Loan Payday

A request:  if a) have anything to do with city or county government, and b) have any interest in, or authority over, property taxes, finance, or energy efficiency, please drop whatever you’re doing for 2 minutes, and skim this article.

Oh, all right, I bet you didn’t actually hit the link.  So to make your job easier, I’ll pull a quote or two.

California [just] enacted a law that allows cities and counties to make low-interest loans to homeowners and businesses to install solar panels, high-efficiency air conditioners and other energy-saving improvements.

Participants can pay back the loans over decades through property taxes. And if a property owner sells his home or business, the loan balance is transferred to the next owner, along with the improvements. [Emphasis added.]

I don’t think that I emphasize this enough, so I’ll use capital letters: THIS IS TRULY GROUNDBREAKING.  In fact, it may well be among the top three climate policies ever adopted by the state.  I hope that other states follow suit soon—even if it means fixing the state constitution.  (Cough*Washington*cough).

 Why am I getting all exercised about this? Because energy efficiency is a truly awesome investment opportunity.  There are hundreds of energy saving measures—new appliances, new insulation, new heating systems, you name it—that cost a little bit of money up front, but recoup their costs within 3 years or less.  After that, the cost savings from efficiency are gravy — they keep adding up, helping out home or business budgets for years or even decades.  Investments in efficiency are a great way to boost finances, goose the economy, and save the climate—all in one easy step.

But even though it’s a great investment, most of us vastly under-spend on energy efficiency.  It’s actually pretty astonishing: we think that 3 percent is a pretty good rate for a savings account, but we often turn up our noses at efficiency opportunities that yield returns of 60 percent or more.

Some of this is just plain consumer irrationality: many of us are leaving money on the table for no good reason.  But there are plenty of perfectly rational reasons we don’t invest as much as we should in efficiency:

1. The up-front costs can be daunting.  A super-efficient furnace, for example, may cost $1,000 more than a less-efficient model.  A thousand bucks seems like a lot to spend to save a few bucks a month. If you don’t have that kind of money to throw around, you’ll have to take out a loan—which is an expensive and time consuming nuisance, and could affect your credit-worthiness for other loans.
2. Homeowners aren’t sure they can recoup the costs.  A furnace upgrade might start paying for itself within 10 years.  But by that time, the original homeowner who made the purchase could be long gone.  And since experience suggests that home buyers aren’t willing to pay much for a new furnace, there’s often no way for a homeowner to recoup their money on efficiency investments.
3. Uncertainty is scary. It’s hard to know in advance how much you’ll save on utility bills with any particular efficiency upgrade.  Will the extra efficiency pay for itself within 5 years, or 10, or never?  That sort of uncertainty is intimidating for someone considering a major purchase.

So the reason why I’m so excited by California’s new law is that it absolutely shatters these legitimate financial barriers.  The loan from the city eliminates up-front costs.  Financing the loan with property taxes means that homeowners don’t have to worry about their own credit, or whether a new homeowner will pick up the costs.  And a well-designed program, with low government-backed loan rates, will eliminate much of the uncertainty—homeowners will save starting on day one, without having to wonder when their investment will pay for itself.  The only financial uncertainty: will they save a lot on utility bills, or only a little?

As I discovered with my own home, financing efficiency investments can make good sense—but the conditions have to be just right.  But with this sort of program, many families will find that there’s simply no reason NOT to opt for an efficiency upgrade.  Well, there’s always inertia and procrastination, but I know of no government program that’ll fix that.

Of course, this isn’t the first time I’ve been bullish on using creative financing to fix some of the market failures that inhibit energy efficiency.  Time will tell whether my optimism is justified.  But in the meantime, I’m going to be watching California, to see whether this idea will get some momentum.

Photo courtesy of Flickr user Trevor Blake under a Creative Commons license.