Financing the Electrification of Homes
Government-backed financing programs need greater flexibility and new funding sources to meet the electrification challenge.
Fully decarbonizing California’s economy by 2045, as required by state law, will require investing billions of dollars into existing homes to eliminate the burning of fossil fuels to heat air, water and food. (How many of you reading have gas furnaces, water heaters or stoves?) One study estimates the costs reaching $150 billion. A study focused on San Francisco estimates costs averaging around $20,000 per dwelling unit.
Governments are committing to cover some of these costs through direct subsidies and tax credits, but individual property owners will be expected to pay part of the cost. Some homeowners will pay from savings, but others will need to take out loans to afford upgrades.
A new study authored by Ted Lamm and Katherine Hoff at Berkeley Law’s Center for the Law, Energy & the Environment and yours truly considers the role of government-backed lending to help meet the demand for loans. We discuss the critical role of consumer finance to accelerate electrification and recommend improvements to California’s existing loan program, GoGreen Financing. We argue that the program should be funded through state and federal budgets, not utility rates, for reasons I will explain below.
The Role of Loans
Americans borrow money to pay for large purchases. About 80 percent of home buyers financed their home purchases in 2021. For vehicles, 80 percent of new vehicle purchases and 40 percent of used vehicle purchases in 2021 were financed. Home electrification investments will tend to be the same order of magnitude as a vehicle – tens of thousands of dollars for comprehensive projects, suggesting consumers will need to borrow to afford the investments.
Home upgrade loans available in the market, however, tend to have high interest rates and have short repayment periods. This is because the loans are unsecured and considered risky by lenders. If a homeowner defaults on their home upgrade loan, the lender cannot cost effectively repossess an electric panel, wiring or an installed heat pump. A homeowner may be able to put up their homes as collateral to get a lower rate through a home equity loan or a Property Assessed Clean Energy (PACE) loan. However, the additional debt increases the chance that a homeowner could lose their home if their overall financial situation becomes precarious due to sudden necessary expenses or a lost income source. For some homeowners who took out PACE loans, the energy loans quickly caused unexpected financial stress.
Building on a Small Foundation
Seven years ago, following California Public Utilities Commission approval, California’s GoGreen Financing program launched to help homeowners borrow to pay for home energy efficiency upgrades. Lenders that join the GoGreen Financing program have access to a loan loss reserve (managed by the State and funded by utility ratepayers) that partially covers losses if a borrower defaults. This motivates lenders to make riskier home upgrade loans and offer lower rates and longer terms.
We find that the GoGreen Financing program could help homeowners electrify their homes, but is still far too small relative to the scale of the challenge. The program has issued $55 million in loans since its inception, but the electrification costs over the coming decades are in the tens of billions. The program needs to find a path to attract more affiliated lenders and contractors. Ultimately, it will need to facilitate many more loans if it’s going to be an enabler of electrification. One of our strongest recommendations is for policymakers to change the way the program is funded.
The Downsides of Ratepayer Funding
We make the case that about two million single family homes could be candidates for loans for home electrification. About 100,000 loans would need to be issued each year to meet the state’s 2045 emissions goals. A program of this scale could cost about $50 million per year to administer and require growing the loan loss reserve to more than $700 million. The numbers could be much larger if GoGreen Financing cannot reduce its costs in line with other states.
Today’s program is funded by the state’s investor-owned utility customers through charges that are added to the cost of each kilowatt-hour of electricity that a customer uses. We point out several ways in which this is undermining program success.
First, as research by the Energy Institute’s Severin Borenstein, Meredith Fowlie and James Sallee has shown, collecting revenues through per-kilowatt-hour charges is extremely regressive. Increasing the relative cost burden on lower income households to pay for a program aimed at affordability seems especially perverse.
Second is the point made by Borenstein et al. that the investor-owned utilities’ reliance on very high per-kilowatt electricity rates has made electricity less attractive as a fuel for vehicles and heating homes. The GoGreen Financing program is just a small piece of this much larger rate design challenge, but if the program is intended to encourage electrification, there’s a very strong case to move the costs out of rates in order to encourage electrification.
Third, California has a patchwork of investor-owned and publicly-owned utilities. Program funding has historically come from investor-owned utilities. Until some limited new funding recently arrived via the state budget, regulators did not allow the loans to be used for electrification projects in the territories of publicly-owned electric utilities. Many potential borrowers were excluded by these rules, and the program has been less attractive for lenders and contractors with service areas that cross utility boundaries. This is another argument for a larger, more cohesive program.
Fourth, the program has been specifically funded as an energy efficiency program, which has led to limits on the types of projects it can fund. Homeowners cannot today use GoGreen Financing to fund comprehensive upgrades that include building electrification, electric vehicle charging equipment and panel upgrades. These investments will be necessary for many Californians between now and 2045.
All four of these downsides could be addressed by shifting from ratepayer funding to federal and state funding. The state has already provided some limited funding, but the biggest opportunity on the near horizon is from the federal Inflation Reduction Act. The Act gave the EPA $27 billion to fund programs that leverage private capital for clean energy and clean air investments. The GoGreen program may provide one viable framework to obtain and effectively use this funding. California policymakers should pursue this funding when the EPA releases the competition details this month.
Suggested citation: Campbell, Andrew, “Financing the Electrification of Homes”, Energy Institute Blog, UC Berkeley, June 12, 2023, https://energyathaas.wordpress.com/2023/06/12/financing-the-electrification-of-homes/
Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.
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Andrew G Campbell View All
Andrew Campbell is the Executive Director of the Energy Institute at Haas at the University of California, Berkeley. At the Energy Institute, Campbell serves as a bridge between the research community, and business and policy leaders on energy economics and policy.
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This is not a new idea, but I’d like to point out how important it is to consider improving insulation and passive heating and cooling in addition to changing the heat source.
In the SF Bay Area we replace ~100 year old home recently with a newly built home. The change is dramatic. Even with the temperature dropping into the 40s at night we rarely run the heater because the new home is so well sealed and insulated. On sunny days the walls heat enough to keeps us warm into the evening. We opted for a white roof which keeps us cooler in the summer. The old home had a tar and gravel roof that absorbed a lot of heat in the day. At night the bedrooms required cooling because of this.
Also, using all LED lighting the power consumption has dropped.
I’ve haven’t seen one personally, but I’ve heard of intelligent power distribution devices that rotate power distribution among appliances such as water heaters, HVAC and refrigerators/freezers. These are high consumption appliances that don’t need to be powered on all the time. Selectively powering these devices means that the electrical panel can be smaller. Upgrading the electrical panel is often cited as an obstacle to going fully electric in older homes.
Finally, let me give a plug to the use of R744 refrigerant (CO2). We use a Sanden hot water heat pump using R744. It has worked fine, it is very quiet, and we were able to locate the entire system outdoors saving space indoors.
John,
Hope you no longer have PG&E as your service provider. One of the reasons for our leaving the state back 2021 was their inability to provide us service (PSPS’s) at affordable rates. It’s tad unfortunate that they didn’t spend a bit for time on maintaining their equipment-
“Author Katherine Blunt provides what is being called a “revelatory, urgent narrative with national implications,” exploring the decline of California’s largest utility company that led to countless wildfires—including the one that destroyed the town of Paradise—and the human cost of infrastructure failure.”….
“California Burning The Fall of Pacific Gas and Electric and What It Means for America’s Power Grid”
.
Manufactured natural gas can be a pathway to the future. Why phase out a future possibility for CO2 reduction? Anyway the grid cannot sustain the heating load in severe cold weather and it will be uneconomical to pick up heating loads with electric energy when a thermal source is cheaper and can be better at GHG reduction. It would be better use of the government money to spend it on conversion of existing gas delivery systems to green or pink gas creation.
Interesting article:
Another related concern involves cost recovery for the natural gas distribution system. As those who can afford to electrify without government support and those who provided subsidies make the switch away from natural gas, cost recovery for the extensive investments in the the natural gas distribution system will fall on an ever-declining customer base. Low income natural gas consumers, who may well be the slowest to migrate away from that fuel, will see exploding rates for natural gas distribution system cost recovery unless some alternative cost recovery mechanism or a system of “exit fees” is adopted for customers leaving the system. Any ideas how to address this concern as a part of your proposal ?– seems like very big amounts of funding may be required.
the devil is always in the details – just as EV subsidies. i wonder if for a change we start with the low-wealth communities – direct subsidy through the utility based on gas usage history of that location. i say ‘location’ because tenants often lose their account history when they move.
California definitely needs tens of billions of dollars to reach its decarbonization goals, but its not realistic to expect much of that coming from the state’s General Fund instead of ratepayer surcharges. The state’s current budget deficit is north of $30 billion, and California’s Legislative Analyst, Gabriel Petek, projects that double-digit billion dollar budget deficits are likely for at least the next few years. The legislature and governor’s office are working on passing a budget this week (maybe), and that already includes several billion in cuts for climate change initiatives (though it also potentially includes a “Climate Resilience Bond” from Newsom’s May Revise). The state should aggressively pursue IRA funds, but it’s clear that there will not be another pot of Federal money remotely close to this in the near future.
I think it’s time to start repurposing the funds that high-speed rail gets automatically from the Greenhouse Gas Reduction Fund (from cap-and-trade), which is 25% of the total amount. That’s about $750 million to $1 billion a year. Repurposing those funds would be strongly opposed by the Building Trades and come with some semblance of abandoning a 21st Century vision. However, as reporter Ralph Vartabedian noted last month, the “bullet train” is “now $100 billion in the red.” (https://calmatters.org/economy/2023/03/california-high-speed-rail) Yes, California is the fourth or fifth largest economy in the world, but that’s a huge amount of money, and there’s no realistic plan for securing an amount even close to that.
Vartabedian has been covering the HSR project since the initial bond initiative passed in 2008 (mostly with the LA Times), and his chronicle of the of the project, especially over the last 10 years, reads like the sad saga of a long-beached whale that is barely alive. Perhaps we should finish the Merced to Bakersfield HSR link as that would provide some economic benefit and emissions reduction to an area that really needs it. But we should start directing the bulk of that GGRF allocation to programs such as GoGreen and others that lack the glitz of a cutting edge, big ticket project but are vastly more cost-effective and beneficial to a broad swath of Californians.
I agree. The HSR, at least as currently conceived, is just too expensive. We could build a high speed electric bus line (like that in Holland) for a fraction of the cost down the I-5 or Hwy 99 corridors. That money should be spent much more cost effectively on other electrification measures.
I just came across an alternative financing mechanism that could rely on the public sector–leasing heat pumps. (The heat pumps could have a device to disable them if payments fall in arears.) The leasing terms could be more flexible than a standard loan, for example using asset rental terms instead of straight levelization. https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/bringing-a-digital-platform-to-the-home-heating-services-market-lessons-from-thermondo
And an important financial player could be the gas utilities such as Sempra that will see a declining customer base. The utility holding companies have substantial financial resources and can set up affiliates to managing the leasing programs.
Noted was “per-kilowatt-hour charges is extremely regressive”. This would imply that there should be two line items on an electric bill, infrastructure and energy use. Let us take this to its logical conclusion.
Infrastructure benefits all of society, directly and indirectly, much like roads, harbors, parks, etc. Living in San Diego, the Golden Gate Bridge is not much of a benefit to me, but I benefit indirectly. Therefore on can conclude that the infrastructure should be a governmental function under direct governmental control and funded from the general funds. In this way people who pay more taxes pay more for the grid, subsidizing the disadvantaged. This redistribution of wealth is in line with one of the current objectives of the utilities.
Energy is a completely different animal in that various consumers require different amounts and various generators can provide extremely different amounts. One can think of the infrastructure like a public market; sellers rent space and sell their goods to all-comers at a price the market will bear.
Now, with the mandate to reduce our carbon footprint, comes the challenge: few large point source generators or many small distributed generators. The state would have to make the responsible choice in an attempt to keep taxes reasonable and choose the latter. Not only that, to date, the smallest generators have been constructed and maintained with private (non-ratepayer) funds.
It all comes back to that pesky elephant-in-the-room, climate change. The way to keep climate change from being an existential threat is lifestyle change, the deployment of technologies that mitigate climate change and the retirement of technologies that aggravate it. It can be cost effective or not, morally done or not, it just has to be done.
Do your part.
OSD
Can you please correct my error in stating the battery capacity? That should read “20 kWh of battery storage in two 10 kWh steps.” I often make fun of people who make this mistake, and it’s a little embarrassing here. LOL.
In 2021 we completed a total electrification of our home, which we purchased in 1999. This was not a single project, and rolled out over a period of almost ten years. While there were several motivations for this, evolving over time, the end result is a total electric home. The costs were significantly more than $20,000 (depending on which costs you associate with “electrification”), and financing was accomplished through various means, including a HELOC for our first PV system, a 12 month “no interest” credit card through Home Depot, and from savings. There was no help from the state except, I think, a $600 rebate for the water heater. CSI had run out of funds by the time we installed our PV system in 2012. There were significant Federal tax credits for some portions. I could write a long report on this, in fact I did a “lunch and learn” presentation at work in 2021. In the interest of time, I’m copying below most of a Facebook post that I made last year. It may be too long to publish here?
I would like to add that the payback on all of this is almost too complicated to even approach, but I’m retired now and counting on using all of this investment to minimize my utility costs going forward. If the recently proposed “income based” fixed costs for electric service are implemented, my annual costs will increase by several hundred percent, which I would consider a major betrayal by the CPUC and a massive case of bait and switch. I’m all in favor of public financing of electrification and residential solar. Move the costs from the ratepayers, finance through the general fund and charge a “fair” monthly fixed fee (I pay $16.00 per month now to SDG&E for their EV rate). But don’t renege on promises that were made and are being counted by on many “early adopters” to recover our investment in clean energy and electrification.
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Early last year we finished the complete electrification of our home, which started in 2012 when we installed 5 kW of solar PV capacity. At that time we had no intention of electrifying our home, as “electrification” was not even on the horizon as an issue. We just wanted to reduce our electric bill and provide some shade on our patio (the 5 kW array is on a solar shade structure).
It’s probably obvious to most that retrofitting an existing home is a lot different than building a new home with all electric appliances. When we bought our home in 1999 it had a 300 gallon propane tank with hookups for a clothes dryer, water heater and forced air furnace. I knew at the time that propane was pretty expensive, but we have no natural gas service in our “semi-rural” area of San Diego County. I didn’t realize how expensive it was until 2016 or 2017 when I sat down and did some simple calculations showing that it was about four times the cost of natural gas per Btu delivered. I estimated at the time that we were spending about $3,000 per year on propane alone.
In 2018 our old washing machine gave up the ghost and we decided that it was a good opportunity to replace both the washer and dryer. The problem is that all of the new full-sized washer/dryer sets are too big to fit in our undersized utility room. We ended up buying a German brand (Miele), which is not considered “compact,” but still smaller than the normal American appliances. The washer and dryer are both extremely water and energy efficient. The dryer employs an electric heat pump to provide the heat for drying. Its’ so efficient that it runs off of a 120 volt wall socket and doesn’t need a vent. Condensed moisture is disposed of through the same drain that the washer uses.
At around that time I was also leasing a plugin hybrid (PHEV) Ford Fusion, and the electrification started becoming more intentional, with potential motivations including:
• Reduce electric consumption
• Reduce or completely replace propane consumption
• Replace old appliances that were reaching their age limitations
• Minimize utility costs
• Enable Level 2 EV charging
• Better indoor temperature control
• Emergency backup (we had major outages in 2007, 2011 and 2017, plus we are in an area that is subject to Public Safety Power Shutoffs when we get hot, dry windy conditions
• Fire safety (get rid of propane completely)
Since 2019 we have leased a battery electric vehicle (Hyundai Kona EV); replaced our HVAC system with a high efficiency zoned air source heat pump system; added 2.5 kW of PV capacity to cover the EV and electric heating loads; replaced the propane water heater with a heat pump water heater; added 20 kW of battery storage in two 10 kW steps.
The final step of the battery upgrade was completed in February of 2021. This allows us to have a secure source of backup power in case of a grid failure or PSPS. It also allows me to shift almost all of the electric use not covered by the PV system to the lower cost off-peak and super off-peak periods.
Plus…we finally got rid of the 300 gallon propane bomb that was sitting right next to our garage just waiting for a wild fire.
I’m a little confused about the suggestion that consumer-owned utilities have not been involved in electrification financing.
SMUD has had big rebates for heat pumps, heat pump water heating, and induction ranges for several years now.
https://www.smud.org/en/Rebates-and-Savings-Tips/Go-Electric/Residential-Go-Electric
They also have grants up to $250,000 for electrification of businesses.
https://www.smud.org/en/Rebates-and-Savings-Tips/Go-Electric/Business-Go-Electric
And, with their off-peak rates of about $0.12/kWh, they make it attractive not only to switch, but also to shift, charging up water heaters and EVs during off-peak hours.
Utility capital is MUCH more expensive that home equity loans. It makes no sense to finance electrification with utility capital.
I’m sure that in addition to SMUD, other Munis are engaged in electrification financing. True, Muni ratepayers may not be eligible funds through the GoGreen Program itself, but that’s because they don’t contribute directly to it. The Munis are well represented in the Capitol, and they generally prefer to do things in accordance with the directives of their own governing bodies. For example, when the initial RPS was passed in 2002, we couldn’t secure enough votes until the Munis were removed from the legislation (SB 1078, Sher). They generally were not opposed to increasing their use of renewable resources, but they insisted on doing it on their own. In addition, I’m not sure that commingling IOU and Muni ratepayers’ funds in the GoGreen program or others would work smoothly. I’m not sure that this has been done for any other program of this sort due to, among other things, administrative challenges.