Energy efficiency: Cure for mortgage meltdown?

By Elisa Wood

October 7, 2010

My first reaction was that the Alliance to Save Energy was stretching a bit by titling its October 6 talk: “Is energy efficiency the key to recovery from the recession?”

But after hearing David Goldstein’s presentation, I must admit I’m thinking about energy efficiency in a whole different way. Goldstein, author of the book, “Invisible Energy: Strategies to Rescue the Economy and Save the Planet” crunched the numbers to show the enormous economic relief efficiency could bring to both the average homeowner and the US government.

He went as far as to suggest we may have averted the mortgage meltdown had we instituted more efficiency over the last few decades. Sound extreme? Consider this.

The average suburban home now costs $175,000. When banks evaluate a homeowner’s ability to pay a mortgage, they look only at that figure. They do not consider the cost to pay utilities, which adds another $75,000 over the life of the mortgage. Nor do they consider the cost to drive back and forth from work to the house, another $300,000.

These energy costs have gone up over the years, while worker income has stagnated since 1973. When energy costs are added to mortgage costs, suddenly homeowners are paying as much as 62% of their gross income to live in their homes. It is not surprising that the lending system went wrong, he said, given that banks looked only at the $175,000 commitment and not the accompanying $375,000.

“Would you invest in a mortgage like that? That is what we are doing every day,” Goldstein added.

How much of a difference can energy efficiency make? Goldstein calculated that green building and transportation costs could chop that $375,000 by half.

Because efficiency reduces utility and transportation costs, it frees up consumer spending power. As a result it could ease several of the nation’s other financial woes, among them our low savings rate, weak consumer spending, trade deficit, inflation risk and joblessness. Efficiency also could take a big chunk out of the federal deficit, given that government is the largest energy user in the nation, he said.

“This recession did not just occur randomly. It is largely a predicted result of fundamental problems,” he said. “Weak energy efficiency policy is at the heart of many of them and is related to all of them.”

How much energy can we save through efficiency measures? More than we think, Goldstein said. Conventional studies indicate the US economy can wring out about 30% savings, but these are cautious estimates, biased toward the low end since no one ever loses their job for underestimating energy efficiency potential. But they might if they over-estimate and as a result the lights go out somewhere because we built too few power plants, he said.

Goldstein suggested that instead of relying on forecasts of energy efficiency potential, we set goals: “We best discover the size of the resource by going out and acquiring it.”

Elisa Wood is co-author of “Energy Efficiency Incentives for Businesses 2010: Eastern States,” www.realenergywriters.com

Did energy cause this mess?

By Elisa Wood

March 11, 2010

Much of today’s economic debate boils down to these questions: How did we get in this mess? And how do we get out? Two recent studies implicate the energy industry as a cause and a solution.

While our economic tumble is clearly linked to an inflated housing market and overly-hedged financial products, we cannot discount pressure from high energy prices.

In fact, 10 out of the 11 U.S. recessions since World War II (including this one) occurred after oil price spikes, says “Reassessing the Oil Security Premium,” a discussion paper by Resources for the Future.http://www.rff.org/News/Features/Pages/Reassessing-the-Oil-Security-Premium.aspx

The Washington, D.C. think tank looks at price spikes caused by oil supply disruption and the economic reverberation. In particular, the paper analyzes oil externalities – the spillover effect of high oil prices onto those who are not players in the energy market.

It works like this. If I pay a lot of money for oil, not only do I take a financial hit, but so do my neighbors down the street, even if they buy no oil. This is because high oil prices lead to losses in gross domestic product and wealth transfers to foreign oil producers. In other words, my pricey oil purchase harmed the economy and therefore harmed my neighbors.

The report attempts to quantify the costs to society to keep oil flowing our way during worldwide supply disruptions. It calls this cost an “oil security premium.” The report estimates costs of $4.45 per barrel of oil consumed in 2008, rising to $6.82 in 2030 for imported oil. We’re damaged less by disruption in domestic oil supply, which carries a security premium of $2.28 per barrel in 2008 to $4.45 in 2030.

If the energy sector contributed to today’s economic slowdown, can it help lift us out?

We can improve our energy security somewhat by displacing imported oil with domestic oil. But an even better way to avert the pain is through energy efficiency, according to the paper: “Our estimates suggest that energy security is more greatly enhanced by policies to reduce overall oil consumption than by those that substitute domestic production for imports.”

Think about it. We’d be spared a couple of dollars per barrel by buying domestic instead of imported oil. But we’d be spared more than double that amount if we could forego the barrel completely.

Another analysis, released this week by the American Council for an Energy Efficient Economy, gets even more to the point about how efficiency can help our society financially. The advocacy organization looks at how many jobs energy efficiency programs create.

More specifically, ACEEE calculated the likely job creation from three programs under consideration before Congress. The programs include a residential retrofit program, also known as Home Star or “Cash for Caulkers,” and the commercial retrofit program, Building Star. Both programs would offer rebates for energy efficiency installations and improvements. The third program would offer $4 billion in energy efficiency grants for manufacturers. http://www.aceee.org/press/030810.htm.

ACEEE found that three efficiency programs could add 333,000 jobs in 2010 and 184,000 in 2011.

Steven Nadel, ACEEE executive director, points out that the job creation points out that these job figures “are probably conservative.” There is a bigger picture to consider: “We did not examine the impact of lower energy consumption on energy prices. When energy prices go down, money is freed up for spending in more labor-intensive parts of the economy.”

No sophisticated math here. These reports indicate that consumption carries a price tag, particularly when energy supply is low. High energy costs add to economic destabilization. Reducing energy costs – by reducing consumption – frees up money, which can help right the economy again.

Debate about the cause of the recession has focused heavily on problems within the financial arena. Maybe we’ve been too quick, this time around, to let the energy sector off the hook?

Visit Elisa Wood at http://www.realenergywriters.com/ and pick up her free Energy Efficiency Markets podcast and newsletter.