Rethink

Rodin-the-ThinkerIn my post of two weeks ago, I described some of the issues with past residential energy efficiency incentive programs, particularly EcoEnergy for Homes. I promised more info about a program Guelph is devising to address those issues. After a one-week delay to trumpet a good news story (and after resisting the temptation to devote this week’s post to celebrating recent accolades from the Toronto Star), here are the goods on GEERS – Guelph Energy Effficiency Retrofit Strategy.

Nearly a year ago, we commissioned Garforth International Inc. to create a plan to tackle the problem of energy efficiency in Guelph. This plan would rethink past incentive programs and create an entity that would address their shortcomings. The plan would be tied directly into the targets for residential energy efficiency that were set in the Community Energy Initiative. That plan is now complete and we’re working through the process of implementing it.

The two key issues with EcoEnergy for Homes were economics and complexity, so today I’ll look at how GEERS will address the first of these.

Homeowners are reluctant to invest in energy efficiency because the payback period may be longer than the length of time they expect to stay in the house. The first of the two houses I retrofitted under EcoEnergy for Homes had a project payback of eight years. Had I known that I would be moving out of there in a few short years, I wouldn’t have gone ahead with the project. When I sold the place, I had to pay off the home equity line of credit I’d used to pay for the project. I have no idea what the value of the house would have been absent the retrofit, but my best guess is that I wound up short a few thousand dollars.

GEERS will likely take advantage of a financing mechanism called Local Improvement Charges (LICs). This tool has been used to facilitate a user-pay model for municipal infrastructure. If a street requires new pavement, water mains, and sewers, LICs can be used to have the property owners on that street pay for the project, rather than every citizen in the entire municipality. I moved into a new house back in ’99, and shortly afterwards my street was torn up, new water mains were installed, new sewers went in, and new asphalt and sidewalks were laid down. My next property tax bill had a new line item: A Local Improvement Charge to cover the cost of these improvements. At that time, LICs were mandatory, and could only be applied to traditional municipal infrastructure.

The scope of LICs changed in 2012, allowing them to be used on a voluntary basis for energy projects. A property owner could, if the municipality permitted LICs for this purpose, request permission to undertake an energy project – a major energy efficiency retrofit including insulation, triple-glazed windows, and a high-efficiency furnace, say – and pay for it on their tax bill.

The amortization period would be matched to the usable life of the asset, so twenty years or so. The interest rate would be somewhere around what the municipality pays for debt. That’s a way better deal than you would get on a home equity line of credit. Also, in the case of energy efficiency retrofits, the payments match up much more nicely with the savings on utility bills.

Another advantage for the LIC – and probably the post important one – is that the financing is attached not to the property owner, but the property. The significance of this may not be evident at first, but it becomes clear when you think of what happens when the property is sold. With traditional bank financing, like my home equity line of credit, the debt must be completely repaid when the property changes hands. With the LIC, the financing is transferred automatically to the new owner when the property tax roll is updated to reflect the new ownership.

This completely changes the decision process for the property owner, Now, I no longer have to worry about whether the retrofit project will pay for itself before I choose to pull up stakes. I complete my project in year one, the savings on my energy bills start right away, as does the charge on my tax bill. If everything works out properly, the savings are bigger than the LIC payment and I wind up ahead – all without paying anything out of my own pocket. I don’t have anything to do with the initial sticker price of the retrofit project, so payback period no longer means anything to me. I get a more comfortable home, a more valuable home, lower utility bills, all for a modest ongoing charge on my property tax bill.

Here’s the kicker. The LIC is fixed – it will never increase. However, my savings stream will grow over time since energy costs are rising – faster than inflation. That means that every year, my project – I hesitate to call it an investment, since I didn’t actually invest any money – is worth more. If you look at page 18 of Ontario’s Long Term Energy Plan, you’ll see that the average monthly household electricity bill will rise by nearly two thirds, from $137 to $210, over the 18-year period from 2014 to 2032. And that’s just electricity – we haven’t even talked about the savings on natural gas bills. The value of the project just keeps going up and up.

LICs have their detractors. Mortgage providers have expressed concern over the fact that they represent a senior debt obligation, meaning that a homeowner in financial trouble would have to pay off the LIC before tackling the mortgage. That is true. However, the LIC reduces household energy costs and so actually reduces the risk of the mortgage, since the homeowner now has lower utility bills. That means that every year, the homeowner has more money, not less, in their pocket than their less forward-thinking neighbour that decided to give the LIC retrofit project a miss. More money makes them less likely to run into financial trouble, so they’re a better credit risk with each passing year. Mortgage lenders should cheer, not jeer.

Next week I’ll delve into the way GEERS will make the energy retrofit process much simpler. Stay tuned.

 

Get ready to Ramboll

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Welcome to the Promised Land

Last week I hinted that I would be talking more about GEERS in this post, but breaking news – especially good news – trumps prior plans.

In case you didn’t see my tweet yesterday, Guelph’s Community Energy Initiative (CEI) got a big shot in the arm from across the pond. Danish District Energy leader Ramboll Group announced that it was setting up shop here. This is a tremendous economic development win for the city, but it’s only the beginning.

The origin of this news flash dates back to 2007, with the creation of Guelph’s CEI. The plan set a goal to use District Energy (DE) to produce significant energy efficiency gains for the city. (If you need a DE primer, I recommend my prior post Git ‘r Done.) At the time, this was a bold and, at least on this continent, unique proposition. Many cities had DE systems – some, like Veresen’s system in London Ontario, dating back nearly a century – but no city stated its intention to build out a citywide DE network.

Fast forward to 2013. As part of the implementation of DE, Guelph commissioned and published a District Energy Strategic Plan. This document stated a more specific goal – to meet at least 50% of the city’s heating needs using DE by 2041. This was even more bold and ambitious than the CEI objective, and placed Guelph’s plans even further beyond anything any other North American city had in the works.

Then in February of this year, a Guelph delegation consisting of me, Mayor Karen Farbridge, Chamber of Commerce President Lloyd Longfield, and Guelph Municipal Holdings Inc. General Manager Rob Kerr, travelled to Germany to participate in the Transatlantic Urban Climate Dialogue Plus. While in Berlin, our delegation met with a number of leading companies in the European DE market. Ramboll Group was one of them.

We described Guelph’s plans, and delineated how the CEI has enlisted a broad cross-section of the community and enjoys widespread and enthusiastic support as a result. We expressed our conviction that the DE market in Ontario, across Canada, and indeed in all of North America is on the verge of explosive growth. This growth will be driven by rising energy costs, increasing urban densification, and growing concerns over the effect of fossil fuels on our climate. We positioned Guelph as the gateway to a market that was about to blossom.

Our case was well received. Each of the three companies agreed to visit Guelph to explore the opportunity further.

In May and June, we hosted delegations from each company. Our European colleagues learned more about the details of our plans, and heard about the prior month’s visit by the Minister of Energy to announce two Combined Heat and Power (CHP) projects totalling 18 megawatts of electricity production. They also toured the city, saw the elements of the DE network that were already in place, and cased out the areas where we planned to continue building this new thermal energy utility.

We soon learned that our estimates of the cost and difficulty of implementing the system were out of whack. North American DE players are project focused, and the costs reflect this. Their European counterparts are program focused and are willing to offer prices with a long-term view. In other words, when ordering, say, 100 metres of DE piping as part of a program to lay over 100 kilometres, a North American company will offer a price for the 100 metre quantity; a European one will price based on the full 100 kilometres. By partnering with our new European friends, we stood to reap the benefits of significant bulk purchase pricing.

Another factor which was out of whack was our understanding of the ease of constructing a DE network. The first thing our Danish friends pointed out was that our roads are straight. So what? At first we didn’t understand why this was relevant. Of course our roads are straight. Aren’t all roads? And why does that matter, anyway?

European cities are, generally, ancient. At least more ancient than the automobile, which is the main reason for straight roads. European cities tend to be constructed along natural features, like rivers, deltas, lake shorelines, or seashores. Pipes are straight. Laying them along Mother Nature’s curves and bends is nightmarish, but it’s par for the course in the mature European DE market.

In North America, straight lines predominate – except for in the centres of the cities that were first settled on the east side of the continent. As you travel west, and as you travel out from the centre of older eastern cities, you find – you guessed it – straight roads. And since DE networks generally follow roadways (like other infrastructure such as water mains, sewer lines, buried cables, and so on), straighter means cheaper.

Another factor is the width of our roads. In European cities, at least in the downtown areas, drivability is clearly an afterthought. Negotiating some of the narrow lanes in anything larger than a Fiat Uno is a hair-raising experience. Installing any infrastructure means that the roads will be shut down for the duration of the work. Crews are lucky if they can find a route for the pipe that doesn’t interfere with existing services.

Our roads don’t feel that wide, but only because most of us haven’t experienced European ones. In some parts of Guelph, our Danish visitors gaped at wide roads, wide shoulders, and wide ditches – for the first time in their careers, they considered that they could run their pipe without halting traffic. It was a completely new and astounding idea for them.

The bottom line is that Guelph – and indeed all of North America – is the promised land for DE. It didn’t take long to reach agreement with all three companies. Ramboll is just the first – more good news is coming to Guelph, more economic growth, more jobs, and an exciting future at the forefront of a huge new market.

Blind alley

Dead-End-Good-Ways-To-Make-Money1In my last post (which also happened to be a speech I gave for last week’s launch of Project Neutral in Guelph) I pointed out that the city is hemorrhaging money to pay for energy. By 2031 the annual bill will reach half a billion dollars. Guelph is not alone – every city has to pay for the energy it uses. Since no North American city has achieved energy self-sufficiency, most of that cash leaves town.

Guelph is a growing city. The Province of Ontario’s Places to Grow Act of 2006 committed the city to a 50% population increase over the ensuing 25 years. That means adding nearly 60,000 more citizens, and 20,000 more dwellings to accommodate them. Growth in population has traditionally been tied directly to growth in energy consumption, so as long as the two go in lockstep, we would expect Guelph’s energy consumption to grow by 50% from 2006 to 2031.

Guelph’s Community Energy Initiative commits to breaking the link between population and energy. It states the goal that all growth in energy needs for the residential sector will be met by efficiency. In other words, if a new house is built, the energy it uses will come not by generating and importing more energy, but by all the existing housing using less.

Energy efficiency programs, in which utilities work with government to encourage homeowners to use less, are nothing new. One of the most recent such programs was the EcoEnergy for Homes program. It achieved less than 10% penetration. Unfortunately, that’s not enough for the program to be considered a success.

Why was EcoEnergy for Homes a blind alley? First, the economics were problematic. Second, it was maddeningly complicated. I went through the process on two successive homes, so I got to know the details pretty well.

Economics first. The return on investment for an energy retrofit is reasonably good, but not fantastic. The fact that the risk is near zero, and so should be rated alongside, say, Canada Savings Bonds, didn’t register with me at the time. If it had, I would have realized that it was a fabulous deal – normally you only get moderate returns with moderate risk, but this was a moderate return with very low risk. Sweet. If I’d only seen it.

Rather than return on investment, some people look through the payback lens. An investment with a return of 10% pays for itself in ten years. With the incentive cash considered, my payback was eight years or so. That made me hesitate – was I certain that I’d stay in my house long enough to get my money back? (As it turned out, I didn’t stay in either house long enough.) The payback looked worse if I took interest costs into account. More on that in a moment.

So much for economics; now on to the complexity problem. The initial step was to learn about the program. The marketing for EcoEnergy was pretty good, but I expect they threw buckets of advertising cash at it to achieve that level of awareness among prospects. There was no personal touch, no way to ask questions other than a FAQ file.

The next step was to get financing. No bank offers a home energy loan program, so the only way to finance the project (if you don’t have a stack of cash gathering dust somewhere, and who does) is with a home equity line of credit. If you’re pushing the limits of your creditworthiness, you’ll never convince your banker that you will be able to pay for the loan out of the savings on your energy bills, so you may never get out of the gate. Fortunately, I had credit to spare so I got the money I needed.

Next, I needed an auditor. Most people hear “auditor” and run for cover, so seeking one out seemed like masochism. I eventually learned that energy auditors are nice folk, but I’d never done business with one before. Plumbers, yes, electricians certainly, but energy auditors never once. Fortunately I was given a list of approved suppliers, which helped the process along, but it was still terra incognita.

Now on to contractors. Many people have done home renovations and so have a favorite. I’d gotten badly burned on a re-roofing job, so even if dude hadn’t gone bankrupt and skipped town, I wouldn’t have sent another contract his way if my life depended on it. Figuring out the good guys from the bad, the experienced from the fly-by-nighters, and the everything-under-one-roof shops from the subcontract-all-you-can guys…well, it’s a nightmare.

Next is suppliers. My contractor had specific brands of furnace, air conditioners, and water heaters that he liked, so I was stuck with those. I could have tried another brand, I suppose, but I would have gotten a line like, “Well, I can install that one if you want, but I don’t really know it that well/I’ve had trouble with them in the past/their new product line just isn’t as good as it used to be”. The cynic in me figured that low volume of purchases meant no bulk discount which meant tighter margins for the contractor. Anyway, how many furnaces does the average person buy in a lifetime? How do you know the good from the bad?

Finally was the incentive process. The auditor took care of it, which was nice, but it took forever for my cheque to finally arrive. There were no guarantees that I would get the money I expected. It was all very nerve-wracking.

What’s really needed in a home energy retrofit program is simple, low-cost financing that is matched to the investment itself, and a turnkey process that requires minimal effort on the part of the homeowner.

It just so happens that Guelph is planning to deliver exactly that. To find out more, tune in next week.

[By the way, if you landed on this page because you were looking up the 2011 movie directed by the unfortunately named Antonio Trashorras, you landed in the wrong place. And you need to get a life.]