The Biden administration is preparing to grant states $4.3 billion to give to homeowners for heat pumps, thicker insulation and other renovations to keep homes from wasting energy.
First, federal regulators must set ground rules for how the administration wants states to spend the money. There are two potential pathways to choose from, and one is forecast to save more than twice as much energy as the other. Yet the other option is potentially easier to roll out because it follows a formula several states already use.
Since the more effective approach is newer and requires states to try something different, inertia favors the status quo option, which risks limiting the impact of the biggest federal spending package for home renovations in modern history and setting a weak precedent for the programs through which any future funding will likely flow.
It’s also likely to be the most visible part of President Joe Biden’s Inflation Reduction Act, the landmark climate-spending law that, in addition to directing tens of billions of dollars toward power plant owners, pipeline builders and big companies, contains pots of money like this one for average homeowners. Just slashing home energy waste could, according to the International Energy Agency, deliver 40% of the emissions cuts needed to halt runaway global warming.
The Department of Energy is set to detail as early as this week how it wants state energy offices to spend the unprecedented billions. Depending on how federal regulators write the guidelines, the rules will likely either stack the deck for the less effective but easier-done status quo approach or make, the more potent but harder-to-get-started method simple enough to be the obvious priority for state regulators.
Either way, sources with knowledge of the Biden administration’s plans say the draft regulations include at least one rule that would dramatically temper the program’s ambitions and limit benefits for the average homeowner.
Modeled Vs. Measured
Most states already provide rebates to homeowners for improvements that lower energy usage. But only a handful require data establishing how much energy an individual home used in the first place to figure out how much money governments should pay out to homeowners. Instead, the majority of states simply allow contractors to plug numbers into a computer program that makes projections on energy savings based on factors like adding some insulation or replacing an old oil furnace. Under this “modeled” approach, states use those numbers to determine how much they should pay to cover the cost of the home improvements.
Without data to contrast energy usage before and after renovations, this method is imprecise at best. And there are myriad ways for contractors to game a modeled system. If the computer program that calculates the modeled savings indicates, for example, that more heat pumps equals more savings, then the contractor has an incentive to install a bunch of appliances even if doing so does nothing to lower the homeowner’s energy bills.
“These programs pay for the exact wrong thing,” said Matt Golden, who leads the California-based Recurve, a software firm that tracks energy data to boost efficiency programs. “They’re encouraging bottom feeders because the companies that do it the cheapest make the most money.”
Instead, federal rulemakers could incentivize states to follow a “measured” approach currently used in California. Energy savings are measured over time, and homeowners are given money based on how much less electricity or fuel is used each month after the renovations.
Under this system, “aggregator” companies would help finance home makeovers upfront and earn the investment back over time by taking a cut of the rebates the state pays out for monthly savings.
A contractor working under a modeled system might wait weeks or months to get paid by the government and have little incentive to perform high-quality work that delivers energy savings. But with a measured system, a middleman financier estimates the total value of renovations, pays the contractor almost immediately, and earns the money back in rebates only if the improvements actually save energy.
“We’re taking the risk that those savings are actually there,” said Andy Frank, president of Sealed, a New York-based aggregator and climate-tech startup. “It could be that we think that rebate is worth $4,000, but the project doesn’t perform well, and it’s worth $2,000. We take a loss.”
The result is a win either way for the homeowner, whose bills go down, and the contractor, who gets paid on time. Studies by New York state officials also indicate that contractors tend to raise prices to reflect the additional labor that goes into the paperwork needed to qualify for rebates under a modeled program. While some contractors may also be large enough to perform the work of an aggregator, a measured system with companies like Sealed frees small-business contractors from that additional work.
Companies like Sealed would, meanwhile, bundle household projects to help offset losses and provide a system of recommendations for contractors whose work regularly meets or exceeds projected savings.
“In traditional programs, there’s a race to the bottom where you want to do the minimum that is necessary to get the incentive,” Frank said. “With measured savings, there’s a race to the top because high-quality work is rewarded.”
That could be a counterbalance at a time when Wall Street investors are eying the heating, ventilation and air conditioning contractor industry as a potential money maker. Private equity companies are gobbling up energy efficiency groups, a move that historically presages layoffs and other company cost-cutting measures. And Goldman Sachs is backing Sealed rival BlocPower’s bid to overhaul aging buildings in Ithaca, New York, to run on electric heating appliances.
“All the incentives are misaligned” under a modeled system, said Nate Adams, a West Virginia-based home performance consultant expert who consults on insulation and air sealing for HVAC technicians and runs a Facebook group called Electrify Everything. “Measured is definitely better.”
But how that system goes mainstream enough to impact more than just a sliver of the U.S.’ more than 140 million housing units is unclear, he said.
To make the measured method work, states need data on energy usage to establish a baseline against which any post-renovation energy savings can be assessed. For California, the only state with an active and widely-used measured program in effect, it took nearly a decade to force utilities to release that data. In a sign of how effective it’s been, Golden State regulators this month passed a new rulemaking for measured savings in the default program for energy efficiency retrofits in the state.
“In traditional programs, there’s a race to the bottom where you want to do the minimum that is necessary to get the incentive. With measured savings, there’s a race to the top because high-quality work is rewarded.”
It helps lay the foundations for “virtual power plants,” where utility operators pay homeowners for the right to tap into rooftop solar panels and plugged-in electric vehicles to help balance the grid when demand is high. Tesla started work on harmonizing some of its customers’ solar panels and electric car batteries through software in a Texas virtual power plant pilot late last year. The Energy Department awarded solar giant Sunnova Energy a $3 billion loan guarantee for a similar project in April.
With all that data, measured programs can ultimately help tailor demand for electricity to available supply, making it easier to rely more heavily on weather-dependent power sources such as wind and solar by providing more financial incentives for customers to turn off appliances when the air is still, or the sky is dark.
But once the data is available at that scale, Adams wondered what would stop utilities themselves from running the energy-savings programs themselves and pushing companies like Sealed out of the market.
“What I question is whether there’s enough room for a third party,” Adams said.
While utilities may try to withhold data they see as proprietary, there are ways around the power companies. Homeowners can request their own data and provide it to aggregator companies financing renovations. With homeowners’ consent, data companies can directly scrape utility information from websites and supply the numbers in accessible formats. And third-party sensors can be installed to collect data on energy usage, which over time could be used as a baseline for a measured energy-savings program.
That’s where the federal guidelines come in.
What Federal Guidelines Could Do
The Energy Department is considering telling states to use energy data from power plants instead of homes and to assume that the country’s various electrical grids are all as efficient as a single federal estimate from 2015, according to three sources with direct knowledge of the agency’s current draft proposal. The effect would be to artificially limit how much money households using a measured program could earn in rebates, give homeowners who use heating fuel like propane little incentive to participate in government effort that would offer no obvious way to even quantify the energy saved by switching to a heat pump.
There are other potential ways the Energy Department rules could quash a measured savings program.
If, for example, the agency tells states to only rely on data from the utility to set a baseline for energy savings, the measured approach would be unlikely to succeed in the near term.
If the federal regulators require aggregator companies to comply with the strictest-possible data security standards ― a pricey process that can take years ― few entrepreneurs are likely to enter the market, putting measured savings further out of reach.
There’s also the issue of what the Energy Department might not do. If the Biden administration’s guidelines don’t establish a national standard for formatting energy data, aggregators would need to deal with potentially 50 different ways of organizing that data.
This was a problem the last time the federal government funneled a significant sum of money into energy efficiency retrofits. In 2009, the Obama administration directed federal dollars toward home retrofits but left the program open-ended and allowed states to set their own standards. This made it hard for private-sector firms like Golden’s to design software and other tools that worked in every market.
The money Biden secured in his landmark Inflation Reduction Act far exceeds the total sum of the Obama-era spending and is more specifically tailored to upgrading homes. But the current administration has not yet indicated if it will set national standards for formatting energy data in its guidelines.
Without clear direction from federal agencies, even states with relatively strong climate records are moving forward with systems that cut out energy data altogether, choosing to give out money for energy savings that are, at best theoretical.
Despite historically competing with California over the ambitions of its climate policies, New York energy officials are considering expanding a program that does not require any data to set a baseline for energy savings.
The New York State Energy Research and Development Authority (NYSERDA) said it plans to wait to see what the Biden administration’s guidelines look like before reaching a decision on its program. But if the Energy Department’s rules allow data-free programs like New York’s to qualify for a cut of the $4.3 billion, then neighboring states like New Jersey and Connecticut, whose modeled programs do require energy data, would be less likely to maintain those approaches or pursue a more precise measured system.
In a joint letter sent last month, 30 Democratic state lawmakers warned NYSERDA against taking steps that would jeopardize creating a measured savings program, criticizing the agency for providing “misaligned incentives” in past programs that led to “poor installation quality.” For example, advocates produced a photograph of a three-story house in Westchester County, a suburb north of New York City, with at least 13 visible heat pumps installed.
“It’s more important than ever that we make the right choice,” state Assemblyman Alex Bores, a Democrat representing Manhattan’s Upper East Side who signed the letter, told HuffPost. “Not just for consumers in New York but as a model for the whole country of the right way to implement this program to ensure that our tax dollars are used the right way and we maximize the gain and reduce emissions as much as possible.”
In an emailed statement, NYSERDA said it “remains open and flexible to supporting pathways that accelerate the pace of building-level decarbonizing” but said it would wait to see the Energy Department guidelines before inviting the public’s input on its plans moving forward.
For low-income households, a measured program offers far bigger benefits. Since the modeled approach provides the rebate upfront, the law establishes a cap of $8,000 per household. Under a measured program, the only real cap is how much can be shaved off utility bills ― and the value of rebates for low-income homes could be more than twice the modeled program limit.
“If a low-income household could achieve 90% in actual energy savings, they could get $18,000 in rebates under the measured pathway — much more than the $8,000 cap for modeled,” said Kristen Eberhard, the senior director of state and local policy at Rewiring America, a nonprofit that advocates for the electrification of buildings.
Maximizing payouts to low-income Americans under the program, which is known officially as the HOMES Act, is essential in part because its sister program, a $4.5 billion fund for electrifying homes, calculates annual earnings more broadly, meaning more households can qualify, and there may be less money available for the poorest. (States could tailor the funding to different income levels, so it’s difficult to say exactly how the program will pan out in every market.)
But those means-tested programs mean households will need to provide proof of income to qualify, which could prove tricky. The federal guidelines due this month will need to provide a method for verifying household income ― and asking poor Americans to hand over tax return data may dissuade some from taking part. And some industry experts have raised concerns over privacy related to devices that monitor energy usage.
“It’s less a question of privacy than a question of value. How do we make sure consumers are getting value for their data?” said Ted Thomas, the former chairman of the Arkansas Public Service Commission who now leads the consultancy Energize Strategies. “There are people who don’t want to do Amazon. But there are fewer people who don’t want to do Amazon than there were 10 years ago.”
Combined, however, the two programs amount to the most ambitious attempt by the U.S. government yet to reduce how much energy American households use.
Long considered the “fifth fuel” because reducing how much energy is wasted roughly equals tapping a whole new source of power, efficiency efforts have stepped up in recent years as more cities, states and countries enact legal deadlines to cut back on climate-changing emissions.
Because building codes are set by state and local governments, and based on model codes designed by a private nonprofit organization with close ties to industry, the Biden administration has resorted to leveraging access to federally-backed loans to force builders to follow the most efficient standards on the market.
The IRA also contained money to help states adopt the latest and greenest model building codes available.
The spending on home renovations is by far the most public-facing program. But it’s hardly the biggest pot of money for energy efficiency retrofits. Over the next 10 years, states and utilities together are forecast to spend upward of $26 billion on the kind of work the HOMES Act will fund.
“Even that is a drop in the bucket for what should be invested in energy efficiency,” Frank said. “There’s much more money being spent today and available in the capital markets than what the federal government is providing.”
The challenge, he said, is making it easy for utilities and private investors to spend money “at the scale that is necessary to really bend the curve when it comes to energy and carbon emissions.
“To do that,” Frank added, “you can only manage what you measure.”