Guest Post that I wish I’d thought of: “Free” way to reduce energy use

January 21st, 2010 by Al Lewis (alewis)

The myth of the landlord as a Mr. Potter-type figure still persists, even though many of them today are as cash-strapped as the tenants.   That is the only rational explanation for why many building owners fail to make obvious energy-saving improvements in their buildings, improvements that have paybacks of 4 years or less and add to the resale value besides.   Even those building owners who have the money balk at caulk:   conservation investments simply aren’t sexy.   And yet we know first-hand such investments are needed – we have all worked in office buildings or lived in apartment buildings that are perpetually too hot in the winter and too cold in the summer.  Plus, these first-hand observations don’t begin to address the energy inefficiencies that we can’t see.

At the same time, various generous tax credits are available for solar and other energy sources that are not even close to cost-effective in most cases.  (Hence the need for the generous credits.)  On the other hand, if the government were to provide credits for all energy-savings improvements, the impact on the deficit would be substantial and there wouldn’t be any real controls on what investments make sense.

So ThinkOOB is willing to suggest, courtesy of Steve Reichtenstein, a third way:  Let us create a new industry to fix this market inefficiency, an industry that would offer to do energy audits and then finance conservation measures, and get paid for them out of savings in utility bills.     There would be no budget required by the building owner – the whole thing would be paid for out of the existing utility budget.

The company could offer to do the audits at no charge and with no obligation. The building owner receiving the audit would then have a choice of either agreeing to allow this company to make the cost-effective improvements, and then repay them out of savings, or simply buying the audit after the fact and financing the improvements themselves.  Or doing nothing. 

This new company could probably also make preferred-price purchase arrangements with suppliers and with utility companies that may already provide limited free audits. 

Why isn’t this obvious economically viable activity happening today already?  Why aren’t owners already making these investments?  Well, why do people fund their 401ks to get tax-deferred 5%-10% returns while carrying credit card balances with aftertax 20% finance charges?    Simple – neither credit card paydowns nor conservation investments are sexy.   OOBonomics proposes a solution to the former in Chapter 10.  This post suggests a solution to the latter. 

In both cases, I would call it “psychological disintermediation,” creating a sexy business out to address a plebian problem, a problem that is unaddressed today not because of economics but because of lack of interest or understanding.

The hangup, which is where the government comes in, is that it would be difficult to get financing from a bank for this or, these days, almost any other new business.  Financing would be complicated by the fact that the payback to the company (the bank’s client) is based on savings in someone else’s variable costs.  The government could address this problem and jumpstart this industry simply by guaranteeing loans for companies in this business for a few years, until the industry establishes a track record. 

You might say, “Let’s keep the government out of this,” and I would generally agree:  OOBonomics philosophy is to minimize government intrusion, but OOBonomics makes exceptions for short-term marketplace interferences, to noodge an industry to a new equilibrium.  Also, as a practical matter, the government already interferes heavily in energy markets, usually with much more questionable rationales than this one.

Oh, yes, and this would create jobs, reduce pollution, and even improve the balance of trade…all without increasing the deficit or raising taxes.

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