Why Do Lower-Income Families Pay More In Energy Costs? Some Answers—and Solutions

Multifamily housing lags behind other types of large urban buildings when it comes to energy efficiency—a statement confirmed by a recent report that got national attention for its finding that the average low-income housing resident spends more than three times what others pay in energy costs.

Since 2013, Energy Efficiency for All, a partnership of the Energy Foundation, Elevate Energy, the National Housing Trust and the Natural Resources Defense Council, has worked to link the energy and housing sectors together to tap the benefits of energy efficiency for millions of low-income families living in affordable multifamily housing.

Building on that work, NRDC’s Center for Market Innovation (CMI) set out to find out the reasons behind the disparity, and now we have some answers—as well as some solutions.

CMI in January launched the Affordable Multifamily Housing Integrated Retrofit Demonstration Project, nicknamed the AMFD, in collaboration with three New York City affordable multifamily building owners and industry experts. We experienced first-hand the process of identifying cost-effective energy efficiency improvements for their buildings and financing options to realize those savings.

The demonstration project was straightforward: (1) Select buildings with high energy consumption subject to New York City’s Local Law 84 benchmarking regulation. Local Law 84 requires owners of New York City properties over 50,000 square feet to submit their properties’ energy usage to the City annually. (2) Give these owners a free comprehensive ASHRAE Level II energy audit in exchange for allowing CMI to work alongside them on the ground to understand their decision-making, and then help them translate the audit findings and develop viable financing solutions. And, (3) Use the insights gained to develop a set of tools to help scale up demand from owners in this critical sector.

CMI’s findings are documented in two easy-to-read case studies that highlight the significant savings potential in this building segment—a 22-29 percent reduction in energy bills – and discuss financing options to achieve those outcomes.

Gross savings over the useful life of the efficiency measures identified as cost effective for these buildings ranged from nearly $1.3 million to $8.7 million.  Payback periods were between 3 to 7 years.   

Here’s a summary of the financial analysis:

For buildings in solid financial standing, there are a number of options to finance the upfront cost of implementing these energy conservation measures, including conventional recapitalization, green mortgage loan programs, direct unsecured loans and off-balance sheet energy service agreements whereby a third party installs and maintains the equipment and is repaid via a portion of the energy cost savings.

But it’s not all good news. The studies also identify the challenges still facing affordable multifamily housing owners as they consider an energy upgrade, along with possible solutions. Barriers include limited funding options properties that don’t fit traditional lender risk profiles or have complex existing financing structures, along with owners’ limited capacity to deal with a complex and time-consuming process and uncertainty about realizing projected savings.

Despite substantial savings and returns potential, owners expressed resistance to undertaking the full package of measures. They were interested in lower-cost measures, including electric upgrades and thermostat controls but more complicated measures were less favored. The latter would require larger up-front capital investment like cogeneration (CHP), solar panels (PV), and advanced sub-metering, which entails converting master-metered properties into those in which residents pay for their own electricity usage.  Ironically, these more extensive measures typically have the greatest dollar savings potential.

Fortunately, there is a growing array of technical and financing resources being developed to help affordable multifamily housing owners surmount these barriers. CMI has developed a Process Guide aimed at helping affordable multifamily building owners navigate the complexities of implementing an efficiency project—from initial concept to post-implementation. It is complemented by a free, do-it-yourself, web-based value analysis tool that allows owners to evaluate the financial returns associated with different combinations of measures after an energy audit has been completed. CMI’s tool kit is one among a growing number of resources being developed by New York City and private stakeholders to increase energy efficiency in this important sector.

Another exciting development is the recent commitment by the Community Preservation Corporation, the State of New York Mortgage Agency, and the New York City Department of Housing, Preservation and Development to recognize a portion of energy efficiency utility savings in their first mortgage lending programs. This step means these affordable multifamily housing lenders are able to issue larger loans to cover project costs. 

The City, too, is investing in solutions. New York City Homes and Community Renewal now has special financing for certain types of affordable multifamily properties (known as Mitchell Lamas), and it requires benchmarking and improved energy standards for all preservation projects. In addition, the City recently launched its Retrofit Accelerator—a one-stop resource that helps building owners and operators reduce operating costs and increase sustainability by providing much needed technical guidance to help accelerate the process.

Additionally, the New York City Energy Efficiency Corporation (NYCEEC) offers innovative financing solutions to overcome first-cost hurdles like unsecured direct loans underwritten to utility savings. It also provides an online efficienSEE tool that calculates the savings potential for larger buildings in advance of an energy audit just by entering an address. 

As the City recognizes, reaching the affordable multifamily housing sector is key to achieving its goal of reducing carbon pollution by 80 percent by 2050. With so many efficiency resources being directed at all building owners by the New York marketplace there is no justification for leaving the affordable multifamily housing sector behind from an equity, economic, and environmental perspective. 

As my colleague Khalil Shahyd explains in a recent blog, closing the energy efficiency gap in affordable multifamily homes delivers not only cost savings for families and property owners, but lowers carbon emissions, cleaner air, and a more reliable transmission grid. 

The triple bottom-line outcomes for affordable multifamily housing owners are real, and the benefits for all are clear. It’s time to double down on these investments that will pay dividends well into the future.