Sometimes Market Forces Work

Most of my experience over the past 40 years shows that the market forces they teach you about in Economics 101 don’t work when it comes to energy efficiency. Just about every day our team hears new examples of efficiency options that make great sense economically but are overlooked. As a result of these failures of the market, policy solutions need to be implemented to stimulate (or simulate) the outcomes of perfect markets.

So it is gratifying when occasionally you see markets functioning more properly. One of the key assumptions needed for markets to work is the availability of information. For the case of homes, the key information that consumers need is how efficient the home is: how much it will cost to operate.

The simple measure of energy efficiency is the HERS® Index —a number ranging from 100 for a house that meets the 2006 International Energy Conservation Code (and larger than 100 for a leaky older home) to zero for a zero-net-energy home. Lower is better. HERS ratings also provide an estimate of utility costs.

Such information is provided according to a standard, to assure comparability. The standard is maintained by RESNET, and is accepted by new home builders and is part of the International Energy Conservation Code (IECC) of 2015.

As part of its quality assurance program, RESNET maintains a database of all homes rated to date. The results for the first half of 2016 are now in, and they show that over 100,000 homes were rated. The average score for a rated home was 61, which means that the average rated home saves almost 40% of total energy use compared to a home built to the 2006 IECC standard. The average rated home is also more efficient than an Energy Star new home and consumes about 10% less energy than a home that meets the component-by-component requirements of the 2015 IECC.

These results also illustrate continual improvement. In the first half of 2015, the average HERS score was 63 (rather than 61) and 13% more homes were rated in 2016 than the precious year. This improvement is noteworthy because:

  • There are few financial incentives for ratings: most homes were rated by their builders (at the builder’s expense) to gain a competitive advantage with their customers.
  • One might expect that as the number of ratings increases, the scores get worse because builders who build less-efficient homes start to enter the program. Instead competitive forces are driving homes to be more efficient at a rate of about 2 HERS points year on year.

Of course, this observed rate of improvement is insufficient to meet our climate goals—but it is one of the only times I have ever observed efficiency advancing in the absence of policy (other than the existence and maintenance of the HERS program). The advance can be accelerated, and here is what NRDC is doing to help:

  • Advocating to maintain and strengthen the standards for the HERS Index in the 2018 IECC (where the index is referred to as the Energy Rating Index, or ERI)
  • Advocating, along with Leading Builders of America and other business and nonprofit stakeholders, to require inclusion of savings disclosed in the HERS score as an offset to mortgage costs when qualifying for a home loan. This is the objective of the bipartisan SAVE Act pending before Congress.
  • Encouraging utilities to offer financial incentives for homes whose HERS scores are above specified ambitious target levels being set by the Consortium for Energy Efficiency.

Use of the HERS index is growing. It is succeeding in encouraging builders to meet consumer demand for energy efficient homes, even in the face of policies such as mortgage underwriting that discriminate against energy efficiency. Imaging what we could do with all factors pulling together.

About the Authors

David B. Goldstein

Energy Co-Director, Climate & Clean Energy Program

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