Time for a System Update: Financing our Buildings’ Future

Buildings should last decades or longer, but to do so they must be periodically modernized — and that’s challenging when financing options are limited. This means we are missing opportunities to implement new technologies that support efficiency, health and productivity in homes and businesses — and opportunities to equitably improve buildings.

Our homes, offices, stores and recreational centers consume 41% of total U.S. energy use. In cities, this figure can be as high as 70%. Home energy use should not be a significant financial burden, but over 25% of U.S. households pay more than 6% of their monthly income on energy bills, and 13% pay more than 10%; these disparities are concentrated among people of color and low-income communities in Southern states.

New buildings benefit from updated energy codes and consequently tend to be more efficient. However, half of the U.S. housing stock was built before 1980, and most of it lags far behind current building standards. Even some newer buildings do not perform as intended, wasting more than 30% of the energy they use. While we have the tools and technologies to upgrade these buildings, retrofits are expensive and often require financing, and though many energy-efficient and electrified options reduce costs over time, they cost more up front.

The Building Blocks of Effective Finance

Many states have adopted financing policies to overcome these cost barriers. These generally fall into three categories: direct or indirect financial grants to decrease cost at the point of sale; policies that decrease cost over time through rebates and tax incentives; and policies that provide low-cost financing. Most states have financing policies that fall into the first two categories, such as point-of-sale rebates and tax incentives. About half of the states have policies that provide low-cost financing.

State decision-makers should review both proposed and existing mechanisms in all these three categories to answer several questions:

• Do existing policies reach intended population segments? Depending on state goals, financial incentives may be targeted to certain populations. For instance, many states target financial incentives to low- or moderate-income households, aiming to decrease energy costs while addressing inequality and the legacy of systemic racism. Others may focus on incentives to owners of large commercial or industrial buildings to increase efficiency and decrease cost and carbon emissions.
• Does the structure of the incentive achieve the desired results? States need to ensure that the customer segment they are targeting can take effective advantage of the incentive. For instance, tax incentives are more easily used by wealthier individuals and businesses, while point-of-sale rebates are more accessible to low- and moderate-income households and members of overburdened communities.
• Does financing cover the newest and most energy-efficient technologies? One potential barrier to efficient and cost-effective electrification is state policies that bar fuel switching or rely on a limited definition of energy efficiency (e.g., covering only kilowatt-hours rather than total energy saved).
• Have technologies reached market parity or saturation? When this is the case, it’s possible that incentives can be reduced or eliminated, at least for specific target segments.
• Are incentives aligned with wider energy goals? Where practical, policymakers should strive to design incentives to align with ultimate goals (e.g., addressing climate change and reducing peak load) and to be technology-neutral.

Beyond these traditional categories, recent innovations in financing policies have stretched the bounds of market transformation, especially when paired with other policies.

One set of innovative policies falls under the category of promoting performance-savvy appraisal. This approach recognizes that appraisals play a critical role in financing the construction and renovation of buildings, but that they typically do not account for the full value of energy efficiency and high performance. This blind spot leads private parties to underinvest in building performance. One example of this is owners’ reluctance to invest in renovations to improve energy efficiency out of concern that they will not recoup the investment when they sell the building.

As laid out in a fact sheet from the Institute for Market Transformation, the elements of a performance-savvy appraisal policy are:

• Require that government appraisers receive training on energy efficiency and building performance broadly.
• Provide technical assistance to industry: Help appraisers and their clients to fully value building performance and to understand why doing so is in their interest.
• Add building performance training courses to requirements for individuals to receive and renew appraisal licensing (continuing education). Oregon is the first state to require this.
• Facilitate training courses for appraisers and others on valuing building performance.

By making building performance visible to the market, benchmarking and transparency laws are a good complement to performance-savvy appraisal policies.

Setting an Ambitious Example: Ithaca, New York

The most ambitious financing policies recognize that while traditional finance has done much good, it is not producing investment in improved building performance on pace with what climate scientists (as reflected, for example, in the 2022 report from the Intergovernmental Panel on Climate Change) have determined is necessary to prevent catastrophic climate change or to meet many states’ bold climate commitments.

The leading example of truly ambitious building decarbonization finance policy is the small city of Ithaca, New York. Recognizing that despite decades of leading policies and programs to drive building renovation, it was far from on pace to achieving its climate commitment, Ithaca put in place a bold policy to finance the renovation and electrification of 6,000 buildings.

Ithaca developed a strategy to leverage private equity finance, state incentives and other sources for this project at a total cost of $600 million (a figure that dwarfs the city’s annual budget of $80 million). Ithaca recognized that such renovations will pencil out for some but not all buildings. So, Ithaca took a portfolio approach and aggregated its buildings together for financing portfolios that include buildings with varying paybacks for such renovations. Using local taxpayer, ratepayer and federal funds, the city directs subsidies to owners, including low- and moderate-income households where low credit scores and lack of capital posed barriers. Ithaca further facilitates the financing of renovations, especially by low- and moderate-income ratepayers, by arranging on-bill financing so that ratepayers can repay renovations on their utility bills. To secure private equity investment — investors have already committed about $105 million for Phase 1 — the New York State Energy Research and Development Authority and the Kresge Foundation provide loan loss reserves to insulate investors from risk.

Considered as a whole, Ithaca’s financing policy may be the first in the United States to put a U.S. jurisdiction on a path to achieve building decarbonization at a pace consistent with bold climate commitments.

Risks, Standards and Planning

Even Ithaca’s approach may fall short in one regard. The experience of Massachusetts, which provides energy efficiency renovations for affordable housing at essentially no cost, shows that home and building owners will often not avail themselves of even extremely generous financing programs. Many have more pressing demands on their time and resources, particularly when one in five U.S. households reported reducing or forgoing necessities such as food or medicine to pay an energy bill.

Combining financing with building performance standards and other mandates can help overcome this inertia. Ithaca has committed to put in place a building performance standard and joined President Biden’s National BPS Coalition. The Institute for Market Transformation has developed a concept that simultaneously addresses all the root causes of inaction on building renovations by marrying the bold financing, contracting and workforce development approaches used by Ithaca with a building performance standard.

As part of the Biden administration’s whole-of-government approach to fighting climate change, federal financial regulatory agencies including the Commodity Futures Trading Commission and the Federal Reserve have moved to require companies to account for, plan for and take steps to prepare for risks associated with climate change, including transition risk as governments put in place policies like building performance standards and carbon taxes to drive decarbonization of the economy. The most prominent such step is the Securities and Exchange Commission’s proposed rule requiring public companies and other issuers of securities to assess and publish their risk exposure and greenhouse gas emissions. These policies will give financial incentives to lenders and investors to invest in high-performing buildings and renovations and serve as a force multiplier for building performance standards and other mandates to drive action on the ground.

A broad range of both proven finance policies and exciting and innovative new policies is available to states. With the impacts of climate change and the barrier of housing affordability presenting a twin crisis, now is the time for states to act.

The RAPPORT, Europe edition, April 2023

The RAPPORT, Europe edition, February 2023

Better, faster, stronger: A look into further electricity market reforms

The European energy crisis was not caused by the electricity market. But it sure made people pay closer-than-usual attention to its design. That is not a bad thing. The electricity market becomes ever more important as large swaths of the economy further electrify. The electricity market therefore needs to be fit-for-purpose. In this briefing, RAP lays out how the electricity market can deliver better, faster and stronger for the energy transition and the people living it.

Any follow-up to the crisis should aim to speed up the replacement of fossil fuels with renewables, demand-side flexibility, storage and energy efficiency. The focus of market reform induced by this crisis should be to elevate the demand side on par with supply-side resources and improve hedging in the market to alleviate the remainder of the ongoing crisis and prepare for the next. This requires boosting a new portfolio of longer-term market features to share risks and benefit consumers.

Here, RAP discusses the following advances in market design:

• Short-term markets see location and scarcity
• Forward markets allocate risks
• Contracts for Difference are carefully designed and procured
• Infrastructure planning and operation integrates sectors
• Windfall profit taxation as the exception
• Capacity remuneration mechanisms fit for flexibility
• Required demand-side flexibility
• Empowered and protected consumers

Review of Integrated Resource Planning and Load Forecasting Techniques in India

Accurately forecasting electricity demand in India is imperative for governments, utilities and industries when it comes to investment and planning decisions. Over the years, forecasting has becoming even more challenging as planners must take into account changes in technology, load profiles, consumer energy end-use, and economic growth. The changes are the leading cause of uncertainty when it comes to future electricity demand.

In Review of Integrated Resource Planning and Load Forecasting Techniques in India, the authors provide an overview of India’s system of load research and integrated resource planning (IRP), describe related experiences in other developing countries, and deliver recommendations that could strengthen the process in India. The goal is to enable India’s power sector to reliably, efficiently and sustainably meet the country’s demand for electricity.

Discom Business Models Require Changes to Promote Distributed Energy Resources

In this third part of our distributed energy resources (DER) in India series, we look at changes to the current distribution company (discom) business models. These models can overcome the financial disincentives DERs often face. Instead, discoms can embrace and promote DERs to improve system efficiency, increase consumer savings, and address climate change goals.

This short paper discusses the reasons the current discom model should change and how regulators should listen to concerns many discoms have when it comes to the changes associated with promoting DERs.

The paper also discusses the steps regulators can take when it comes to transforming the current discom business model, including:

• Require discoms to evaluate non-wires alternatives to meet system needs where practical and cost effective
• Require discoms to create distribution system platforms
• Require discoms to modify tariff design to send unbundled granular price signals to facilitate DERs
• Require discoms to develop DER programs
• Develop a process to effectuate changes to the discom business model

Read Part 1: Empowering Retail Customers: Improve Efficiency, Lower Costs and Reduce Emissions

Read Part 2: Facilitating Distributed Energy Resources Requires Policy Actions 

Price shock absorber: Temporary electricity price relief during times of gas market crisis

European policymakers are weighing possible responses to the extraordinary surge in energy prices and the consequences for citizens and industry. The European Commission expects to issue additional guidance in May, following analysis due in April from the Agency for the Cooperation of Energy Regulators. Targeted relief to vulnerable consumers should be undertaken in any case. Whilst RAP would urge caution in considering possible broader interventions in the electricity markets, if such a course of action is under serious consideration, we offer this proposal of a ‘price shock absorber’ for reflection as a measure best fit for purpose, designed to acknowledge and address the essential aspects of the current crisis:

• This is a gas market crisis — it is an extraordinary event that is adversely affecting all sectors of Europe’s economy. The priority for the electricity sector must be measures that allow the electricity market to ride through this shock to the system, and similar future shocks, preserving its functionality whilst avoiding undue harm to consumers.
• The midst of a crisis is the wrong time to take decisions with long-term implications that will be difficult to walk back once the crisis has passed. Our proposal acknowledges that the fundamental design of the electricity market is sound; whilst improvements are certainly needed, they have no direct bearing on the causes of or remedies for this crisis.
• This crisis has revealed in stark terms the true cost of dependence on a volatile fossil gas market, including the risks inherent in the prominent position Russia will continue to occupy in global supply.
• Consumers and industry have the power to contribute to the response to these risks, by procuring the energy services they need more efficiently and flexibly.

When responding to the crisis, policymakers should preserve and even intensify the electricity market’s role in mobilising and empowering consumers rather than concealing the true cost of ‘business as usual.’ The value of the only durable response — an accelerated transition away from fossil fuels — must remain visible to consumers in an equitable fashion.

The authors outline this price shock absorber mechanism as an additional market feature to bring consumers some measure of relief whilst preserving the market’s essential functions. These include valuing energy efficiency, rewarding beneficial demand and resource flexibility and ensuring a ‘normal’ level of expected inframarginal rent to incentivise and compensate investors in the energy transition for the value of their investments. If a decision is taken to intervene broadly in the electricity market, we suggest this approach offers a significant measure of relief whilst doing the least harm.

Utility Business Models and Performance-Based Regulation

​In a presentation for the U.S. Climate Alliance, Mark LeBel explored the promise of performance-based regulation as an alternative to traditional cost-of-service regulation for utilities.

The RAPPORT, Europe Edition, September 2021

Zukünftige Anforderungen an eine energiewendegerechte Netzkostenallokation

Mit fortschreitender Energiewende werden fluktuierende Erneuerbare Energien immer zentraler bei der Energieversorgung. Für ein kosteneffizientes Energiesystem müssen die bestehenden industriellen und größeren kommerziellen Verbraucher sowie deren anstehende Elektrifizierung der Wärme- und Produktionsprozesse (Sektorenkopplung) darauf reagieren. Strompreise signalisieren dabei die Knappheiten und Überschüsse der Erzeugung. Auch das Netz ist schon heute sehr unterschiedlich ausgelastet. Trotzdem gilt, dass auch Knappheiten, die nur über kurze Zeiten auftreten, maßgeblich über einen kostenintensiven Netzausbau beseitigt werden. Kosteneffizient wäre es, auch die neuen und bestehenden Verbrauchseinrichtungen im industriellen Bereich und zur Schnellladung von Elektromobilen (Verbraucher mit registrierender Leistungsmessung) für eine Netzoptimierung einzusetzen.

Hier gewinnt die Frage nach Anreizwirkungen, einschließlich möglicher Hemmnisse und Fehlanreize, die von Netzentgelten (neben anderen Umlagen und Abgaben) ausgehen, stark an Relevanz: Es geht nicht mehr allein um eine „gerechte“ Kostenallokation, sondern um die Frage, ob energiewenderelevante Entwicklungen durch ineffiziente Bemessung und Strukturen der Netzentgelte unangemessen behindert werden.

Dieses Projekt betrachtet, wie die heutigen Regelungen zu problematischen Wirkungen bei der Netzkostenallokation führen können. Geeignete Weiterentwicklungen können sich dabei jedoch nicht auf kleine, kurzfristig umsetzbare Anpassungen und Ausnahmen beschränken. Deshalb werden hier grundlegendere Optionen andisktutiert. Das Ergebnis der Ausarbeitung soll dabei einen Impuls geben und keine konkret und detailliert ausgearbeiteten Vorschläge unterbreiten. Es soll vielmehr einen grundsätzlichen Diskussionsprozess anstoßen, der in die konkrete Ausarbeitung von Details und Implementierungen in der nächsten Legislaturperiode münden soll.