True stories of the hidden barriers to residential energy efficiency
“In essence, the rebate on the boiler (which I’ve already paid for via a surcharge on my electricity bill) is captured by the plumber”
by David L. Levy
This week the temperature hit 90F in Boston, and after appropriate procrastination, I finally started replacing the winter clip-on storm windows with fly screens. We survived another winter with our antiquated and rusting steel casement windows in Brookline, Mass. These single pane windows, which date to the1951 construction of the house, are wintertime energy hogs – they are drafty, provide no insulation, and get covered in icy condensation. We were paying more than $600 a month in the coldest part of the winter, and that’s with my sophisticated solar thermal management system: we have huge south-facing windows, so I raise the blinds when the sun is shining to keep the house comfortable in winter, and lower them for some insulation at night (reverse in the summer…).
In an earlier confessional, I explained why we have not yet splashed out the $20,000 to replace the old windows with new energy efficient ones. The return on investment is only 2% at best, and who knows how long we’ll be in the house, or whether new windows would add much to the sale price. Somehow my own personal experiences don’t square with the conventional wisdom on energy efficiency, which is that substantial reductions in energy use (and greenhouse gas emissions) can be obtained while the investments more than pay for themselves in cost savings (i.e. have positive RoI). McKinsey issued a report in July 2009 claiming that “the U.S. economy has the potential to reduce annual non-transportation energy consumption by roughly 23 percent by 2020, eliminating more than $1.2 trillion in waste – well beyond the $520 billion upfront investment that would be required. The reduction in energy use would also result in the abatement of 1.1 gigatons of greenhouse gas emissions annually.”
As Mark Sarro and Jurgen Weiss explained in their guest post last year, the actual costs may be higher than engineering estimates suggest and there are a host of market, institutional, and psychological barriers. McKinsey acknowledges some of these barriers, though they emphasize a lack of financing and the presence of market failures, such as the owner-renter problem and the limited time horizon of residential owners. Most existing efficiency programs at the city and state level, such as Property Assessed Clean Energy (PACE) address these specific issues. My own experiences, however, lead me to think that, in the residential buildings market, an important but overlooked part of the problem is the high retail cost of efficiency investments, due to small scale and lack of competition.
This point was reinforced by my investigation this winter of options to replace our antique oil furnace. I was stirred to action by a confluence of three events: a promotion arrived in the mail from National Grid promising a 60% discount on a new energy efficient gas boiler, and up to $1500 extra tax credit for a very high efficiency product. Second, the oil company maintenance person said we need to put nearly $1000 into various repairs on the old oil guzzling beast. Third, I began teaching my new MBA Business and Climate Change course and thought that I should make at least some effort to walk the talk. A high efficiency gas boiler promised energy savings of around 15% on efficiency grounds, on top of which gas is currently about 30% cheaper than oil per BTU. The switch to gas would also mean burning a less carbon intensive fuel. With new furnaces running at about $2000 without a subsidy, here was an investment that would burnish my tarnished environmental credentials while appeasing my inner hedge fund manager.
I called the National Grid number, and was assigned a local plumbing company to come by and give us an estimate. The plumber proceeded to recommend an Energy Star high efficiency (85%) Burnham boiler for only $822, including tax, after the 60% rebate. When I asked about installation costs, I got the usual consolation look that electricians and garage service people seem to have perfected prior to giving an outrageous estimate. After poking around a few pipes and the flue, he gave me an estimate of $9200 for installation, plus a few hundred for carting away the old oil tank. Oh, and $1900 for a new gas line into the house, giving a total of well over $12,000.
When I asked about the ultra high efficiency (95%) burners, I was informed in no uncertain terms that this would be a big mistake – these would be less reliable, suffering problems with acidic condensation, and they would need a special flue. Remember, this is the sales pitch from a plumbing company assigned by National Grid for efficiency upgrades! The extra $1500 tax rebate available on these would be more than offset anyway by the higher installation and purchase cost. In any case, didn’t I want some “wasted” heat to keep the basement warm in the winter? We do use it for hanging up clothes to dry, cutting back on our electricity-hungry drier. And our basement boiler sits directly under the living room, keeping the floorboards warm. In any event, the ancient oil relic claims around 78% efficiency on the tag hanging on it, so maybe the energy savings are not so high.
This was a useful lesson for me and for my MBA class. Why the high costs? The old system had accumulated lots of extra pipes and valves over the years, to accommodate several new rooms, making a new installation more complex. Then there are the new regulations, which require a new flue lining and external vent. But I still suspect that the cost estimate is inflated by the lack of competition: National Grid specifies the plumber from their list of preapproved contractors. I found out afterwards that, in principle, I could find my own qualified plumber, but that’s extra hassle (i.e. transaction costs). In essence, the rebate on the boiler (which I’ve already paid for via a surcharge on my electricity bill) is captured by the plumber, who can inflate charges because of the relationship with National Grid. For comparison, I got a quote of $6300 for a new high efficiency (also 85%) oil boiler, all inclusive. Going with gas I save $1200 on the rebate, but pay about $3000 more for installation.
There are clearly some market barriers and problems with existing energy efficiency promotion programs that are not being recognized. One idea we came up with in class to squeeze costs out of the system Walmart-style was to aggregate residential upgrades together. National Grid could bundle 100 jobs into a larger contract that it would put out to bid. Other suggestions included a surcharge, or systems benefit charge, on heating oil to fund upgrades, or a multiyear guaranteed price contract for natural gas. A third is to require houses for sale to undergo an energy audit, and provide relevant numbers, as on a new car or refrigerator. This would help ensure that upgrades get reflected in market value. (Yet the real estate industry is opposed, and a similar measure in the UK was recently repealed.) Note that none of these require direct subsidies – rather, they address the barriers and market failures.
There is also a lesson here on the increasing marginal cost of carbon reductions. If I get new windows, the marginal benefit of replacing the boiler is goes down. When I grab some low hanging fruit, some of the other fruit gets a bit harder to reach. It also illustrates what economists call the rebound effect: if I make the house more efficient, I’ll take some of the benefit in the form of more comfort, keeping the house a bit warmer in winter, a bit cooler in summer. I’ve noticed this myself with compact fluorescent lighting: I used to be a “turn-off-the-lights” nudnik, but am less zealous for a 13 watt bulb than for 60.
Several months later, summer is here, the boiler is silent, and there is no pressure for a decision. As with the international climate negotiations and national cap-and-trade legislation, inertia is the default option. At least I’m ruminating on policies that will stir me to action.