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The Value of Energy Inefficiency

By April 5, 2021 No Comments

It’s no secret house prices in Canada are going berserk, again. These days, everything from a shack to a shoebox-sized condo can sell for over a million bucks. In the past few months alone, some hot areas have witnessed price inflation over 20%.

I’m far from a real estate expert, so it’s not for me to say whether the mad rush presents a bubble or a bargain. As an energy guy, I’m more interested in how much buyers value a home based on how it’s cooled, heated, lit and insulated. In an era of looming carbon taxes, do they discriminate between an energy-neutral house decked out with the latest renewable gear and an uninsulated energy hog that runs appliances with old burner tips?

By 2030, buyer’s remorse could be acute for an inefficient gas-fired home. Compared to today, the imposition of a $170/tonne carbon levy will triple the cost of cooking a steak in the middle of January, not to mention a hot bath. It seems appropriate then to price in a discount today for a poorly insulated home that’s fired up with natural gas or heating oil.

Sounds good, but …

Well, that’s all theory.

In the mind of a frenzied house buyer, the energy circumstance of their new property is not likely top-of-mind. As home prices inflate rapidly, the operating expenses of their combustion-based appliances — furnaces, stoves and water heaters — become smaller as a fraction of the total real estate value. In other words, a future utility bill is just a rounding error in a bidding war. For now, taking a selfie with a new set of door keys trumps carbon taxes.

Then there’s the post-sale spending psychology. What happens to a consumer’s budgeting when the value of their new home has inflated far faster than its operating costs? And their household income?

In the face of a burdensome mortgage payment, a homeowner’s incentive — or outright ability — to spend thousands of up-front dollars to retool their house diminishes. Changing out a stove is one thing, swapping a furnace for a heat pump or replacing windows with triple-glazing is a whole other dinner conversation.

A future utility bill is just a rounding error in a bidding war.

Let’s talk carbon tax

The conversation may then shift to the government’s carbon rebate that was magically deposited in their bank account. Every household is different, but federal carbon rebates won’t be trivial to their budget. Paid every three months, the deposit will equal the estimated carbon tax incurred by an average person. Payments will differ by province, depending on carbon intensity. But for a typical Alberta family of four, the federal government estimates the total annual payment to be $2,150 by 2025, and $3,250 by 2030.

So when the conversation between our fiscally conscious homeowners turns to “The money is in the bank! Should we buy insulation for the attic or make a double-payment on our crushing mortgage?” … what do you think the answer is likely to be?

Homes in Canada contribute 6% of all carbon emissions today. Superficially, inflating home prices, much of them financed to the max with leverage, may not be helpful in the pursuit of becoming more energy efficient at a minimum, nor to achieving net zero in the ideal.

Monetizing that inefficiency

Yet, if we peel back the wallpaper a little farther, there’s another dynamic to consider. Carbon taxes are expected to inflate far faster than home prices, consumer prices and wages. Increasing from $50/tonne to $170/tonne between 2022 and 2030, the fuel levy will be compound-inflating, on average, by almost 15% per year.

The value gap between efficiency and inefficiency may not be financeable by a cash-strapped homeowner, but, as it grows wider, it becomes increasingly appealing to those who do have capital to invest. In fact, third-party financiers, consultants and vendors are emerging to take advantage of the burgeoning efficiency arbitrage — the cost difference between operating a highly efficient versus inefficient home. Commercial and industrial operations have been the first targets of such contracts, but it’s likely the residential market will become more appealing as carbon taxes rise.

The proposal is fairly simple. Contractors measure a baseline of energy expenses and create a plan to make the place more efficient. After renovations are done, the ongoing cash savings from the baseline are split between the owner and efficiency contractor. While such business models aren’t new, they have never been mainstream because the arbitrage hasn’t been wide enough to justify the whole exercise.

Now, the time could be right. Cash-poor homeowners with high-priced houses will have greater incentive to call an energy efficiency contractor to lower future expenses. The contractor’s smile will be proportional to the inefficiency of the home — the more inefficient, the better the payout for all.

So, ironically maybe people are right not to discount older homes that waste energy and create emissions. Inflating in value faster than home prices, inefficiency is likely to go from being a liability to an attractive asset that can be monetized by those who see its potential.

Energyphile subscribers were the first to see this commentary from Peter Tertzakian. To get priority access to this content and exclusive invitations to Energyphile Book Clubs, subscribe now.

Thermostat image by Moja Msanii on Unsplash.

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