United States
Environmental Protection
Agency
Office of Policy
(2171)
EPA-236-F-98-004
September 1998
&EPA Climate Change Solutions
Vermont Trims Energy Bills for Low-Income Families
The Vermont Energy Investment
Corporation, a nonprofit organization, has
developed a number of innovative
financing arrangements and partnerships
to help low- and moderate-income
Vermonters reduce their energy bills.
When less energy is used, fewer fossil
fuels are burned. The combustion of fossil
fuels produces carbon dioxide, an
important atmospheric gas that is
increasing in concentration and
contributing to global climate change.
Working with the state housing finance
agency and other public and private
partners, the Vermont Energy Investment
Corporation (VEIC) has cut energy use in
low-income multifamily buildings, helped
low- and moderate-income Vermont
homeowners make energy efficiency
improvements, and led a successful effort
to establish a city ordinance on energy
efficiency for residential rental units.
Removing Barriers to Efficiency
Energy costs can place a significant
burden on low-income families. In
Vermont, at least 15 percent of the annual
budget of an average low-income family
goes to pay winter heating bills.
Nationwide, households receiving Aid for
Families with Dependent Children spend
an average of 26 percent of their total
income on electricity and other energy
such as fuel for home heating. In
comparison, the average family in the
United States spends only 3.8 percent of its
total income on energy.'
Improving the energy efficiency of low-
income housing could make life better for
millions of Americans while reducing
greenhouse gas emissions and other
energy-related pollution.
Building owners often are reluctant to invest
in energy upgrades.They may lack capital for
the upfront expense of energy improvements,
preventing them from making even the most
cost-effective upgrades.They also may lack the
energy expertise to ensure that their
investments will provide a reasonable and
timely return. In rental housing, short-term
tenants are unlikely to make energy and
efficiency upgrades because they may not
remain in the housing long enough to enjoy
the benefits. Owners of rental housing have no
direct incentive to invest in energy efficiency if
their tenants pay the energy bills.
Pipefitter Bob Fitzgerald solders a connection in a new
high-efficiency gas-fired water-based heating system
at a 51-unit senior citizen home in Burlington, Vermont.
VEIC has focused much of its work on
removing barriers to energy efficiency. The
organization provides financing, technical
RESULTS AT A GLANCE
• Working with public and private partners, the Vermont
Energy Investment Corporation (VEIC) implemented
energy efficiency measures in nearly 100 low income
multifamily buildings.
• Energy efficiency measures installed in 20 lowincome
multifamily housing projects in 1997 will save 416
megawatt hours of electricity, 465 therms of natural gas, and
$53,000 per year in energy costs—resulting in carbon
dioxide (CO2) emission reductions of over 33 tons per year.
• Since 1986, Vermont's Home Energy Improvement Loan
program, established by VEIC and the Vermont Housing
Finance Agency, has provided more than $800,000 in
energy loans to 180 Vermont households. Energy savings in
those single family homes averaged 20 percent or about
$350 per year.
• VEIC has performed more than 3,000 home energy ratings
that allow Vermont homeowners to qualify for a mortgage or
obtain financing for energy improvements.
• VEIC led a successful effort to establish a city ordinance
that requires residential rental properties in Burlington to
be brought to a minimum standard of energy efficiency
when they are sold to a new owner. The ordinance is
expected to reduce energy related CO2 emissions from
rental units by an estimated 3,300 tons per year once it has
been in place for 10 years.
'Energy and the Poor: The Crisis Continues (Boston, Law Center, 1995).
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expertise, reliable information, and direct
installation of measures to facilitate
efficiency upgrades and investments in
buildings.
The State's Role
A key to VEIC's success is its long-
standing partnership with the Vermont
Housing Finance Agency, a state agency,
which has worked withVEIC to develop
home energy improvement loans, energy
efficient mortgages, and other innovative
programs. The housing finance agency also
has been a source of capital for some of
VEIC's loans and performance contracts.
Although the Vermont Housing Finance
Agency cannot control most factors
affecting housing costs (e.g., land prices,
construction costs, and the cost of capital),
the agency has long recognized that it can
help control energy costs. The housing
finance agency has played an active role in
lowering the energy bills of low- and
moderate-income Vermonters.
All 50 states, the District of Columbia,
Puerto Rico, and the Virgin Islands have
housing finance agencies similar to
Vermont's. State housing finance agencies
act as secondary mortgage buyers to
promote affordable housing for low- and
moderate-income people.
Improving Energy Efficiency
in Multifamily Low-Income
Housing
In VEIC's work with multifamily low-
income housing, it operates as an energy
services company (ESCO), entering into
long-term relationships with building
owners to implement energy efficiency
measures. Through performance
contracting (see box),VEIC assumes the
financial risk for its projects and is paid out
of the resulting energy cost savings. By
eliminating the client's risk and
need for upfront capital,VEIC removes two
major barriers to investments in energy
efficiency.
As a nonprofit organization,VEIC's
mission is to save energy. "We are
interested only in covering our costs, not
generating a profit," says VEIC Executive
Director Beth Sachs. This allows VEIC to fill
a void left by commercial ESCOs, which
generally are unwilling to take on smaller
projects or those where the profit margins
may be unacceptably low.
At least 15 percent of
the annual budget of an
average low-income Vermont
family goes to
pay winter heating bills.
An Attractive Opportunity
Performance contracting for energy
efficiency improvements is especially
attractive to local public housing authorities,
according to Sachs.The U.S. Department of
Housing and Urban Development (HUD)
provides an incentive to public housing
authorities to use performance contracting
for energy efficiency improvements by
"freezing" the annual subsidy paid to the
housing authority for utility costs.The
subsidy is frozen at the levels used prior to
the installation of energy improvements,
which allows the public housing authority
to retain the cost savings for up to 12 years.
The housing authority can then pay the
debt service for the energy improvements
and the newly reduced utility bills out of the
subsidy.
Once the performance contract is
completed, HUD lowers the subsidy
needed by the housing authority to cover
the new energy bills, and the cost of
operating the housing is reduced
permanently. The only condition is that
the new energy costs plus the debt
service must be the same as or less than
the old energy bills. "This is a window of
opportunity for public housing, and
housing authorities should be jumping on
it now," Sachs says.
Innovative Financing
In the late 1980s and early 1990s, the
Vermont Housing Finance Agency launched
programs to help owners of subsidized
multifamily housing boost the energy efficiency
of their buildings. Most of the financing for
these programs comes from "project cost
escrow funds," which are monies set aside at the
time of the initial financing to be used 7-12
years after purchase of the building for
necessary repairs and enhancements.
Before property owners can spend their
project cost escrow funds, the Vermont
Housing Finance Agency requires an energy
audit. If the audit reveals cost-effective
opportunities for energy efficiency
investments such as improved insulation and
heating equipment, the owners are
encouraged to make those investments and to
use the energy savings to pay for repairs,
painting, or other improvements. In other
words, Sachs says,"They get to spend the
project cost escrow money twice to improve
the property"
The Vermont Housing Finance Agency also
works with multifamily property owners to
take advantage of other funding sources—such
as surplus operating income, increased cash
flow from refinancing, and the agency's own
capital—to improve energy efficiency
WHAT IS PERFORMANCE CONTRACTING?
Energy services companies (ESCOs) sell energy efficiency and
management services through long-term service agreements. They earn
their fees from their clients' energy savings, thereby reducing financial risk
to the client. An ESCO may be a division of an electric or gas utility, an
independent company, or, as in the case of VEIC, a nonprofit organization.
Through performance contracts, an ESCO implements and finances (or
assists with financing) energy efficiency improvements for a client.The
client, typically a building owner or local housing authority, pays the ESCO
for the improvements with savings from lower energy bills. Under a shared
savings agreement, the client's payments to the ESCO are based on a
percentage of the measured energy cost savings. If there are no savings, the
client pays nothing. Under a guaranteed savings agreement, the client makes
fixed payments to the ESCO based on an estimate of energy savings. If
actual savings are less than the guaranteed amount, the ESCO pays the
difference.
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Improving Energy Efficiency in
Single-Family Housing
Faced with a shortage of capital and a
lack of financing opportunities, many
homeowners cannot afford to improve the
energy efficiency of their homes.To rectify
this situation, the Vermont Housing Finance
Agency andVEIC established Vermont's
Home Energy Improvement Loan Program,
which offers affordable loans to low- and
moderate-income homeowners for energy
investments.The program, created in 1986
and now being implemented by the
Vermont Development Credit Union, offers
low interest rates and loan terms of up to
seven years. Energy costs and anticipated
savings can be included when calculating
debt-to-income ratios, which allows energy
savings to be credited to the "income" side
of the ratio when determining a purchaser's
eligibility for financing energy
improvements.
Since its inception, the program has
provided more than $800,000 in energy
loans to 180 Vermont households. Energy
savings averaged 20 percent.
Innovative Mortgage Products
The Vermont Housing Finance Agency
provides affordable mortgages for 15-20
percent of the existing and new homes
bought each year in the state. Many of
these sales have involved VEIC's Energy
Rated Homes of Vermont program,
allowing energy efficiency to be
incorporated into the mortgage process.
For low-income and first-time buyers
of existing homes, VEIC worked with the
Vermont Housing Finance Agency to
develop the Yearly Energy Savings System
(YESS) Mortgage Program, which offers a
reduced mortgage interest rate to eligible
homebuyers who make energy
improvements at the time of purchase.
To ensure that low-income and first-
time buyers of newly constructed homes
will not be burdened by future high
energy bills, the Vermont Housing
Finance Agency requires that the home
receive an energy rating of at least "4
Stars."A home energy rating is a standard
measure of a home's efficiency, much
like mileage ratings for cars. The ratings
allow homebuyers to compare the
energy efficiency of one house to
another in order to estimate future
energy bills. Homes are rated from 1 Star
to 5 Stars, with 4 Stars or higher
considered energy efficient.
Vermont also offers "energy-efficient
mortgages" to help all families (not just
low-income) buy better homes and lower
their energy costs. In Vermont, a home that
earns an energy rating of 4 Stars or more
is eligible for an energy-efficient mortgage,
which allows consumers to qualify for
homes that might otherwise be
unaffordable.The energy rating assures the
lender that the energy-efficient home's
lower heating and electricity bills will free
up money that the household can use to
meet the higher monthly mortgage
payment of a more expensive home.
Energy ratings below 4 Stars can be
used to obtain "energy-improvement
mortgages," which allow home buyers to
finance the cost of energy improvements
through larger mortgages.The
improvements are tax-deductible because
they are included in the loan, and the
monthly savings in energy costs must
exceed the additional amount of the
mortgage.
Addressing the "Split Incentive" in
Rental Units
Rental housing creates what energy analysts
call a split incentive: tenants are unlikely to pay
for energy efficiency improvements, and
owners have little direct incentive to do so if
the tenants pay the energy bills.As a result,
renters often bear the burden of trying to stay
warm in dwellings that are poorly insulated
and expensive to heat.
A display in the Burlington Electric Department's lobby
shows some of the ways Burlington residents can
save energy.
Burlington is one of the coldest
metropolitan areas in the United States and
ranks among the top 10 percent of cities in
fuel use per capita. More than half of
Burlington's homes were built before 1939.
In the city's Old North End, where most
rental housing is located, 70 percent of the
homes are more than 50 years old. Low-
income residents there often find that they
pay more for energy than for any other
items in their household budgets, except
food and rent.
To overcome this problem,VEIC led an
effort with support from the U.S.
Environmental Protection Agency's State
and Local Climate Change Program to
establish a city ordinance that requires
residential rental property in Burlington to
be brought up to a minimum standard of
energy efficiency at the time of property
transfer.This time-of-sale ordinance, which
went into effect in September 1997, is
designed to lower tenants' energy costs
while minimizing costs to the property
buyer or seller.
A Win-Win Proposition
Property owners can benefit from the
ordinance in a number of ways. The
average tenant in Burlington stays in an
apartment for only one year, and over
half of the frequent movers who were
surveyed cite unaffordable energy bills as
a primary reason for moving. With lower
energy costs, tenants may stay longer.
Building owners not only keep their
rental units occupied, they also may gain
from efficiency improvements that help
alleviate property maintenance issues
such as moisture and mildew, peeling
paint, and roof damage from ice dams.
The costs of energy improvements
could be passed on to tenants through
higher rents, but any increase is expected
to be offset by lower energy costs. VEIC's
conversations with officials in
communities with existing energy
ordinances for rental units (in Wisconsin,
Minnesota, and California) suggest that the
ordinance should have little impact on
rents compared with market forces.
The Burlington ordinance will require
that an energy inspection be performed
on rental properties before they are sold.
A certificate of compliance, a stipulation
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that work will be done to meet the
standard, or an application for a waiver
must be filed with the city clerk. Either
the seller or the buyer may bring the
property into compliance. A buyer who
agrees to take responsibility has one year
from the filing date to comply. The
ordinance includes cost limitations and
exemptions to avoid placing an undue
burden on property owners.
The Burlington Electric Department
administers the ordinance and offers
information on financing, technical
assistance, and other services to help rental
unit owners comply with the ordinance
and go beyond its minimum requirements.
The ordinance is being phased in over
time. At present, it applies only to the Old
North End Enterprise Community, and it
will be expanded to all of Burlington in
two years after a report is given to the city
council.
VEIC estimates that the ordinance will
reduce energy-related CO2 emissions by
3,300 tons per year once it has been in
place for 10 years.
"This is an area where public policy
intervention was important because
needed improvements were not getting
made as a result of market forces," Sachs
observes. "The challenge now is to
encourage owners to go beyond the
minimum required to meet the standard
and implement optimum, cost-effective
improvements in their properties."
Lessons Learned
Emissions can be reduced without
affecting low-income families
disproportionately. VEIC's work is helping
make energy more affordable for low-
income residents of Burlington and other
Vermont communities. It also contributes
to municipal and state goals for reducing
greenhouse gas emissions.
Energy audits are just the beginning
"Energy audits alone don't save energy or
empower people," Sachs observes.VEIC's
work grew out of experiences that Sachs and
co-founder Blair Hamilton had when they
talked to people who had received energy
audits.They discovered that few building
owners actually implement the efficiency
measures recommended as a result of the
audit process because they lack access to
capital.
Barriers can be overcome
Sachs and Hamilton realized that the main
obstacles to investing in energy efficiency
are a lack of capital and trustworthy advice.
By providing a one-stop shop for financing,
technical expertise, and reliable information,
VEIC has helped multifamily building
owners, private homeowners, and others
overcome these barriers to reduce their
energy bills.VEIC has built a reputation as a
trustworthy provider of services, based on its
nonprofit status and its track record of
cutting energy costs.
measures. Although the co-op's reliance on
"green" power might make its rates slightly
higher than those of its competitors,
customers' bills would be lower because
their homes would use less energy.
Greenhouse gas
emissions can be
reduced without having
a disproportionate impact
on low-income families.
VEIC's work can be replicated
in other states
According to Sachs,VEIC's approach
could be replicated by states and
municipalities throughout the nation. Others
could achieve results similar to VEIC's by
establishing partnerships among community
action agencies, community development
corporations, county planning organizations,
state and municipal agencies, and other
organizations.
Looking Ahead
VEIC is now preparing for electricity
deregulation by creating a statewide
energy co-operative that will provide
customers with environmentally
sustainable energy at affordable costs.
"The idea is not to lower customers' rates,
but to lower their bills," Sachs says.The co-op
would package energy services along with
the energy supplied, helping customers slash
their energy bills through energy efficiency
For More Information
Vermont Energy
Investment Corporation
255 South Champlain Street
Burlington,VT 054014717
Tel: (802) 658-6060; Fax: (802) 658-1643
E-mail: beth@veic.org
http://homepages.together.net/~veic
Vermont Housing Finance Agency
EO. Box 408
Burlington.VT 05402
Tel: (800) 287-8432 (toll-free)
Fax: (802) 864-8081
E-mail: home@vhfa.org
http://www. vhfa. org
State and Local Climate Change Program
U.S. Environmental Protection Agency
401 M Street, SW (2171)
Washington, DC 20460
Tel: (202) 260-3354
Fax: (202) 260-0290
http://www.epa.gov/globalwarming/actions/state
U.S. Department of EnergyOs
Rebuild America program:
www.eren.doe.gov/buildings/rebuild
U.S. Environmental Protection AgencyOs
Energy Star programs:
http:l I www.epa.gov/energystar
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