California Local Governments Lead the Way to Saving Energy by Offering A Utility Allowance Category for Energy Efficient Projects and Projects with Photovoltaic/Solar Energy Systems

Recognizing that utility allowances which are established based on the costs of utilities in older rental properties, will have no correlation with the energy costs in newer or rehabilitated energy efficient properties, California Housing Authorities and local governments are adding a utility allowance category for dwellings that more accurately reflects the lower energy costs associated with energy efficiency.

The designation of a utility allowance category that reflects energy efficiency is necessary because of certain provisions within IRS regulations that require housing developers to use applicable PHA Standard Utility Allowances for Section 8 program for buildings occupied by one or more tenants receiving HUD rental assistance (Tenant Based Assistance). The same requirement also allies to HUD-regulated buildings if tax credits are used for acquisition and rehabilitation. The IRS' expectation in both cases is that utility allowances required by HUD reasonably reflect utility costs.

Under HUD's guidelines for calculating utility allowances, the "first step in establishing allowances using an engineering-based methodology is to develop allowance categories that group dwelling units according to factors that affect consumption requirements." HUD's standard for setting utility allowance in public housing also recognize relevant factors such as the type of construction and design of the housing project and the energy efficiency of appliances and equipment. The utility allowances under this category would also follow the usual course of accounting for unit type and size, as required by HUD's regulation 24 CFR 982.

Many new affordable housing projects that are funded through Low Income Housing Tax Credits or Tax Exempt Bond Financing are required to exceed state minimum energy efficiency requirements. For example, in California, they need to be at least 15% more efficient than California's energy code. In some California PHA jurisdictions, projects may now qualify for an energy efficiency-based utility allowance (EEBUA). By better aligning the utility allowance with the cost of utilities, more of the tenants' housing burden is applied to rent, providing the property owner with a mechanism to pay back the additional costs of reaching this level of energy efficiency. In some jurisdictions, existing projects that undergo rehabilitation efforts, improving efficiency by at least 20% over existing conditions, may also qualify for a lowered utility allowance category. In all cases, the burden of proof is on the owner-developer to provide independent third-party verification that the project meets the PHA's energy efficiency requirements and that, in fact, the efficiency measures are installed. Many developers qualifying for utility company incentive programs are already required to provide a Homes Energy Rating System (HERS) report before receiving their rebate.

Housing Authorities have concluded that newly constructed properties built to a standard equivalent to EPA's Energy Star rating, or substantially rehabilitated properties that improve existing energy consumption by 20 percent or more, constitute a distinctive category of buildings with factors that affect energy consumption and that can be reasonably measured and verified. Also, more developers are installing on-site generation, such as photovoltaic (PV) systems that substantially reduce the electric energy consumption. If appropriately designed and sized, PV systems can eliminate most of the electric energy use.

To respond to the need for a new utility allowance category, the California Public Utilities Commission (CPUC) funded a third party program called Designed for Comfort: Efficient Affordable Housing (EAH). The primary focus of this program is to develop an Energy Efficiency-Based Utility Allowance (EEBUA) schedule based on each housing authority's Standard Utility Allowance schedule and provide assistance in adopting and implementing the new category of utility allowance.

The goal of adopting an EEBUA is to encourage more investment in efficiency and comfort by allowing owners and developers to recover their investment in energy efficiency in rehabilitation and new construction projects. An EEBUA works on the principle that if a project is energy efficient, the utility costs to the tenants will be lower and the utility allowance should also be lower. Without increasing the total amount a tenant pays (the housing burden), an EEBUA allows some of the monthly utility cost savings to be added to the rent, increasing project cash flow and enhancing the economic viability of affordable housing projects. While the EEBUA model is based on a specific level of energy efficiency, the model also includes a safety factor ensuring that part of the cash benefit of the energy efficiency improvements will accrue to the tenants. This results in positive economic benefits for both the tenant and the property owner, and increased comfort for the tenant.

Out of this effort, some housing authorities asked EAH staff to take it a step further by helping them to create an On-Site Generation Utility Allowance Schedule (OGUA). If an owner-developer provides on-site generation, such as a photovoltaic system that covers all or part of the tenants' electrical needs, the electric portion of the bills could also be reduced accordingly. Like the EEBUA, this provides a payback to the owner on the investment (the cost of the on-site generation system). In this case, any adverse impact on the tenants can be avoided by the owner-developer agreeing to pay the electricity bill for any electricity usage not met by the site-generation.

While each owner-developer's and housing authority's needs are different, California housing authorities are starting a trend to reward owners and developers for investing in saving energy and building more comfortable homes.

Pioneering housing authorities that adopted an Energy Efficiency-Based Utility Allowance in 2003 include: The Housing Authority of the County of Riverside (HACR), Housing Authority of the City of Norwalk, and the Housing Authority of the City of Anaheim. HUD highlighted the HACR implementation of an EEBUA and indicated that it deems adopting the Energy Efficiency-Based Utility Allowance schedule to be a "best practice." They story appears in their March-April 2004 edition of the online newsletter: "Public Housing Energy Conservation Clearinghouse News." In the newsletter, HUD recognized the Housing Authority of the County of Riverside as a leader.

In 2004, several other housing authorities took the following steps to encourage energy efficiency in affordable housing:

• The Housing Authority of the County of Monterey offers both an EEBUA schedule as well as an OGUA schedule. According to one County of Monterey Housing Authority Board Member "by adopting this new category of utility allowance, we are creating an incentive for owner-developers to invest in saving energy." The Monterey PHA is hosting an owner-developer workshop on February 10, 2005 to announce the program to local developers and provide training on how to qualify.
  
• San Diego County Department of Housing and Community Development also adopted both an EEBUA and an OGUA. "Our Board has consistently sought new ways to increase affordable housing, while maintaining practices that enhance its chances for success. For tenant and owner alike, utility costs can be an insurmountable burden that can lead to the failure of the project or the homelessness of the tenant," says County Supervisor, Bill Horn. "By utilizing this program, we will help increase the economic viability of affordable housing projects, while at the same time working toward our Board's goal of energy independence for our region by promoting energy efficiency and use of solar energy systems," says County Supervisor, Ron Roberts. Supervisor Roberts goes on to state, "This policy demonstrates our County's commitment to reduce the region's reliance on outside energy sources, and an understanding of the correlation between energy savings, home affordability, and comfort."
  
• In a move corresponding to the City of San Diego Affordable Housing Task Force' recommendation to "explore energy efficiency incentives that can help the developer to build a more efficient project," the San Diego [City] Housing Commission (SDHC) is also offering both an EEBUA and an OGUA to qualifying projects funded through their Notice of Funding Availability (NOFA) for Construction, Acquisition, and Operation of Affordable Rental Housing. This will help ensure that affordable housing owner-developers effectively improve the energy efficiency of projects located within the SDHC's jurisdiction, and allow them to recover their investments in energy efficiency.
  
• Contra Costa County Housing Authority and Yolo County Housing Authority also each adopted an EEBUA in 2004. EAH program staff is assisting several other PHAs to explore the advantages that an EEBUA might offer developers and tenants in their jurisdictions, and many more adoptions are expected in California during 2005.

Non-profit affordable housing associations endorse this utility allowance category. "Essentially, an EEBUA changes the economic equation for energy efficiency in affordable housing by lowering the utility allowance of projects that are energy efficient. A lowered utility allowance recognizes that these units will have lower energy bills and allows the owner-developer to receive a quicker payback on the investment in energy efficiency without raising the total housing costs to the tenant. In the end, the tenant benefits from a more comfortable and energy efficient home. Since a safety factor is built into the EEBUA schedule, tenants' energy bills are lowered more than their rent is raised. Everyone wins," says Tom Scott, Executive Director of the San Diego Housing Federation.

According to Doug Shoemaker, Director of Policy & Programs at the Non-Profit Housing Association of Northern California (NPH) "The Energy Efficiency-Based Utility Allowance schedule is the most cost-effective way to make affordable housing owner-developers serious about energy efficiency."

The program that assisted these local jurisdictions to adopt an EEBUA, Designed for Comfort, Efficient Affordable Housing or EAH, is funded by California utility ratepayers under the auspices of the CPUC. According to HUD's Regional Energy Advisor, Wayne Waite, "The program is certainly one of the most innovative market-based means available for attracting investments in high value energy improvement."  

The California housing authorities that have adopted an EEBUA are doing what's most important, encouraging projects to be energy efficient to lower utility bills and make homes more affordable – and comfortable.

For more information about this program, please contact Julieann Summerford at Summerford@h-m-g.com

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