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Efficiency is the ugly stepchild of the energy and climate world.

Recently, I put solar on my roof.  Many neighbors and friends are excited about trying to do the same.  When I hear this from them, the advice: make sure that your home is energy efficient before putting a penny into something like solar power or a generator. One friend's response, "I know that but insulation isn't sexy."

It might not be sexy, but efficiency is powerful.

In Invisible Energy, NRDC's David Goldstein lays out a strong case why our national policy should be that of the home: first, second, and third priority should be energy efficiency and then clean energy (renewable energy) can meet the reduced energy demands.

Invisible Energy is filled with important insights and policy recommendations. The key point is that, systematically, energy efficiency is low-balled in terms of just how much an impact it could have in improving the economy and helping to mitigate climate change. Goldstein works through how our analysis and decision-making patterns drive to a 'worst-case' on energy efficiency which, almost, becomes reinforcing. Modeling assumes zero technology improvement, targets are set low, etc ... Goldstein lays out "an interesting irony" of invisible energy:

One might expect that technologies producing profits for a large number of people would be more attractive than those that create a few big winners and many losers. In fact, the prospect of producing enormous gains for a few always attracts business excitement, venture capital, and press attention, while the prospect fo bigger but more democratically distributed profits is often both practically and politically invisible.

While I find the Chevy Volt truly Energy COOL and part of a path toward electrifying transit, inflating car tires would have a far larger impact on US oil demand for the next coming years and getting attics insulated (and air gaps sealed) more impact on our emissions for the next decade.  The Volt is sexy, the more efficient fan in the office HVAC system is invisible.

As an example of an interesting discussion, Goldstein asserts that the barriers to greater energy efficiency are not just "market barriers" but provides a set of causes with explanation:

  • Market barriers are where direct institutional changes will allow the market to function properly. Split incentives, such as between landlord and tenant about investing in energy efficiency when the tenant pays the utilities, provides an example.
  • Market failures are where a complex interplay of factors leads to downplaying energy issues amid a broader set of investment choices when there is diffuse decision-making.
  • Human failures include, for example, our basic nature such as loss aversion and status quo bias inhibit action. Also, with limited decision-making time, the 'marginal' energy efficiency items often aren't the management's highest priority.
  • Institutional Failures occur to regulations, business structures, and other patterns that inhibit energy efficient choices.

No, it is not just "the market" that has failed, but ourselves and our institutions -- the obstacles are complex and interrelated.

Goldstein doesn't end with laying out the challenges, he provides clear thoughts for how to break through these barriers and a vision for how we could be improve our energy efficiency by upwards of eight percent per year.
Some minor problems

Invisible Energy didn't preach to this choir, but educated. There is much that I "knew", with Goldstein adding detail and perspective. But there was much new to the table or, perhaps as importantly, given reinforcement to highlight importance.  While tremendous, Invisible Energy is not faultless. Goldstein, quite legitimately, focuses on energy efficiency and spends very little energy on renewable resources because "energy efficiency merits greater attention among decision-makers and by the public."  He is right that pursuing energy efficiency will make it easier and less costly to cover a greater share of our energy requirements with renewables. He, however, makes an avoidable mistake when discussing this in commentating that "in more optimistic cases, renewable sources become cheaper than business-as-usual."  I have to disagree -- considering the climate, health, and other costs of fossil-foolish practices, any honest accounting would show that renewable energy is already "cheaper than business-as-usual".  Such discord, however, was rare in reading pages -- the far more frequent experience was nodding up and down in agreement, highlighting insightful points, and marking up references worth looking at for further detail.

A glance at two items

Let's look at two items in a little more detail:

  • how efficiency relates to our housing financing; and,
  • the poster child for energy efficiency.

The mortgage failure

The financial approach to home ownership fosters a far more energy-inefficient way of life for individuals, communities, and the nation. This, of course, includes the mortgage deduction that enables ever-larger homes but, less obviously to many, how the banking system undermines its own strength through failure to consider efficiency in loan decisions and how this drives ever expanding suburbia and exurbia.  When purchasing a home, in brief, a lender considers your income and the cost to buy the home.  What they fail to consider are two critical measures that have a significant impact on long-term ability to pay that mortgage: energy efficiency and location efficiency.

  • Energy Efficiency is rather straightforward: how efficient is the house system in terms of energy (and, well, water) usage.  An old home with bad insulation, leaky windows, and decrepit appliances will cost more to heat and cool than a home built to modern standards.  And, a house built to Energy Star (or, even better, passivhaus) standards will have even lower heating and cooling bills. While there are mortgages that relate to energy efficiency, this is mainly in theory as most lenders simply aren't aware of them.  A homeowner with a more energy efficient house, which costs $1000 less per year in heating/cooling bills, will have more money available to pay the mortgage. And, this is seen in actual default rates as the more energy efficient the home, the lower default rate.  Sadly, essentially no lenders take house energy efficiency into account when making lending decisions.
  • Location Efficiency is also straightforward but rarely discussed item that never makes it into the mortgage lending decision.  This relates to walkability but is, in essence, how much will you need to drive to get to work, get to the grocery, to live ...  "After a mortgage, owning and driving vehicles is the second highest  household expense, and people who live in a walkable neighborhood near  shops and schools can save serious money each year. That makes the  "drive ‘til you qualify" mindset as outdated as buying a gas-guzzling  SUV."  As Goldstein and colleagues documented earlier this year, there is a very strong correlation between location efficiency and default rates. More that "gas-guzzling SUV" is required, the higher the chance of default.

Yet, the bankers ignore these factors and this contributed to the housing bubble.  Consider the numbers.

for a typical new home, which is now priced at about $178,000 (median  price), the cost of driving to and from the home over the course of a  30-year mortgage exceeds $300,000 for homes located in sprawl and the  energy costs exceed $75,000 on average.

It seemed evident that a system designed to look only at the ability  of the borrower to pay back the $178,000 or so loan but that ignored the  affordability of the $375,000 commitment to transportation and utility  costs was bound to go wrong.

A key path forward for a stronger mortgage loan program: including energy efficiency and location efficiency in decision-making about loan qualification and loan rates. These should not be stove-piped decisions, excluding easily calculable costs impacting buyers' ability to pay, but should be more realistic "total cost of ownership" calculations.  Now, that house 30 miles outside the city isn't "cheaper" than that house a bike ride from the office: it might be cheaper to own while being much, much more expensive to own.  Including energy and location efficiency in loan programs would help reduce default rates. It would also likely improve home lives, as less time would be spent in the car. And, oh by the way, it would have a real (and cumulative) impact on our energy usage -- helping steer Americans toward more cost sensible and less fossil-foolish housing choices.

Energy Efficiency's poster child: the refrigerator

In 1973, refrigerators were the largest single use of electricity in the home and the demand had been growing at 9.5% per year since WWII.  Energy efficiency had been declining as manufacturers sought to cut costs. Utility planners had, at that time, carved out a 9.5% growth rate in refrigeration power demand indefinitely. In the face of the oil embargo, California began to drive standards that were followed by five state and national standards (Energy Star as latest round).  In 1972, the average refrigerator used about 2000 kilowatt hours / year.  Today, with ice makers & water cooling & increased average size & inefficient side-by-side models, the average refrigerator uses under 500 kwh/year.  And, by the way, in current dollar terms, the price of refrigerators has dropped per cubic foot in part because the requirements for energy efficiency have led manufacturers to redo production lines & drive improved efficiency in construction.

This is a very straightforward example of the power of government regulation to drive reduced energy usage and save consumers money. As Secretary of Energy Steve Chu discussed the other day, writing regulation and setting standards are (without exception) the lowest cost move with the highest payoff to the economy that the Department of Energy can pursue.   Speaking of libertarians like Bryce, Chu commented that there are economists that will account, as a value, the reduced freedom of choice due to tightening standards.  To this, Secretary Chu noted that

Forcing people to save is a cost that I am willing to bear. We’re going to enforce standards

This is the type of understanding of and allegiance to the power of energy efficiency and government's role in promoting that Goldstein is looking for ... while Chu might not have read Invisible Energy, he certainly has a grasp of the key issues.  What we need, as a nation, is for more of our policy-makers to emulate Chu's understanding.  Goldstein's Invisible Energy should not be on the bookshelf, but required reading for every member of Congress and for their staffs. The banking community should read it. And ... well, the list is long -- Goldstein's credentials promise much and, with this book, he delivers.

NOTES:  To be blunt, Goldstein is one of the voices to listen to in this arena. He is the Natural Resources Defense Council's (NRDC)  Energy Program Director, a MacArthur ("genius award") Fellow, has worked closely with California's Energy Commission for decades, and has a plethora of other engagements both international and domestic.  And, these varied experiences weave together to inform Invisible Energy.

The real "genius" in the MacArthur Program is that by providing a half  million dollar grant, they get people’s attention.  The biggest  difference in my career since the MacArthur Fellowship is that I find my  opinions get taken more seriously by people who would otherwise be  skeptical or even dismissive.  Presenting a message about energy  efficiency as a MacArthur Fellow has meant that policymakers cannot  simply dismiss the arguments, as some had done previously, but are more  inclined to listen seriously to what I have to say.  And the case for  energy efficiency is so compelling that once people open their minds it  is easier to achieve advocacy success.

Originally posted to A Siegel on Thu Aug 05, 2010 at 08:35 AM PDT.

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