thing the proposed legislation will do is create home energy certificates—which rate a home’s energy performance—that will be standardized across the state. A home’s energy certificate will be based on the features of the house, not on the habits of its inhabitants. Thanks to these certificates, people will be able to make apples-to-apples comparisons when it comes to energy performance.

Second, by 2021, home sellers will have to make this energy certificate available when they list a home for sale. That way homebuyers will better understand the true costs of a home beyond its “sticker price.” For buyers comparing two similar homes—such as different three-bedroom, two-bath, 1,800-square-foot two-story homes—knowing which one is already cozy and inexpensive to heat and which one will take some investment to get there is important information to have. You don’t want to wait until you’re ready to sign the closing documents, or until your first winter in the house, to find out which one you got!

The Benefits

Energy efficiency is the largest unmet need for homeowners, beating out safety, schools, walkable neighborhoods, and kitchen upgrades for features that Americans want but aren’t getting in their homes. One of the reasons for this failure is that few people actually know how efficient their home is (or isn’t) or what upgrades would improve its efficiency.

This program shines a light on the previously hidden costs of a home’s energy use, and this transparency brings great value by helping homeowners get greater insight into their houses. This information can help them prioritize upgrades, prepare their home for sale, know what they’re getting when they buy a home, and save money on energy bills. Utilities add 25 percent to the average homeowner’s monthly costs, which is an even greater burden to low- and fixed-income customers. The governor’s plan won’t require homeowners to make any changes to their homes; rather, it provides information that will make it easier for homeowners to understand ways to improve their homes to reduce their energy burden.

Real estate agents and homeowners alike should be encouraged to know that they would benefit even if they are selling a home that isn’t energy efficient. A study by Elevate Energy showed that even when homes performed poorly, they still sold faster and for more money if energy information was provided. This suggests that the central issue is that people just want to know. Buyers can deal with less-than-ideal news because they know what they’re getting into and what to do about it. This is exactly the kind of targeted information that real estate agents should pride themselves on providing.

Finally, this kind of activity should help create jobs in Massachusetts by leveraging market forces to unlock latent demand for energy improvements. This approach provides information, but then leaves it to homeowners and the market to do what they want with it. This kind of transparency should help more people tackle energy efficiency upgrades with a clearer sense of priority and value, and with continued control of what they want to do. Energy efficiency jobs can’t be outsourced, and Massachusetts already has over 82,000 jobs in energy efficiency.

What’s Next

Massachusetts is already a national leader when it comes to energy efficiency. If the state enacts the governor’s plans, then it will again lead the country with its bold vision. This would have direct benefits for the citizens of Massachusetts, and it would also have important impacts for the country. As this best practice is adopted in more parts of the country, it will become easier and easier to integrate into business as usual, which would help improve the housing stock and energy bills across America. It would also correct a current market failure, freeing the market to let people make informed choices and improve standards of living.

Image courtesy of iStock.