Residential Energy+: Making Home Energy Upgrades Accessible, Convenient, Affordable

Imagine a world where you have a contractor in your home for a renovation to expand your kitchen and living room space. You plan to get conventional windows, lighting, and appliances because you expect the energy-efficient options will come at a higher upfront cost. But then your contractor starts inquiring about your comfort level in the home: Are there rooms where you’re much colder or warmer than others? Are some rooms noisier than others? After incorporating your answers and an assessment of your home into an app on a tablet or smartphone, the contractor notes that a more-comprehensive update is not just a possibility, but also the more financially sound decision for your renovation. This raises an eyebrow.

In addition to offering help secure an extremely competitive financing rate for the entire project and to process any utility incentives available for energy performance improvements, the contractor informs you that by combining better insulation with more-efficient windows you can downsize your heating and cooling system—which was already due for replacement—reducing the total cost of the project. The support of this (clearly) well-trained contractor (and the fact that you’re going to have contractors crawling all over the house anyways) may have been sufficient to make an energy upgrade part of your renovation. However, what ultimately offers confidence in moving forward with the comprehensive update is the assurance of having a home that speaks to so many of your values—greater comfort (especially in drafty winters and baking summers), better indoor air quality, less noise from the street and neighbors, more resilience to extreme weather events, lower utility bills, and increased property value.

ENERGY EFFICIENCY ISN’T EASY…YET

In today’s market, home energy upgrades are not part of an integrated set of recommendations when contractors remodel homes. Instead, they’re an add-on, an afterthought, and only really considered by those who value energy efficiency for its own sake. Furthermore, even when consumers are motivated to make home energy performance improvements, the process is generally daunting and time-consuming—which too often discourages them from making the improvements.

The existing process for a home energy upgrade generally follows multiple steps, each of which can serve as a reason for consumers to give up on energy efficiency:

1. Getting a home energy assessment
2. Considering measures to install based on the findings of that assessment
3. Understanding how those measures interact with each other
4. Selecting products to install
5. Finding contractors to do the work
6. Accepting bids
7. Securing some form of financing for the project
8. Applying for utility rebates to cover some of the project costs
9. Applying for end-of-year tax rebates on qualifying measures (for the proactive consumer)

Consider what a corollary example would be with a cell phone: 1) pick which cell phone towers to route cell service through, 2) do a comprehensive analysis of the hardware required to make the smart phone “smart,” 3) secure the financing to purchase the phone, 4) fill out rebate forms and a tax form to defray some of the costs—all with different companies over a period of time. The conclusion of most consumers would likely be, “I’ll just stick with my land line and computer, thank you very much.” The telecommunications industry offers an important lesson for the residential energy efficiency market: Bundle all services with financing, and target offerings towards what consumers value.

A PATHWAY FORWARD

RMI’s Residential Energy+ initiative will unlock pent up demand for residential energy performance improvements nationwide by addressing how home energy upgrades are financed and delivered.

A recent study by BMO Harris Bank reinforces this idea of pent up demand, and reflects an opportunity to expand the market for home energy upgrades. The study found that 80 percent of Americans plan to do some form of a home renovation in the next five years. Forty percent of those surveyed plan to make their home more energy efficient. Interestingly, 50 percent of those who will make updates expect to pay for these improvements with savings, 18 percent with credit cards, and only 17 percent with a home equity loan. What if we could convert the 60 percent who are just thinking of traditional remodels into whole-home performance upgrades? What if we could empower almost 70 percent of remodelers (those financing through savings and credit cards) with some form of financing that leverages the energy savings as opposed to simply tying up their savings or relying on high-interest-rate credit cards?

On the delivery side, research shows the importance of addressing the hassle factor associated with any form of desired behavior change. Therefore, Residential Energy+ focuses on efforts across the market to simplify and reduce the number of steps involved in home energy upgrades, thus increasing the number of those who follow through with the investments.

There are several promising actors entering the market who recognize these challenges. Energy Pioneer in the Midwest and Next Step Living and Sealed in the Northeast offer interesting models of how to bundle everything from the home assessment, to the financing, to the installation, to the performance guarantee in one fell swoop. Startups such as Domino offer customer-facing “energy concierge” platforms for consumers looking to reduce their environmental impact, directly connecting them to service providers and vendors. RMI seeks to build on this momentum through three main areas of focus:

• Offering new energy upgrade delivery models through non-traditional channels
• Ensuring publicly visible, accessible, low-cost financing for energy upgrades
• Empowering contractors to be the home service providers of the future

RMI is engaging a range of market actors to cultivate affordable, hassle-free packages that improve home energy performance, particularly those fulfilling the following market roles:

• Customer acquisition: Those already providing homeowners with a range of services—including telecommunications, cable, Internet, home security, and insurance providers—who can integrate energy upgrades into their home service offerings
• Energy upgrades installation: Those involved with the assessment, selection, and installation of measures that improve home energy performance
• Financing: Those offering the financial products that make energy performance improvements affordable and appealing for homeowners, such as large retail banks, credit unions, and energy financiers
• Quality control: Those ensuring energy performance improvements are in fact being captured by homeowners

ENSURING PUBLICLY VISIBLE, ACCESSIBLE, LOW-COST FINANCING FOR ENERGY UPGRADES

Just this past August, the White House and the Federal Housing Authority announced new Property Assessed Clean Energy (PACE) guidelines. These guidelines ensure FHA loan underwriters will continue to offer mortgages to homes with existing PACE obligations, as long as those are subordinate to the mortgage. This is a huge step towards opening the floodgates in residential PACE lending. Nonetheless, there is a lot of work to do to unlock this attractive form of financing: only five U.S. states—California, Florida, New York, Vermont, and Maine—currently have operating residential PACE programs, and there remains limited awareness among consumers about PACE and whom they should speak to about procuring it.

Besides PACE, a multitude of other financing options exist that can help homeowners pay for energy upgrades, including conventional energy efficiency and energy improvement mortgages; FHA Powersaver Energy Rehab first mortgages, second mortgages, and home energy upgrade loans; Fannie Mae HomeStyle Renovation mortgages; Warehouse for Energy Efficiency Loans (WHEEL); and on-bill financing. However these options are poorly promoted by financial service providers, unbeknownst to many homeowners and contractors, and therefore underutilized. Many consumers aren’t even aware of the available incentive-based options such as utility rebates and tax incentives.

Therefore RMI seeks to convene players across the financial services industry to not only make consumers aware of these products, but also ensure they are offered by contractors and lenders when customers are in a position to utilize them.

EMPOWERING CONTRACTORS TO BECOME THE HOME SERVICE PROVIDERS OF THE FUTURE

For too long we have looked to the utility industry to “sell” energy efficiency. But in reality contractors are in a position to become the on-the-ground energy upgrade sales force when customers are already considering making improvements to their home. They can inform consumers about the multiple benefits of home energy upgrades that speak to consumers’ values as well as the sources of financing available to them, and play a key role in bundling the services together.

Platforms are emerging that seek to empower contractors to do just this. SnuggHome and Pearl are, for example, designed to support the contractor sales process and allow contractors to provide a range of important services, including home energy assessments, MLS data entry, home improvement recommendations, and real-time financing options.

Although these platforms can empower contractors to become the home service providers of the future, whole-home performance still needs to become part of the traditional contractor’s thinking. In today’s market, rigorous certification programs in green building and home performance remain a niche specialty in the overall home building and renovation market. Thus, equally critical are efforts to ensure that mainstream contractors are well versed on options for whole-home performance, properly trained to implement them, and knowledgeable about how to address consumer concerns about cost.

Hence we arrive at the mutually reinforcing nature of RMI’s strategy for Residential Energy+. The broader construction industry will only be incented to add whole-home performance to their repertoire if—and only if—consumers demand it, home values increase because of it, and more and more contractors bundle these services to meet that demand. But neither increasing the desirability of home energy upgrades nor making consumers aware of the added property value they create for their home alone can help consumers overcome the inertia of inaction. Home energy upgrades must be easily accessible and financeable through bundled service-based offerings.