potrero view

February 2010

Innovative Energy Efficiency Model Could Reduce Low-Income Household Costs and Create Green Jobs

By Lori Higa

Saving energy saves money.  It’s a simple enough mantra in the age of global climate change and sagging economies.  And with recent environmental legislation – particularly California’s Global Warming Solutions Act, Assembly Bill (AB) 32, which mandates a 25 percent reduction in carbon emissions by 2020 – Californians may have little choice but to become more efficient, fast.  

However, “split incentives” – in which a landlord owns the energy using appliances in a home or business, while the tenant pays the associated utility bill – pose a significant barrier to making efficiency progress.  As a result of the frequent divide between equipment ownership and who pays the bill, low-income families and renters often rely on aging, inefficient appliances – even after years of utility- and government-sponsored efforts to retire them – with higher than necessary energy expenditures and dependence on oft nearby fossil fuel power plants.

Dogpatch-based San Francisco Community Power (SF Power) has been helping low-income families, small businesses, and property owners reduce their energy and water use, and strive for environmental justice, for nearly a decade.   Founded by View publisher Steve Moss in 2001, the organization was launched as a cooperative, with seed funding from the San Francisco Department of the Environment (SF Environment).   In 2004, before reducing its emphasis on membership, it boasted of 1,400 members – some 600 businesses and 800 residents – who resided primarily in Bayview-Hunters Point and Potrero Hill.  For a small fee, members received $200 rebates on energy-saving equipment, discounts on efficient lighting, and, in the case of small businesses, up to $2,000 to replace dinosaur appliances.   Small enterprises from Hazel’s Kitchen to Jordan’s House of Ribs breathed sighs of relief when SF Power hauled away their decades old energy hogging refrigerators, replacing them with EnergyStar™ appliances, saving thousands of dollars in utility bills annually.  The feisty nonprofit also joined with other environmental groups in a successful fight to shut down the ancient Hunters Point – which closed in 2006 – and Potrero power plants, which will be shuttered by the end of this year.

SF Power’s latest idea could bridge the split incentive divide with a business model that promotes green jobs and financial sustainability.  The concept, according to executive director Moss and collaborator energy economist Rich White, calls for a pilot program to create a residential energy services company (ESCO).  The residential ESCO would offer property owners the option of transferring responsibility for providing appliances in rental units, and serve as a one-stop shop for energy and water conservation measures, available public subsidies, warranty work, and energy-efficient equipment for low-income renters and landlords.  It would include a small box retail outlet located in low-income neighborhoods, stocked with energy- and water-efficient appliances and staffed by community members trained in energy conservation, “similar to the Delancey Street’s moving company model,” said Moss, “or a job-creating version of car sharing.”  The ESCO would make money from sales and services, paid for with the energy savings prompted by improved efficiencies.

In recent fieldwork, SF Power found that up to 25,000 – one-fifth of refrigerators located in low-income San Francisco households could be cost-effectively replaced, paying for themselves with energy bill savings.  Lack of money and knowledge about energy-efficiency, as well as the split incentive phenomenon, are the main reasons for holding back retirement of energy-hogging devices.  Landlords with tenants who pay their own utility bills have little incentive to replace old appliances with efficient ones.  Tenants who pay for their own utilities want to save money but often have neither conservation savvy nor the funds or property owner’s permission to buy energy-efficient appliances.  “There’ve been many studies pointing out that landlords don’t invest in energy-efficient appliances when their tenants pay the utility bill,” said University of California, Berkeley economics associate professor Lucas Davis.  “SF Power’s proposal is exciting.  It addresses the split incentives landlord-tenant problem with a solution that jumpstarts public intervention by a nonprofit.”

Creating such a program faces a number of challenges.  The plan needs seed money—”at least $1.5 million to implement a two to three-year pilot,” said White.   But the lack of a financial track record makes it difficult to fund, according to SF Environment climate program manager Cal Broomhead.  “We rely on entrepreneurs like Steve to come up with great ideas like these, but we need detail that shows the plan’s viable.  For example, how large is the market pool?  Define it.  There needs to be deliverables, a timeline, fixed costs, positive cash flow.  How much will it cost to rent a small box retail space?  How many appliances, how many repairs, how many jobs will be generated, what are the margins, how will it scale?”  Even if the proposal had these specifics, however, there’s no money to fund it.  SF Environment has opted to invest much of its federal stimulus funds to replace large central heating systems in multi-unit buildings.  Broomfield suggested that legislation may be the fastest way to jumpstart SF Power’s proposal, or a collaboration with existing retailers, such as appliance dealers or hardware stores, “to get your feet wet, see if it works.”

SF Power has pitched a companion proposal – to enable low-income families to redirect existing state utility bill subsidies to purchase energy efficient appliances – to State Senator Mark Leno’s office.  According to Leno, that proposal is “a really interesting idea, the first of its kind that I’ve seen.  I would hope that the California Public Utility Commission or similar organization would move forward with supporting such a program.”  State Assembly member Nancy Skinner has picked-up on the concept, and may introduce a legislation to conduct a demonstration project this year.

“I’ve worked with Mr. Moss to identify and evaluate micro-financing solutions to encourage adoption of energy efficiency by low-income families and small enterprises,” said James Fine, a Bay Area-based economist at Environmental Defense Fund. “We found a clear gap between the needs of renters and existing solutions.  Steve’s innovative proposal will help to bridge the gap and could deliver immediate economic and environmental benefits to our most vulnerable populations.  Steve has a proven track record of mobilizing and delivering projects quickly.  He has the pieces in place with SF Power, understands the issues, has networks in the community, both a grasstops perspective and grassroots experience and is in as good a better position to implement it as anybody.”  

“We’ve proven we can work with the community and be profitable.  Our demand response program for small businesses is one example.  And with our Climate for Community initiative we’ve demonstrated how low-income households and small businesses can step by step reduce their resource use, saving money, energy and the environment,” said Moss.  In a 2009 View advertisement, SF Power congratulated 250 small businesses, cities, and nonprofits who received more than $115,000 – in excess of a quarter million dollars in payments over the past three years – through its demand response (DR) program.  When called on last summer, DR participants reduced their electricity use by seven megawatts, enough to power 7,000 homes.  The program helps protect the state’s power grid from outages during peak electricity use periods, cutting pollutants.

According to SF Power, distribution accounts for roughly half the cost of new appliances.  With a small box retail outlet located in hard-pressed neighborhoods, distribution costs could be slashed.  White envisions the pilot including up to 1,000 multi-family building owners and single-family households in partnership with a financial institution, utility or municipality, with whom low-cost micro-loans could be set up.  “Running a pilot is critical, because there are challenges we just won’t know about until we do it.   We need to figure out the right price points, the right people…Once we know the true costs, we can tweak the financing, the budget, use the approach that really works best.  If you think of it as a carbon reduction plan, we can reduce more emissions more cheaply and quickly with energy-efficient appliances than any other way,” said White.

A potential monkey wrench in the works is how payments for efficient appliances would interact with the City’s rent control laws.   Roughly 65 percent of San Francisco residents are renters, representing upwards of 270,000 housing units.  Many of these San Franciscans reside in rent controlled units, in which the ability of landlords to pass through the higher costs associated with appliance purchases is restricted.  Under one residential ESCO approach tenants would voluntarily pay for efficient appliances through their utility or rent bills, recouping their costs through lower electricity bills.  But, according to Broomhead, “There may be issues, complaints from renters, because of not understanding the tradeoffs of having a different kind of energy services model in order to have energy efficient appliances.”  According to Moss, “The program would be completely voluntary for both landlords and tenants.  The idea is for everyone to be better off, including the local economy and the environment.  An attractive, optional program ensures that only property owners and tenants who want to participate, and understand that the benefits, will sign-up.”

“I would turn the negatives around rent control into positives,” said Davis.  “I don’t see rent control as a reason or even related to the issue of energy efficiency.  It’s about how landlords don’t make the investments to begin with.  The beauty of Steve’s proposal is that an ESCO can be done at no increased cost to a renter.  In fact, rent control creates a good argument for an ESCO.”  Davis recently made a presentation to the City of Santa Monica, where “they have real severe rent control.  Many rental units don’t even come with refrigerators,” he said.  “They take rent control to an absurd extreme.  I think having energy efficient appliances makes rental units more rentable, and smart building owners know that.”           

While successful ESCOs already exist in the commercial realm, they’ve made little headway into residential markets because of the higher costs required to service many residential customers and smaller profit margins.   “You might ask why has the market not done this already? We’re beginning to see private firms get into the third-party ESCO business.  The challenge is: society cares about environmental emissions, but private firms don’t get the gains from reducing emissions that makes it worth their while.  It’s hard to make a go of it when gains are not big enough...there are high administrative costs, large transaction costs, these are some reasons why you don’t see these kinds of ideas arise on their own.  If Steve’s proposal is successful, it will stop the inertia and encourage for-profit companies to get involved in the residential third-party energy services business,” said Davis.  The landlord-tenant challenge and the failure of the marketplace to come up with a solution, Davis believes, results in environmental degradation and resource depletion, to the tune of seven trillion British Thermal Units in unnecessary consumption and 127,000 tons of excess carbon emissions annually.

Fine sees SF Power’s proposal as a potential pathway to enable low-income renters a way to participate in emerging carbon trading markets, by aggregating small greenhouse gas reductions.  “When people can participate in the carbon markets, they have more choices and options as to their energy use.  Community organizations such as the ESCO could serve as third-party aggregators to quantify and trade credits and enter into transactions that return carbon value to the community in the form of cash rebates, incentives, emission reduction projects and other services.  Delivering environmental justice benefits are clearly in the language of AB 32.   This is very significant since residences and small business comprise about 20 percent of greenhouse gas emissions in California, not including transportation,” Fine commented.

“We want to own and trade carbon credits,” White asserted, “it would be an important component of the ESCO, puts residential customers closer to carbon trading, with the ESCO becoming a carbon broker.  It’s a matter of getting the right price.  When people have that data, they can make better decisions about how they use energy. It’s a real benefit, where consumers can get the best value for their money.”

 

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