The City’s Low-Income Efficiency Puzzle

Sadly, when it comes to energy efficiency, helping those who need it most can be challenging and costly.

Compared to average households, low-income households spend a larger portion of their income on energy expenditures.  Low-income households also pay more for energy per square foot than average households because they tend to live in older, less efficient housing.

Energy efficiency activities are usually attractive because they can save consumers money. However, some low-income households may not have the funds needed for upfront energy efficiency investments, creating missed opportunities for savings (the “efficiency gap”).

There are a host of ratepayer-subsidized energy efficiency programs offered by electric and gas utilities (e.g. energy efficiency resources standards, LIURP) and also federally-subsidized programs (e.g. weatherization assistance programs, LIHEAP) that specifically target low-income populations. These beneficial programs provide valuable measures to make low-income energy use more efficient and affordable, and have a host of additional benefits (e.g. avoided emissions, increased comfort, local job creation potential).

But what about the challenges?

Of course, availability of funds (i.e. subsidies) to support low-income efficiency programs is always an issue, but there is more.

Because of the condition of the housing stock, and other factors like low participation rates, efficiency and conservation programs offered by utilities to low-income households can be less cost-effective than similar programs offered to non-low-income households. This is evidenced by how public utility commissions may relax cost-effectiveness criteria when approving such programs.

And some studies suggest weatherization programs save less energy than expected, and expenditures may be greater than the energy savings realized.

So, what does this mean for a City like Philadelphia, where policymakers have announced a plan to invest $1 billion to stimulate job creation through energy efficiency projects for city buildings, small businesses, and low- and moderate-income homes?

The City’s plan has so far focused on the use of energy savings performance contracts (ESPCs) offered by private sector energy service companies (ESCOs). ESCO’s typically serve institutional sector clients (e.g. municipalities, hospitals) that are building owners with big energy expenditures.  This longevity and economies of scale provide financial room to support equipment upgrades over a long period of time. ESCO’s also guarantee the energy savings will be enough to service debt liabilities incurred to purchase equipment, plus the opportunity to deliver savings. ESCO guarantee contracts have detailed stipulations on energy use behaviors that if violated can negatively impacts savings guarantees and the ability to generate the savings needed for debt service.

So, will ESPC’s work for low-income households in Philadelphia? I hope so. But there are at least three facts that might stand in the way:

It’s going to be expensive. Pennsylvania has some of the oldest housing stock in the nation, where the median age is 50 to 61 years (2012). Over 41% of the City of Philadelphia’s housing stock was built before 1939 (2005). This means there is a ton of energy inefficient housing (an opportunity) that will cost incrementally more (a challenge) to address, compared to more contemporary stock.

Savings are uncertain. Savings from energy efficiency depend both on the efficiency of the measures employed (e.g. equipment upgrades, insulation) and also the behavior of the users. The challenging housing stock and the difficulty in controlling the behavior of individuals – even when financial incentives are aligned – combine to make energy savings uncertain, and therefore hard to finance.

The private sector may not be interested. Philadelphia County has some of the lowest homeownership rates in the state, making even short-term ESPC financing difficult and creating a split-incentive problem. Also, low-income homeowners may present unattractive credit risks (and/or may be subject to predatory loan behaviors based on exaggerated savings). Couple these facts with expensive measures that yield uncertain results, and you have a tough sell to any for-profit venture.

Philadelphia’s intent to serve the low-income population is laudable. The idea of leveraging public sector dollars by involving the private sector is fantastic. However, it is doubtful that the traditional ESPC model can serve the residential low-income sector.

If Philadelphia’s leaders have the appetite, they can explore new and innovative strategies to help solve the puzzle of how to serve these communities in need.

Christina Simeone

Kleinman Center Senior Fellow

Christina Simeone is a senior fellow at the Kleinman Center for Energy Policy and a doctoral student in advanced energy systems at the Colorado School of Mines and the National Renewable Energy Laboratory, a joint program.