Affordable Energy News Launch

The Affordable Housing Energy Efficiency Alliance (AHEEA)

Energy Efficiency-Based Utility Allowance Schedule

New Construction: California Multifamily New Homes Program

With national attention on energy issues, more and more California affordable housing owners and developers are capitalizing on energy efficiency. It’s a trend that is destined to pick up speed as resources dwindle and energy prices increase. Affordable housing owners and developers are developing, rehabilitating, and financing homes that optimize cost-effective energy efficiency. This trend helps save energy, reduce greenhouse gas emissions and lower utility bills and provide more comfort to low-income and special needs tenants.

The good news for affordable housing tenants in California is that we lead the nation in funding energy efficiency programs to meet this demand. Hundreds of programs funded by ratepayers and governed by the Investor Owned Utilities provide incentives, rebates, information, and assistance to a wide range of markets – from consumers purchasing appliances at local home centers, to commercial new construction, agricultural processes, and affordable housing owners and developers.

Whether you are an affordable housing owner, developer, housing authority, lender or redevelopment agency, there are public service energy efficiency programs geared to help you with the important work of improving energy efficiency in affordable housing. Listed below are a few of these programs. Some are geared toward new construction, some toward rehab projects, and others offer free design services to affordable housing.

The affordable housing market is a prime target for energy efficiency because low-income tenants pay 20-25% of their income in utilities, whereas average income earners pay 5%. Hence, lowering utility bills makes homes more affordable. To help you incorporate energy efficiency into your projects, this issue introduces several programs that provide cash incentives, information, training, design assistance, and resources to help you design new or rehabilitate existing multifamily affordable housing projects.

The programs in this issue are just a few that are available to the affordable housing industry. Funding for these and similar programs come from California ratepayers through their energy bills. If there was ever a time to get your money’s worth, it is now. Take advantage of these programs to help save energy, lower utility bills, improve tenant comfort, and make homes more affordable.

As California population grows, the efficient use of energy will become increasingly more important. Increase in demand, fluctuating process, and limited supplies suggest critical need in finding ways to reduce energy use. While energy efficiency is critical to reducing greenhouse gases and our overall energy demand, more importantly energy efficiency is vital to home affordability. If tenants struggle to pay their energy bills, the home is not affordable.

Finally, please contact us if you would like to see a specific topic covered in this publication or would like more information on any of the programs or articles covered in this issue.

The Affordable Housing Energy Efficiency Alliance (AHEEA)

AHEEA is a program implemented by the HESCHONG MAHONE GROUP, INC.HMG program funded by Southern California Edison (SCE) and dedicated to assisting the marketing in all things energy efficient. An array of free services are being offered to housing authorities, redevelopment agencies, architects, engineers, lenders, owners, developers and any entity served by SCE that seeks to improve energy efficiency in affordable housing. AHEEA services include:

• Energy Efficiency Design Training which includes design strategies, energy efficiency measure and product information, cost analysis tools, and funding advice. In AHEEA training sessions, participants can learn about:
  • Cost-effective design and construction of new multifamily buildings and rehabilitation of existing buildings to maximize energy efficiency, reduce operating costs, and improve comfort.
  • Funding sources and financing models that help to offset the costs of energy efficiency improvements
  • Energy efficiency programs applicable to affordable housing
  • Energy standards and how they apply to multifamily buildings
  • Energy Efficiency-Based Utility Allowance (EEBUA) schedules
  • Resources – where to get additional help
  • An Affordable Housing Energy Handbook providing a road map of policies, funding requirements, utility allowance reform, and resources on how to incorporate energy efficiency into affordable housing.
• Energy Efficiency Design Charrettes and Assistance. Whether you are building new or rehabilitating an existing project, the design team can provide assistance to help you maximize energy efficiency and minimize costs using an integrated design method. The program offers free energy efficiency design charrettes to help you set energy efficiency goals and specifications for your projects and includes investigation of cost-effective energy efficiency scenarios.
• Housing Authority assistance in adopting and implementing an Energy Efficiency-Based Utility Allowance (EEBUA) schedule; a lowered utility allowance representing more accurately the utility costs for projects that are energy efficient.

Energy Efficiency-Based Utility Allowance Schedule

An important element is the policy work that AHEEA provides to Public Housing Authorities. Already adopted by many PHAs in California, an Energy Efficiency-Based Utility Allowance schedules (EEBUA), corrects a long-standing, split-incentive problem by bringing utility allowances more in line with utility costs for projects that are energy efficient: new construction projects that are 15% above the energy code.
The rationale for this schedule is that developers who include energy efficiency, to reduce utility costs to the tenants, should be allowed to reap some of the economic benefit of their investments. When there is only one utility allowance schedule applied to all properties, efficient or not, owners and developers have no incentive to invest in improvements. A lower utility allowance, resulting in slightly higher rents, allows the owner to receive a portion of the money that the utility company would otherwise have collected – without increasing the tenants’ total housing burden (rent plus utilities).
Further, the model that is used to calculate the lowered (energy efficiency-based) utility allowance ensures that the tenant saves as well. EEBUA thus provides a long-term mechanism to provide a pay-back for investments in energy efficiency.

To ensure proper use of the EEBUA, housing authorities rely on a home energy rater (HERS) to verify that a project meets the policy’s energy efficiency requirements. This program strives to foster good relationships between HERS raters, property owners, and housing authorities.

Figure 1 below shows the concept and impact of an Energy Efficiency-Based Utility Allowance on (1) housing costs to the tenant, (2) rent to the developer, and (3) utility costs. Note that the total housing burden (rent and actual utility costs) is no higher with the energy efficient unit. In the chart, the SUA (and the actual utility costs for the inefficient unit) was $100; the section within the dotted lines represents the reduction in utility COSTS that the tenant pays. The blue area between the dotted line and the EEBUA “slice” represents the reduction in utility allowance from the SUA to the EEBUA, and is what the developer gets in increased rent. The $2 difference between these (the “mini-slice within the larger EEBUA slice) is savings for the tenant.

THE IMPACT OF AN ENERGY EFFICIENCY-BASED UTILITY ALLOWANCE

Figure 1. Impact of Energy Efficiency-Based Utility Allowances

An Example of the Impact of an Energy Efficiency-Based Utility Allowance on Increased Cash Flow for the Owner-Developer

The following is a case study to illustrate the impact that an Energy Efficiency-Based Utility Allowance schedule would have on a hypothetical new construction project. We use a project with 40 two-bedroom units and 12 three-bedroom units. Some of the assumptions (e.g., rents, allowable housing burdens for tenants, “other” laundry income associated with the property, etc.) were drawn from a 53-unit apartment complex in Southern California called, "Vista Verde Apartments." All but one of the units was designed to be affordable to low and very low-income families (41%-47% of median area income). The other one is the manager’s apartment. Table 1 shows what the rents and income figures would have been if an Energy Efficiency-Based Utility Allowance schedule been in place and utilized for this project. Table 1 also shows the difference between the rental incomes using the two schedules. Notice that the developer receives an additional $4,426 in rents per year without increasing the tenants’ total housing burden.

Standard Schedule
Unit Type	Bedroom Per Unit	Number of Units	Total Cost of Housing per Unit	Monthly Utility Allowance Per Unit	Monthly Net rent per Unit	Yearly Gross All Units
2-BR	2	40	$543	$101	$442	$212,367
3-BR	3	12	$543	$111	$432	$62,270
Total Rent per Year						$247,637
Energy Efficiency-Based New Construction Schedule
Unit Type	Bedroom Per Unit	Number of Units	Total Cost of Housing per Unit	Monthly Utility Allowance Per Unit	Monthly Net rent per Unit	Yearly Gross All Units
2-BR	2	40	$543	$94	$449	$215,727
3-BR	3	12	$543	$104	$440	$63,336
Total Rent per Year						$279,063
Total Rent per Year (w/o Energy Efficiency-Based Utility Allowance)						$274,637
Difference						$4,426

Table 1. Hypothetical Project Rental Income

Table 2 below shows the fifteen year annual net income for our hypothetical project, both with the Standard Utility Allowance schedule and with the Energy Efficiency-Based Utility Allowance schedule. The top half of the table shows the income and expense estimates from the actual application for the project proposed to the local PHA. The bottom half shows what the income and expenses would have been with an EEBUA, given the following assumptions:

• $5000 additional first costs (52 units X $96/unit) for efficiency upgrades

• Rents from the Table 1 above

• Repayment (to the lender) of the additional $5000 over the life of the 15-year mortgage

• No additional "Other" income or additional operating expense (e.g., the laundry facilities are assumed to be unchanged)

Note that in both sections of the table, years 8-12 are present in the calculations but collapsed (not shown) in the presentation since they add little additional information. The most notable lesson of the table is that even with a larger debt service payment (more than enough to cover the additional cost of measures even without a utility program incentive), the residual cash is significantly larger. The cumulative residual cash by the 7th year is about $28,477 larger and $68,419 after 15 years. The developer is able to make more return on his/her investment while the tenants’ total housing burden is slightly decreased. Meanwhile, tenants also enjoy increased comfort.

Table 2: Income and Expense Comparison

An essential element of this policy is reliable third party verification of efficiency improvement before the PHA grants the lower utility allowance. In the long run, this means new markets for HERS raters, a market-based incentive for developers to recoup investments in energy efficiency, more comfortable and affordable housing for low-income tenants, and energy savings for a large portion of the state’s housing stock that is often neglected.

New Construction: California Multifamily New Homes Program

Affordable housing builders leading the way in energy efficiency will find that the California Multifamily New Homes Programs offer cash incentives ($150/unit) to qualifying multifamily projects that are at least 15% more efficient than the energy code (Title 24). The program also offers design assistance to developers and design teams to help identify specific cost-effective energy efficiency measures. The program offers assistance from initial design concepts through final inspection. To qualify for these programs, the project must

• Be located SCE’s service territory

• Exceed the energy code by 15% and meet ENERGY STAR requirements

• Show positive electric energy savings.

A set of plans and an electronic version of the energy calculations must accompany the application. The project team will need to arrange for Home Energy Rating System (HERS) inspections to verify that the required measures are installed. In addition to developer incentives, these programs offer incentives to help offset the cost of the HERS rating as well. In all cases, a program representative will assist the project team through the program process to maximize energy efficiency without a time sacrifice during the home-building process. In certain cases where the project design team provides design assistance necessary to achieve the program compliance, they may also receive an incentive through this program.

Builders, designers, and architects interested in taking advantage of these programs are encouraged to contact an HMG representative as early as possible in the design and building process. For projects served by Southern California Edison, contact Colin Jessop at (619) 756-8910 or jessop@h-m-g.com.

California Consumers who choose to participate in this program are not obligated to purchase any additional services offered by the contractor or provider. This program is funded by California utility ratepayers and administered by Southern California Edison Company under the auspices of the California Public Utilities Commission (CPUC).

Los consumidores de California que decidan participar en este programa no están obligados a comprar ningún servicio adicional ofrecido por el contratista o proveedor. Este programa es financiado por los usuarios de las compañías de servicios públicos de California y es administrado por Southern California Edison bajo los auspicios de la Comisión de Servicios Públicos de California (CPUC).