Unlocking the Added Value of Zero that Hides in Plain Sight

Most buyers and sellers in the housing market will agree that a high level of energy performance makes homes more comfortable. And after some investigation, most would accept these homes as being healthier, too. Most would admit that these homes cost less to own and might see them as a good long-term financial investment. There is a growing awareness that energy-saving features pay for themselves when the proper financing is available. Unfortunately, there are two closely related obstacles to the widespread adoption of energy efficient homes including zero energy and positive energy homes – the real estate appraisal and lending practices.

The appraisal industry stubbornly clings to notions of value and uses appraisal methods that lead to a widely-adopted false narrative: high-performance homes have no greater value than similar sized run-of-the-mill homes. Despite a series of research reports supporting the extra market value, appraisers in the field find excuses to ignore a huge source of value.

A new report adds to the weight of the evidence for higher valuations. Freddie Mac recently published Energy Efficiency: Value Added to Properties and Loan Performance. The study compared conventional homes to those that had received energy efficiency ratings, such as a HERS Index, and reaches these conclusions:

  • From the property value analysis, rated homes are sold for, on average, 2.7% more than comparable unrated homes.
  • Better-rated homes are sold for 3-5% more than lesser-rated homes.
  • Once borrower and underwriting characteristics are considered, loans in the high debt-to-income (DTI) bucket (45% and above) that have ratings appear to have a lower delinquency rate than unrated homes.

These findings support the conclusions of the earlier studies. Energy-efficient homes sell for more than conventional homes. The occupants of energy-efficient homes have lower operational expenses leading to more discretionary income. Energy-efficient homes have higher collateral value and impose less financial stress on their owners. These findings should justify consideration in the underwriting process.

Lenders gain something from energy efficient homes, too. These loans are more stable and profitable. A huge study of 71,000 mortgages in 2013 demonstrated that borrowers living in energy efficient homes are 32% less likely to default on their mortgages. It would seem that lenders would find additional value in these mortgages for two reasons. First, mortgage default is a substantial loss of ongoing revenue. Second, higher quality loans should have greater value in the secondary market and should bring a higher price when loans are bundled into securities. With hundreds of thousands of certified energy efficient homes already in the market, it’s surprising that smart investors haven’t already found a way to filter these higher value properties into higher value investment instruments. What would stop someone from assembling an ENERGY STAR tranche or a zero energy tranche. The same principles are also at work in the commercial real estate sector. Lower operating costs and greater financial stability translate into higher market value, shifting the perception of energy efficiency from that of a side benefit to an important business advantage that affects the bottom line.

In many ways, efficient homes and businesses have been flying under the radar. Multiple listing services (MLSs) and appraisal databases often don’t have a systematic way of capturing energy-saving features, ratings, or certifications. If data fields exist, they are unreliable because energy ratings and certifications are missing or erroneous. Some cities are addressing this issue by creating mandatory energy ratings. For example, Portland, Oregon’s Home Energy Score report is required for each home at the time of sale and the rating value is automatically entered into the home’s MLS listing. Several other cities in the US, such as Austin, Texas have developed energy disclosure policies, too.

While waiting for cities to take action and for the lending industry to catch up, homeowners and business owners, and their real estate agents, can take the lead by making sure the value of the energy saving features of their buildings being sold is properly appraised. There are now appraisers trained in valuing energy efficient features who can more accurately appraise the value of an energy efficient home or building. Ask your lender if they have an appraiser on their list who is qualified to evaluate energy efficient buildings. If you cannot locate one, be sure to document the energy saving features and equipment in the energy efficiency appraisal addendum and be sure that it is added to the appraiser’s report.While there is ample reason to acknowledge that everyone wins with zero energy homes, there is a persistent myth in the housing industry that high-performance homes aren’t worth more in the market. It’s clear that the added value is there, the lending and appraisal industries just aren’t looking. In the meantime, you and your real estate agent can do a lot to make sure that the energy efficiency benefits are added to the value of your building.

We Have Met the Enemy and It Is Waste

I remember the first time I saw Amory Lovins, a physicist who co-founded the Rocky Mountain Institute. He held up a compact fluorescent light (CFL) and declared that if everyone in the United States converted all the old-fashioned bulbs to this new lighting technology, 50 coal-fired power plants could be closed permanently, slashing carbon emissions. It was an astounding statement about the magnitude of energy waste in America. The year was 1985.

Unfortunately, America is still mired in wasteful buildings, equipment, and practices. According to Lawrence Livermore National Lab, about two-thirds of the energy consumed in America ends up as waste heat or “rejected heat,” – energy that is consumed but ends up not doing useful work, it’s just wasted. If two-thirds of the energy that flows through the American economy is simply wasted, there is clearly a lot of room for improvement.

Think of society as having an energy chain. To a small extent, we capture energy directly from the sun through agriculture and forestry. But most of the energy used in the human energy chain comes from fossil fuels. This fossil energy does work, such as growing crops, providing light and conditioned air, constructing buildings, manufacturing consumer goods, and providing services. At each step, a relatively small amount of work is accomplished, resulting in a thirty-three percent energy conversion ratio in the U.S. The majority of the energy we consume escapes as waste heat.

How can we reverse this situation to get more work and less waste from the energy we use everyday? The nascent revolution in personal transportation offers a good example. An internal combustion engine (ICE) is about 20% efficient at turning liquid fuel into motion. On the other hand, electric vehicles (EVs) convert more than 77% of the energy they consume into movement. Every time you apply the brakes in a fossil-fuel-powered vehicle, you waste energy as the brakes apply friction and release this energy as heat. In an EV, applying the brakes engages an electric generator that recharges the battery capturing a large percentage of the energy that would otherwise be wasted. (EVs have friction brakes too, but they are used far less often and as a result their brake components last longer.)

The upshot is that a standard ICE sedan will need more energy to go the same distance as an electric vehicle. One good example is the Kia Optima which offers the same vehicle with either ICE or electric drive trains. The ICE version will consume 2.4 gallons of gasoline to go 100 miles, or the equivalent energy of about 80 kWh of electricity. The ICE Optima has an EPA-rated fuel economy of 41 miles per gallon (MPG), making it one of the most energy efficient ICE vehicles available today. Even so, the electric version beats the pants off the ICE version with an equivalent EPA rating of 101 MPG. The EV will consume only 33 kWhs of electricity to travel the same 100 miles, which is equivalent to just a hair under 1 gallon of gasoline. Better still, the fuel costs just $4.50 for the EV compared to about $7.50 for the ICE. Who wouldn’t like that extra cash to stay in their pocket? The EV produces the same work, but uses about 60% less energy, produces far less air pollution and costs less. Although this example uses an extremely efficient ICE vehicle, the EV still proves to be far more efficient. Now imagine comparing an EV to a typical new vehicle with an average fuel economy of less than 25 MPG.

2020 Kia Optima

Internal Combustion Electric
EPA Fuel Economy 41 MPG 101 MPG
Energy to travel 100 miles 2.4 gal

80 kWh (equivalent)

1 gal (equivalent)

33 kWh

Average cost to travel 100 miles $7.50 $4.50

Waste Equals Opportunity

Amory targeted perhaps the most egregious example of waste when he waved CFLs from podiums in the 1980s. The invention that Thomas Edison patented in 1880 is sinfully wasteful. Only 4% of the electricity that goes into an incandescent lamp comes out as light. The other 96% is waste heat. Compared to the improved, but now obsolete CFL (70% efficient), today’s light emitting diode (LED) lights cost less, have greater efficiency (around 80%), provide better lighting, last much longer, and are free of the toxic mercury contained in fluorescents. So converting old incandescent and CFL bulbs to LEDs is an important step we all can take to reduce energy waste and minimize environmental burdens.

Combustion in Buildings

Other examples of waste involving combustion include water heating, conditioning inside air, and cooking. A conventional tank-style water heater burning fossil methane is about 61% efficient. Even super efficient tankless water heaters top out at around 98% efficient. That sounds good until you compare it to a heat pump water heater that can be 300% efficient at turning electricity into hot water.

While it may seem like magic, heat pumps can also keep homes and buildings warm and cool, with much less waste than combustion equipment such as gas furnaces or chillers. Mini-split heat pumps are widely used and readily available for conditioning air in homes or workplaces. In the kitchen, an induction cooktop performs like a gas range, but costs less to operate and doesn’t release toxic gases into the living space. We should all consider replacing old equipment with these advances in energy efficiency both in existing buildings and in all new construction. These upgrades will eliminate combustion from inside buildings and be a big step towards reducing energy waste.

Passive Approaches

It’s obvious that lights, appliances, water heaters, and HVAC equipment that directly consume energy are the main targets of this movement toward greater efficiency. These are sometimes referred to as “active” systems. However, there are many ways to reduce waste that could be considered “passive” – meaning without moving parts. The best example is buildings with more insulation, air sealing, and advanced windows. Reducing the heat loss and heat gain in homes and buildings is the most cost-effective way to maintain comfortable conditions inside, while reducing energy waste.

Amory had a pithy quote for this, too. “We’d find more energy in the attics of American homes (through energy conservation measures) than in all the oil buried in Alaska,” he said.

Those words seem especially prophetic at this time in history when the vast majority of petroleum and natural gas reserves must stay in the ground.

A Proven Track Record

The idea that saving energy is the same as making energy has been proven in the electric utility sector. In its most recent 20-year power plan, the Northwest Power and Conservation Council showed that energy efficiency programs in the region had saved enough energy to compensate for half the load growth over the previous 20 years. Looking ahead to the next 20 years, the council is projecting that it would be possible for up to 80% of the future load growth to be met through additional efficiency and renewable energy development.

The Future Must Be Renewable

Operating energy efficient equipment in well-constructed energy efficient buildings and powering our vehicles with renewable energy is by far the best option. During the transition to a fully renewable economy, we will all benefit by embracing electrification and energy efficiency. In the meantime, if the local utility is slow to move to renewables, we can install our own solar panels. The more efficient our homes, buildings, and systems are the fewer panels we will need.

And if you can’t switch to renewable energy right away, being efficient is it’s own reward. Fueling highly-efficient electrical devices with the fossil fuel generated electric power from the grid emits less CO2 than using so-called “efficient” on-site combustion systems to perform the same function.

Plan for Action

If tomorrow energy waste were reduced by half, it would mean that all the coal plants in the US could shut down immediately. The next time you feel heat, see an inefficient combustion-based system, or notice other energy waste in your home or work place, make a plan to change it.

Here are a few ideas to get started:

When it’s time to replace anything that uses energy, such as an appliance, light, or automobile, choose the most efficient option. Sometimes local stores don’t handle the most efficient or the least expensive options. It can pay to search online retailers for the highest performance and the best deal.

For major appliances and equipment, make a plan ahead of time. When the water heater springs a leak, the local plumber may not have a good selection of efficient equipment in stock. A quick trip to the ENERGY STAR website can help you zoom in on highly efficient products so you can be prepared to insist on a high-efficiency model when a replacement is needed.

When planning a home or building renovation, you have more time for thoughtful decisions. Check out the 12 Steps to a Affordable Zero Energy Home Design and Construction and these energy efficient renovation ideas. Be sure to choose construction professionals who share your commitment to efficiency and low-carbon living. A good place to start is the Zero Energy Project Builders Directory. Also look for local and state green building programs and check with the utility that serves your location to see if they have programs that incentivize energy efficiency improvements. Investing in energy efficiency can provide its own buying power, and with proper financing, earn dividends that begin immediately.

Time is running very short. Improving energy efficiency – starting now – is critical to avoiding the worst and most expensive impacts of climate change. With every consumer and workplace decision, large and small, we can reduce energy waste.

Which brings us back to Amory Lovins. He described using a nuclear reactor to spin an electric generator as “cutting butter with a chainsaw.” It appears that Americans overpower virtually every process of modern life. We can use a lot less energy to get the same result. While the laws of physics state that no energy conversion can be 100% efficient, we can do much better than 33%.