Persuading 5-Million Home Buyers to Invest in Energy Efficiency

Federal and state governments are deploying billions of dollars in an unprecedented push to weatherize America’s existing homes in order to save energy and create jobs. However, the programs piloted by the government during the past decade, and more recently by the utilities, do not yet come close to being able to meet these goals. America can no longer afford to measure program ramp-up time in terms of years, nor should the public have to spend thousands of dollars per house to market, administer, and subsidize a shift to the cleanest energy— efficiency—thought to be the cheapest energy available. Self-interest is the most powerful human motivator, yet it has been largely ignored as a tool to persuade households to invest in energy efficiency improvements that cost less than the wasted energy they save.

This article summarizes what CMC Energy Services, a company I founded 33 years ago, has learned about how to persuade buyers of existing homes to invest in energy efficiency—not just for now, while American Recovery and Reinvestment Act money is available—but as an ongoing way to reduce the energy wasted by our aging housing stock. The key is to provide reliable information to potential clients that shows how they can invest in energy efficiency upgrades, paying for them entirely from the money saved by these upgrades. When given the choice between continuing to pay for wasted energy or making improvements that cost less than the wasted energy, virtually every buyer of an existing home will opt for the improvements.

The Pay from the Savings Group of Improvements

Promoting efficiency may be cheaper for utilities than building new capacity, but does it cost less for homeowners to make energy efficiency improvements than to keep paying for wasted energy? The answer is yes for many, though not all, improvements, based on over 6,000 Home Tune-uP audits performed nationwide by CMC affiliates. The Pay from the Savings Group (PSG) of improvements includes not only the less-expensive upgrades, but also more-expensive ones, such as adding insulation, upgrading windows, and replacing old refrigerators and air conditioners. The items included will differ for each house, depending on a variety of factors. These include the age of the house; the efficiency of the heating and cooling systems; the age and efficiency of the appliances; the type and price of fuel; the location; and the number and lifestyle of the occupants.

When homeowners understand that they will realize a net savings—that is, that they will save more per month in energy than they pay per month for improvements, and there is no down payment required, the implementation rate soars to over 60% for CMC’s Home Tune-uP program, based on our records. Furthermore, the improvements that are included in the PSG are about double the improvements that customers choose based on the payback (usually five years). Thus both the rate of implementation and the improvements implemented increase dramatically with Home Tune-uP. Just how much they increase will depend on energy prices, and on financing. The longer the term of the loan and the lower the interest rate, the more improvements will be included in the PSG. And the higher the price of energy, the more improvements will be included in the PSG.

Identifying the Pay from the Savings Group

How does CMC Energy Services identify the PSG? We do so by

  • making a detailed survey of the home to determine which features could be improved, including the envelope and all major energy-using systems;
  • identifying the energy efficiency before and after improvements;
  • collecting information based on zip code to reflect regional variations in weather, energy prices, and labor costs;
  • estimating costs for the improvements; and
  • obtaining the terms and interest rate of the loan.

To determine which combination of improvements will maximize energy savings requires estimates that take account of the interrelationships among the improvements in the PSG. These interrelationships reduce the resultant savings and sometimes the cost of the improvements. Indeed, the main reason for the inflated savings estimates that characterize current software is that the software is based on the assumption that no other improvements will be made. This is hardly appropriate for a whole-house approach. In order to demonstrate my point, let’s look at a test case. In the following example, a contractor has recommended that a homeowner insulate the house and replace the heat pump. If the homeowner follow this recommendation

  • the savings from the new heat pump based on the original heating and cooling loads should be reduced due to the smaller loads resulting from the added insulation;
  • the savings from the insulation based on the original inefficient heat pump will be reduced due to the more-efficient new heat pump; and
  • the cost of the heat pump may be reduced due to the smaller size required with the lower heating/cooling load,

Using a proprietary equation developed by the author, the Home Tune-uP software recalculates the energy savings and costs, taking account of the improvements included in the PSG. The result is that the energy savings estimates are reduced whenever there is an interrelationship between two or more improvements. The costs may also be reduced, as in the case of the heat pump discussed above.

How Current Audits Discourage Customers from Investing

Car dealers advertise their cars in terms of the cost of the monthly lease. Energy audit reports show the payback—that is, how many years customers must wait to recoup the money they need to invest for each improvement. Thus the more expensive improvements with longer payback times will be missed. Whereas payback, or return on investment, is an appropriate motivation for utilities and investors who want to maximize their profit, after more than 300,000 energy audit clients, CMC has yet to find one client who is motivated by return on investment to make efficiency improvements. Yet proponents of energy efficiency continue to believe that a robust return on investment drives the home efficiency market.

Affordability is the primary requirement for investing in energy efficiency, and Home TuneuP is the only audit report that identifies the specific improvements that are affordable in each home. The customer’s choice is simple: either make the improvements and pay for them from the resulting energy savings, or keep paying for the wasted energy. When the customer compares a one-year energy savings to a one-year payment for the energy improvement loan, it becomes obvious that saving money goes hand-in-hand with saving energy.

Expanding Implementation with Public Funds

For low-income households, where reducing energy costs is an important goal, public funds would be used to pay for all PSG improvements, as is the case for current Weatherization Assistance programs. However, the energy savings would be larger, since the PSG improvements would be determined by the specific attributes of each house, rather than by a spending cap and a list of improvements based on average paybacks. Furthermore, by offering the same program to low-income customers as to other customers, we believe that the cost of marketing to low-income households would be reduced. This is, first, because offering the same program to everyone would remove the stigma of a low-income program, and second, because it would reduce the cost of administering the program, since the software would determine which improvements were appropriate for each home.

Public funds would also be used to support renewables, since their current cost is still too high to qualify for the PSG, and for improvements that benefit the environment more than the home, such as white roofs.

Selling Energy Efficiency Improvements

Smart marketing is as important as a good design to sell a product or service. Here are some of the marketing techniques that have worked for us:

Target home buyers. The best customers for energy efficiency improvements are buyers of existing homes. All home buyers make some improvements, and improvements that pay for themselves will move to the top of the list. This is also the only group that takes a wholehouse approach. They are often willing to buy new energy systems and appliances when the existing ones still work.

Don’t charge for the audit. The energy audit report is the sales tool for the audit. To maximize participation, there should therefore be no charge for the audit. Even a small charge will discourage the majority of potential customers from requesting an audit. The myth that those who don’t pay for an audit are less likely to implement the recommendations than those who do pay is not only unproven, it is irrelevant. Far more potential customers are lost by charging for an audit than are attracted by something that’s free.

Use home inspectors for audits. Home inspectors make ideal energy inspectors, since home buyers trust them. They represent the customer, and have no conflict of interest. Contractors, on the other hand, sell what they recommend and therefore have a direct financial interest when making the recommendations. Furthermore, home inspectors, who are generalists, have already studied all parts of the house and understand the interactions between the different parts. Contractors who have a specialized skill will, even if only out of habit, always look first to see whether they can recommend their specialty.

Reduce ramp-up time and cost. During the past two years, the time required to qualify as an energy efficiency inspector has increased from 1 month, to 6 to 12 months. The cost to become equipped and certified has increased from $1,000 to $10,000. Indeed, more public and private money appears to be spent on anointing contractors than on fixing homes. By trying to build up a “qualified” inspection force, the existing labor force has been disqualified. Thus the 2,000 energy inspectors trained by CMC who have been delivering thousands of audits nationwide are now excluded from the government-financed workforce. Many who are investing the time and money to become BPI certified, find that the jobs promised are few and far between.

Choose the best financing. To maximize the PSG improvements, the monthly payments must be minimized. Thus the best financing is a long-term low-interest loan, such as the FHA 30-year streamlined (k) loan. A further consideration is the cost, time, and hassle of obtaining the loan, as well as the risks involved to the buyer and to the bank in case of default. With a loan to be paid from the estimated savings, the estimates must be reliable.

What Works?

The bottom line is to reach as many households as possible and persuade the occupants to invest in energy efficiency improvements that work. The problem is that rather than simplifying the process of persuading the homeowner to adopt cost-effective energy efficiency improvements, government programs have made the process increasingly complicated, slower, more expensive, and less effective. Programs that have already demonstrated success, such as Home Tune-uP, should be allowed to compete for government funds. The cost of learning whether the present system can be improved is negligible. The cost of failing to consider alternatives is incalculable.

Home Energy | November/December 2010 | www.homeenergy.org

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Comment by Doris Ikle on January 7, 2011 at 7:16pm

The FHA Streamlined (k) Limited Repair Program loan has been around for 5 years now. It was specifically designed to enable homebuyers  and owners of existing homes to improve their homes including making them more energy efficient (see HUD's MORTGAGEE LETTER 2005-50).  It is ideal for homebuyers who will get the same terms as they get for the first mortgage, a 30 year loan at low interest rates. It does not require a rating but does cover weatherization, window and door replacements, replacing/upgrading HVAC systems, insulation, appliances, etc..There is no minimum loan and the maximum is $35,000.

Remembering that ARRA money will end in 2013, shifting from the subsidies currently paid by the Federal government to loans to be repaid by the owner from the energy savings, year by year, is essential for state and county budgets to avoid bankruptcy. For low-income families, public or utility funds would pay for the upgrades, as they do now, so that the energy savings would go directly to the occupants.  The Streamlined (K) loans could be available from any bank that provides FHA loans. Unfortunately, very few banks are interested. This is, as you say, the magic bullet and I would welcome any help in promoting this financing tool in order to avoid, either a financial disaster, or an environmental disaster. We cannot leave the financing of energy efficiency improvements up to the bankers.          

Comment by Nathan Moore on December 17, 2010 at 4:01pm
Doris,

Do you have any more information you can share about the FHA (k) loans? It seems acquiring quality financing for people already struggling with their bills is the magic bullet needed for this to work, correct? Do you get financing from multiple sources? Does that mean you have employees who only work with financing?

This sounds really exciting! Thank you for your advice.
Comment by Doris Ikle on December 13, 2010 at 5:53pm

Dennis,

 I do apologize for the confusion caused by the sub-heading Don’t charge for the audit.  I was referring to government or privately financed programs where the energy audit is the sales tool which informs home-buyers and home-owners of the energy improvements appropriate for the home and of their costs. To maximize customer participation and minimize marketing costs, CMC has found it best to charge the cost of the audit to the marketing budget of the program sponsor, not to the customer.  For private customers of home inspections, adding an energy inspection to the home inspection would be the most economic way to provide this service and would be well worth the additional charge. The energy audit not only points out the improvements needed, but also helps the customer to make these improvements, both with subsidies and/or with loans that are paid from the monthly energy savings,

 As concerns home inspectors vs. contractors, we have found that generally home inspectors make better energy inspectors because they have a “whole house” approach and are not specialists. Of course there are some very well rounded contractors who have made it their business to understand the “house as a system” and have been the leaders in this business.  Home inspectors, however, are more trusted by the public since they have no financial interest in their recommendations, whereas contractors do. Indeed we have found that, just by habit, contractors will tend to recommend whatever they were selling before doing energy audits. Over the years, we have hired contractors, home inspectors and raters and found that home inspectors are more successful in persuading customers to implement the recommendations.  By having home inspectors inspect the home, contractors will get many more contractor jobs, and more energy will be saved.  

Comment by Dennis McCarthy on December 12, 2010 at 12:18pm

Some interesting thoughts. I would take issue with your stance of providing Free energy audits- FREE?

my time has VALUE, my I/R camera was costly its a valuable asset and as is my ability to evaluate

what the image is showing , my ability to do a lighting audit and the provide Quality SSL solutions - thesen are

things  folks get paid for in a capitalistic society.My  company does do Pro Bono work every month but

I'm not a non profit biz.// The issue of home inspectors is their overall effectiveness in all or most areas.

A home inspector that can't or won't perform lighting audits is a prime example - The average home inspector

may be good at Hvac or stuctural facets, but let's say they don't look at the use of lighting in a home inspection. How many kWhs could be shaved with better lighting solutions?

Thats part of the energy waste paradigm thats not being addressed. There could be a lot of limitations on

the overall intell & recommendations from semi qualified H-I s thats now, an energy efficiency expert . I think

its all about improving the patterns of Energy purchase/ energy waste / & then energy repurchases and

Energy loss solution providers need to be more than a retired Hvac guy with an energy auditors cap on!

Comment by Evan Mills on December 10, 2010 at 4:22pm

Enjoyed your article, and thanks for sharing your hard-earned lessons learned with the community here. 

I appreciate your provocative suggestion that audits be free.  I agree (at least in certain circumstances), although suspect there will be some healthy (please) debate about that ;). Something the market will presumably sort out more than public policy. Presumably some business models already include free audits, at least up to a certain level of rigor. I suspect the market will sort this out.

I also welcome the (again perhaps controversial in some circles) idea of inviting home inspectors into the fold. They will of course need to charge for the service, since that's their entire business model and data already collected are generally necessary but not sufficient to do a good energy audit.) Skeptics will argue that they lack energy-centric skills, but not all do and the others can seek training where appropriate.

Interesting conversation about audit costs going on over here.

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