Currents

An Energy Newsletter for Local Governments

Role of Local Government in Promoting Housing Affordability through Energy Efficiency

The Connection Between Energy Efficiency and Affordable Housing
A home must not impose undue burdens upon its occupants or it's not affordable. By far, the two largest components of the typical housing burden are rent and utility bills. Therefore, the role of utility bills in determining whether or not housing is actually affordable cannot be underestimated. Inability to pay utility bills has been noted as the second leading economic cause of homelessness.[1] The recent increase in energy rates in California and the potential for volatile fluctuations in future energy rates only makes this a more important issue in California.

Investments in the energy efficiency of housing can help to reduce the costs associated with utility bills but often result in a higher construction cost to the developer. Generally, the developer has few options for recouping his/her investment in energy efficiency. This is especially true for affordable housing developers where rents are constrained. Residential property for rent, when the rent is constrained by public purpose regulations, is the classic example of what is known as "split incentives." The owner is the party required to pay any costs of making the building more energy efficient, and yet none of the direct benefits of those investments flow to the owner. The tenant is the one who will reap most of the benefits of the upgrades, and yet the tenant has no say in the level of investment in energy efficiency.

Local Governments' Role in Promoting Energy Efficiency In Affordable Housing
Local governments can play a role in promoting energy efficiency in affordable housing by adopting policy that would encourage owner-developers to invest in energy efficiency, increase their cash flow, lower tenant utility costs. After all, lower utility bills help to make homes more affordable. The average California household spends about 5% of its monthly income on utilities and the average affordable housing tenant in California spends about 20%.

By adopting an Energy Efficiency-Based Utility Allowance schedule, housing authorities send a strong message that they support and reward investments in energy efficiency and that it does play a role making homes more affordable. The publicly-funded Designed for Comfort: Efficient Affordable Housing program aims to assist housing authorities in developing, adopting, marketing, and implementing such a policy. It also sets aside a small amount of funding for the rehab of existing affordable projects as case studies to demonstrate the value of the policy. Below is a summary of an Energy Efficiency-Based Utility Allowance schedule and an example of its impact, as well as a description of the benefits provided by the Designed for Comfort: Efficient Affordable Housing program. Finally, a case study of the impacts of an Energy Efficiency-Based Utility Allowance compared to that of The Housing Authority of the County of Riverside's (HACR) Standard Utility Allowance schedule. The case study is based on a typical 53-unit project resulting in a 15-year increase in cash flow of about $181,000.

An Energy Efficiency-Based Utility Allowance Schedule
The rationale for this schedule is that if an owner-developer builds new, or rehabs existing, affordable housing so that it is energy efficient (as defined by the policy), the utility costs to the tenants would be lower, so the project would then qualify for a lower utility allowance. This would in turn allow the owner to collect increased rents without increasing the total housing burden to the tenant. Further, the model that is used to calculate the lowered (energy efficiency-based) utility allowance is conservative and ensures that the tenant saves as well. Below is an example of a Standard Utility Allowance versus an Energy Efficiency-Based Utility Allowance and the differing impact on rent, owner's net income, tenant utility costs, and total housing burden.

As a public service, the Designed for Comfort: Efficient Affordable Housing program provides full-service assistance to housing authorities statewide to:

1. Develop and adopt an Energy Efficiency-Based Utility Allowance schedule
2. Help with implementation for housing authorities that adopt this policy
3. Designate incentives for owners of existing affordable housing projects (located within the housing authority jurisdiction that adopts policy) who rehab their projects to improve energy efficiency by 20%. Incentives range from $700 to $1,500 per unit.

HUD Highlights the Energy Efficiency-Based Utility Allowance as a "Best Practice"
HUD deems adopting the Energy Efficiency-Based Utility Allowance schedule to be a "best practice" as indicated in their March-April edition of the online newsletter "Public Housing Energy Conservation Clearinghouse News." (PDF)

In it, HUD highlights the efforts of Riverside County to adopt and implement an Energy Efficiency-Based Utility Allowance schedule. To download the report "Establishing and Implementing the Energy Efficient Utility Allowance Schedule: Housing Authority of the County of Riverside," register at http://www.designedforcomfort.com/reports.htm.

Why Wouldn't We Adopt an Energy Efficiency-Based Utility Allowance Schedule?
Although there is no one "silver bullet" incentive offered to owner-developers of affordable housing to offset the cost of investing in energy efficiency, however, collectively, increased Tax Credit funding and utility energy efficiency incentives help to offset these first costs. The benefit of a housing authority adopting an Energy Efficiency-Based Utility Allowance schedule has the longest-term impact of increasing cash flow for the owner-developer. The policy is straightforward, simple to implement, and benefits both the owner-developer and the tenant, sends a strong message from the housing authority that they support energy efficiency as a means of reducing housing costs and providing a more comfortable home for tenants. As one housing authority director put it, Why wouldn't we adopt an Energy Efficiency-Based Utility Allowance schedule?

Ask HMG staff how you can help encourage your local housing authority to adopt this beneficial policy. To take advantage of this service, contact Julieann Summerford at summerford@h-m-g.com, 619-917-5690, or visit www.DesignedforComfort.com.

Continued...

[1] Karen Brown, Ex Dir, Colorado Energy Assistance Foundation. James Benfield, Ex Dir, Campaign for Home Energy Assistance.

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