Saturday, April 14, 2007

Financing Hippies

Greetings, venture capitalists.

In my last post, I talked about how it would be a good idea to force all list prices to reflect the expected use cost, so that consumers would be able to more easily compare total costs. In the comments on that post, I also said it would be a good idea to increase energy costs until they hit their "true cost," whatever that might be.

These two suggestions together would be a shock to the economic system, so I'm going to propose a way to finance energy-efficient housing such that the net effect is that nobody gets a stiff bill and energy-efficient technology gets used where appropriate.

Forging a "Standard Deal" with the Banks

Here's the scoop. Everyone want to decrease the taxes they pay towards energy subsidies. Governments are bad at giving environmental incentives proportional to the environmental good done. Banks are greedy. Homeowners don't have piles of cash sitting around, but they're willing to pay huge sums over time in tiny increments.

Here's the plan. Introduce a "standard deal," whereby you can request for a bank to send a housing engineer to your (already-built) home. They will determine which energy-efficient technologies would be most profitable for the house in question. If they decide it to be profitable, the banks could then authorize and pay for energy efficiency updates to be done on the home in question. From that time on, the banks could have a lien on the property for an amount equal to the cost of the thermal upgrading, and for some years' time they would be authorized to take 80% of the difference between the current and pre-improvement utilities bills as estimated by historical usage. The banks would keep the lien on the house until either 10 years have elapsed, or until the amount the bank has drawn has covered the upgrading expense compounded at 15% per year.

Effects of the Standard Deal

The net effects of the standard deal are: homeowners get a short-term small reduction in their utilities bill, and after a few years they get a substantial reduction. Banks get a 15% return-on-investment for their cash, at a fairly low risk. Banks have an incentive to hire engineering firms which will install the most energy-efficient technology which will have a payback time of less than about 8 years. Energy usage will go down across the board. Since the energy-efficiency improvements make the house more valuable, the lien plus improvements actually increase the value of the house (unless the banks made a mistake in terms of what kind of improvements to order).

Case Study: Victorian Toronto Mansion

In the case of the Toronto house I mentioned last post in a footnote, over 10 years they were paying more than $100 000 in heating bills. As long as technology exists which is capable of reducing their winter heating bills to less than $1000 per month, that's more than a $50 000 10-year reduction, so if banks could finance a $30 000 or so insulation retrofit for that house, they'd be rolling in dough. The starving students who lived there would see an immediate but small ($200 - $300) reduction in monthly utility costs, and future students living there would do even better.

Standardizing the Deal

I think there should be no new laws made for this program, but that governments should draw up and promote this standard deal into fill-in-the-blanks contracts between homeowners and banks. If banks want to alter the deal, fine; but governments should provide a default agreement which doesn't screw anyone over as a baseline, in part for efficiency's sake and in part because banks have a lot more expertise at getting what they want out of contracts.

Conclusions: Sometimes Everybody Wins

There doesn't always have to be a trade off between the environment and free enterprise. We can't all be top-notch thermal engineers who know what modifications make the most fiscal sense. With this standard deal, everyone can profit, and there will be an increased economy of scale for energy-efficient technologies which make the most sense. It's win-win-win; let's do it.


Knaldskalle said...

What's the difference between what you're suggesting, and then taking out a regular bank loan to improve your house (energywise)?

LeDopore said...

I guess three things are different. First, the homeowner would pay through the utility company (and not directly to the bank), and the payments would be guaranteed to be less than if improvements were not taken. Second, there would be an explicit understanding that the increase of the value of the house would have to be more than the cost of the improvement (otherwise the bank would do themselves a bad deal) meaning that there would be little risk to the homeowner. Third, the banks could become really good at finding the right home-improvement consulting companies: those that make the right improvements with the right technology. In turn, these construction firms wouldn't have to advertise to every homeowner individually; they could just curry favor from the banks by being good at what they do, so there would be less overhead wasted on efficient technology promotion than if engineering companies had to court homeowners on a one-by-one basis.

Thanks for pointing out that this needed to be stated explicitly.