Mesa concept analysis final spring 2014 by Samantha Dodero

MATCHED ENERGY SAVINGS ACCOUNTS: A New Approach for Incentivizing Home Energy Savings while Building Assets for Families

Concept Analysis Report Spring 2014

ACKNOWLEDGEMENTS

ACKNOWLEDGEMENTS The authors would like to thank the San Francisco Foundation, the Energy Foundation, and the Union Bank Foundations for their generous support and leadership in supporting the intellectual crossover between the energy and asset-building arenas. We are also grateful to our Fiscal Sponsor, the Trust for Conservation Innovation. We wish to give particular thanks to Vanitha Venugopal, formerly of the San Francisco Foundation, and John Wilson, of the Energy Foundation, for their vision, leadership, wisdom, and unparalleled willingness to listen and guide.

Author and Project Leader Stephanie Upp Project Advisor Lori Bamberger

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TABLE OF CONTENTS ACKNOWLEDGEMENTS .................................................................................................................................... 2 BACKGROUND .................................................................................................................................................. 4 INTRODUCTION ................................................................................................................................................ 5 ENERGY SAVINGS IS ASSET BUILDING .............................................................................................................. 6 MESA: PRODUCT DESIGN RECOMMENDATIONS ............................................................................................. 8 MESA: SIX SOLUTION TO REACHING UNDERSERVED MARKETS...................................................................... 9 MESA: FINANCIAL SNAPSHOT........................................................................................................................ 12 EXAMPLE A: ULTRA-HIGH ENERGY CONSUMER ......................................................................................... 12 EXAMPLE B: MODERATELY-HIGH ENERGY CONSUMER ............................................................................. 14 EXAMPLE C: MESA AS A STAND-ALONE PRODUCT .................................................................................... 15 MESA: KEY ATTRIBUTES .................................................................................................................................. 16 CONSIDERATIONS: IS MESA REALLY AN ASSET BUILDING TOOL? ................................................................. 18 CONCLUSION .................................................................................................................................................. 20 APPENDIX A: ADMINISTRATIVE STRUCTURE ................................................................................................. 22 BANKING ..................................................................................................................................................... 22 ELIGIBILITY AND TARGET MARKET .............................................................................................................. 22 MARKETING ................................................................................................................................................. 22 ACCOUNT MANAGEMENT........................................................................................................................... 23 APPENDIX B: DESIGN ISSUES FOR MESA ....................................................................................................... 25

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BACKGROUND Saving Neighborhood Energy (SNE) is an innovative financing and asset-building intermediary catalyzing energy efficiency among ordinary Californians. Our community-based financing pilots enable low- and moderate-income (LMI) families who own homes in California to access the energy savings available to wealthier households. These families can save money while reducing harmful carbon emissions. SNE’s pilots use California’s first-ever authorization for Onbill Repayment Financing (OBR) for homeowners. OBR financing refers to a loan provided by a private bank whose repayment is included on the borrower’s utility bill, enabling the seamless integration of energy savings and loan charge. The Matched Energy Savings Account (MESA) described in this concept paper is designed as a mechanism to incentivize borrowers of energy efficient loans, including our OBR loan pilots, to change their energy consumption behavior after they accomplish a home energy retrofit. We hope to ensure that energy-saving behavior can serve as a borrower protection strategy. Effectively, by rewarding borrowers for attaining certain energy consumption performance after a retrofit, and after the loan disbursement, families should better afford loan costs, achieve net savings faster, adopt life-long habits enabling persistent energy savings, and accumulate important assets at a time when budgets are tight. The MESA also serves as a highly targeted performance based rebate providing an incentive to a homeowner only if consumption is reduced. Compared with energy rebates that have no income or consumption targeting, the MESA is cost – effective: states can repurpose modest amounts of existing incentive funding as a MESA to ensure that consumption is reduced and that behavior changes explicitly for our low- and moderate-income families. In the course of researching the MESA thesis, we have found that it can be structured to accomplish many outcomes. Among them, the MESA can: catalyze participation in a retrofit program, change energy consumption behavior, reduce effective loan costs, and counter the unfortunate rebound effect that causes some families to increase – rather than decrease—their consumption after a retrofit. We are most excited about the MESA’s potential to help families transform emissions into assets (energy savings), and to protect borrowers by incentivizing them to keep their energy consumption low. Indeed, we think the MESA is among the first examples of the cross-over of the asset-building and energy efficiency fields. This paper offers an early concept narrative around the MESA – what it is, how it can change behavior, why it is such a powerful and innovative energy behavior offering, how it can build assets, how it can be targeted, and many different applications, including renters in affordable multi-family housing). We offer financial snapshots built upon just one single design option: a 2-year match of up to $1000 per LMI homeowner per year. This design can and should be tailored to the needs, funding, desired outcomes, and opportunities of deployment sites. We urge foundations, communities, and utilities to pilot test the MESA performancebased behavioral incentive explicitly targeted to underserved low- and moderate-income families and accompanied by critical energy and financial literacy content. We look forward to working with you to test the implementation of this exciting concept. Lori Bamberger, Executive Director, Saving Neighborhood Energy 4|P a g e

INTRODUCTION

alifornia is home to 5.8 million energy inefficient, older single family homes. The owners and renters of these homes, many of whom are low-and moderate-income , may be paying almost 30 percent more per square foot for energy than those living in more efficient homes. When looking at these same energy costs as a percentage of income, the regressive impact of energy cost on LMI households becomes clear: the lowest income households spend three times as much of their income on energy than the highest income households.1 These families also lose out on health benefits arising from efficient, modern energy systems and installations. A typical home energy efficiency investment is often too expensive for these families to prioritize in their family budgets. Despite the plethora of public and ratepayer funded programs and funds spent to incentivize energy efficiency and renewable energy, California’s low- and moderate- income2 (“LMI”) homeowners are caught in an energy conundrum: they earn too much to qualify for state-funded grants, yet too little to pay for home energy upgrades out of pocket. These are the very families for whom $500 to $1000 in annual energy savings from upgrades would be most meaningful. Traditionally, utilities have offered rebates, but these don’t overcome first-cost challenges for families who cannot afford to pay the energy upgrade investment upfront. More recently, the efficiency and affordability arenas have focused on providing access to financing. This paper offers a third approach to reducing the costs and barriers to energy efficiency. The Matched Energy Savings Account (MESA), as designed by SNE, is a product that rewards household energy-saving behavior and outcomes with matched cash savings. This new method, to be offered in tandem with financing or in a stand-alone manner, consists of a behavioral incentive designed to catalyze reduced energy consumption.

Data compiled from Residential Energy Consumption Survey, 2009. Data compiled by Michelle Winters, Senior Manager, Green Strategies NeighborWorks America. 2

“Low- and Moderate-income” families are defined by the US Department of Housing and Urban Development (HUD) based on a household’s income as a percentage of the Area Median Income (AMI). Median incomes vary based on family size and geography. AMI is the most common benchmark to determine eligibility for federal housing programs. Households earning under 60 percent of the AMI are defined as “very low-income”; households earning between 60 and 80 percent are considered “low-income”. Households earning between 80 and 120 percent of the AMI are defined as “moderate-income”. Our use of the term “LMI” in this paper refers to households earning between 60 and 120 percent of AMI. In California, as an example, LMI for a family with four people translates to incomes ranging from $62,000 to $125,000. Note that the energy policy arena has defined a set of households as “middle income”, defined as families who earn between 135% and 325% of the Federal Poverty Line, and the vast majority of whom do not qualify for weatherization, See, Zimring, Mark, Borgeson, Merrian, Goggio, Hoffman, Ian, Todd, Annika, and Billingsley, Megan, “Delivering Energy Efficiency to Middle Income Single Family Households,” Chapter 2. Middle income families have incomes between $32,500 to $72,500 without varying for geographic area or household size. Our selection of LMI families includes, but is broader than the “middle income” definition.

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The MESA product is inspired by the asset-building field’s success with matched savings accounts, a strategy that incentivizes low- and moderate-income individuals to save money while also fostering behavior change on issues of personal finance. Asset building is an anti-poverty strategy that helps low-income people move toward greater self-sufficiency by creating financial products and services to provide 1) access to the financial mainstream, 2) education and tools for accumulating savings and purchasing long-term assets.3 This paper argues that the matched savings account model is a proven strategy that, if emulated in a residential energy efficiency context, would promote deeper and more prolonged energy consumption savings and financial savings among traditionally under-represented market segments: LMI homeowners, seniors, immigrants, and first-time homebuyers.

ENERGY SAVINGS IS ASSET BUILDING

T T

he MESA introduces a new product into the energy arena that provides a financial match of a household’s energy savings. This innovation emerges from the unchartered intersection of the energy and asset-building sectors. It brings together demonstrated strategies from both fields – the energy efficiency field’s financing and incentive strategies with asset building’s matched savings– to produce an impact on households where impact is most needed: the family balance sheet. When families reduce household energy consumption through behavior modification, efficiency upgrades or a combination of both, they save money on their monthly utility bill. Likewise, by investing in home energy upgrades, homeowners shore up the value of what is likely their largest asset: their homes. And by doing so, they are engaging in asset preservation. These families are also averting large, growing4, and unnecessary expenses that could be saved or put to more important uses. Energy savings is an important next step in the evolution of the afield. As described above, the assetbuilding field began as an antidote to an income supplement antipoverty strategy by focusing on incentivizing earned income savings to build long-term assets. Asset building also focuses on averting expenses as a way to build assets. As an example, health insurance helps build and preserve assets because it averts catastrophic health care expenses and drains on family wealth; additionally, transit-oriented development contributes to asset building by reducing commuting and car-ownership costs.

The Asset-Building field was inspired by Washington University Professor Michael Sherraden’s pivotal work in 1990, and emerged as a strategy for helping families escape poverty. Whereas traditional approaches to poverty alleviation emphasized increasing income, recent research has proven that income is necessary but insufficient for solving poverty. Instead, assets — concrete and tangible resources like a home, savings, an education or a business— must accompany income to help families move up the economic ladder. More on asset-building may be found at: http://cfed.org/blog/tags/assets_opportunity_initiative/. 4

An important aspect of energy efficiency is its ability to reduce the risk of energy price increases which typically occur each year.

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Energy efficiency also averts expenses (energy costs) and can create persistent financial savings. Over a decade, achievement of just 20% of energy savings on the average Californian home energy bill can result in $4000.5 For an ultra-high Californian energy bill, a 20% energy savings can result in a 10-year accumulation of $8400. Achieving these savings, however, would require a combination of an investment (financing or out-of-pocket investment or subsidy resulting in a smaller net savings gain) in new energy saving fixture combined with a change in behavior. Energy savings can be meaningful, especially for those who have not fully recovered from the financial crisis. This is particularly true for LMI communities where housing values have not yet rebounded. Take the City of Richmond, for example. Despite rising home prices across the state, roughly half of all homeowners with mortgages in Richmond are under water—in some cases, three or four times as much.6 Out of the 6.8 million California homeowners with a mortgage, 26 percent, or 1.8 million, still had negative equity as of July, 2013. 7 Another 500,000 are barely managing to stay above water, with less than 10 percent of equity in their homes. After factoring in closing costs, these homeowners would still “effectively” be under water. This means about one third, or 2.3 million homeowners in California alone, are still unable to sell or establish a line of credit due to lack of equity. Clearly, these families would benefit from every penny of savings arising out of reduced energy consumption. And every household matters if California is going to meet its goal of reducing household emissions by 40 percent by 2020.8 The largest portion of household energy consumption—over 40 percent—goes toward warming the inside home environment in the winter and cooling it in the summer. Homeowners can dramatically reduce this seasonal energy consumption by installing new heating, ventilation, and cooling equipment (“HVAC systems”); by sealing and insulating existing HVAC ducts; and by improving the building envelope with air sealing and insulation. These energy efficiency measures are proven, cost-effective, and provide numerous benefits for homeowners, including increased comfort, improved air quality and health features, and more stable operating costs. Yet many homeowners have not embraced these measures due to limited knowledge, motivation, or limited financial resources. Significant energy-savings potential remains to be captured. State subsidies of up to $4000.00 per home in the form of rebates for home energy upgrades remain available for California homeowners, yet few LMI

This figure is based on the average California utility bill cost of $165/month and a 20% energy consumption reduction. The ultrahigh consumer that we portray in this paper spends $350/month. A whole-house energy upgrade is typically designed to achieve at least a 15% savings outcome, and often closer to 30 percent savings. These figures do not even factor in the savings associated with averting annual increases in energy rates. 6

An owner with an underwater mortgage owes more on the mortgage than the house is worth. Sheila Dewan, “A City Invokes Seizure Laws to Save Homes,” New York Times, July 29, 2013. (http://www.nytimes.com/2013/07/30/business/in-a-shift-eminentdomain-saves-homes.html). 7

Esther Cho, “One-Third of California Homeowners Locked Out of Market,” August, 20, 2013. http://www.dsnews.com/articles/one-third-of-california-homeowners-unable-to-sell-due-lack-equity-2013-08-20 8

California’s Long Term Energy Efficiency Strategic Plan published by the CPUC in September 2008 and updated in January 2011.

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home-owning families take advantage of them. These rebates require upfront investments and my take months to be reimbursed, creating a barrier to participation for those households unable to carry the initial expense.

MESA: PRODUCT DESIGN RECOMMENDATIONS

he MESA borrows, in spirit and design, from the model of the Individual Development Account that proved low-income households could and would save money given the right tools and incentives. Like the IDA, the MESA is a financial savings product that rewards monthly energy savings with a $1 for $1 match – each dollar a participant saves on a monthly utility bill will be matched by a MESA dollar. Energy savings will be measured by comparing actual current usage data with data from the same quarter or month of the previous year. 9 Program participation would expire at the earlier of two years or when $2000 in match has been achieved. Key energy literacy aspects of the MESA will consist of regular consumer engagement messaging through cell phone texts or email savings tips, notices about upcoming programs and events in participants’ communities, and links to other services or products to help bolster their energy savings goals. This regular and continuous messaging is designed to change behavior. One of the reasons for optimism for this model is the success of IDA participants amidst the mortgage crisis and slow economic recovery. A recent study from the Urban Institute and CFED, thought leaders in the asset-building field, found that 97 percent of people who used IDAs to accumulate the cash they needed to contribute to the purchase of a home still owned their residences, even though, in terms of income, IDA participants come from the same economic strata as subprime borrowers. The reasons for the vastly different outcomes: the financial education IDA participants receive, coupled with the savings habits they develop during their participation in the program, vastly improves their ability to make timely loan payments and avoid unnecessary and costly refinancing. 10 The MESA was conceived as a means to help ordinary working families engage in the benefits and savings of energy efficiency upgrades. Instead of matching financial savings, like an IDA or a 401(k) does, the MESA matches a portion of the financial equivalent of a family’s energy savings. Our recommendations on account structure ultimately come down to simplicity and ease of use.11 The dollar for dollar match is both an easyto-remember marketing device and it resonates with potential consumers, which is important in a process that can often be confusing (e.g. competing financing products), unfamiliar (e.g. “what is duct sealing?”), and, at times, intimidating (e.g. when strangers – energy auditors – are crawling around in the attic). It is

See Appendix C for a discussion of whether or not to weather-adjust the data.

Ida Rademacher, et al., Weathering the Storm, Have IDAs Helped Low-Income Homebuyers Avoid Foreclosure? CFED and the Urban Institute, http://cfed.org/knowledge_center/events/webinar_for_the_field/ (April 2010). 11

Fuller, M., C. Kunkel, M. Zimring, I. Hoffman, K.L. Soroye, and C. Goldman. Driving Demand for Home Energy Improvements LBNL3960E. September 2010

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important to note, however, that the $1 to $1 match only generates meaningful savings where pre-retrofit energy consumption is relatively high (typically in rate tiers 3 through 5) and where the potential for deep energy savings exists.12 With a participation maximum of $2000 per household, the MESA offsets a portion of energy efficiency financing. Households that engage in efficiency upgrades (through financing, credit cards, or savings) will be able to realize greater MESA savings in a relatively shorter timeframe. By allowing the program to run for two years, the MESA would allow families who install a relatively modest upgrade that has relatively lower annual savings to realize more meaningful savings accompanied by more persistent behavior change. The two-year timeline provides ample opportunity for energy savings habits for both types of participants (deep savings accompanying a whole-house, financed upgrade, and modest savings accompanying a more modest upgrade) to develop and become ingrained in everyday actions. We recommend a 2-year MESA for two reasons: 1) In conjunction with 5 or 10-year energy efficiency or OBR loans, the MESA acts as a borrower protection helping ensure – to the maximum extent feasible -that the borrower will actually reach projected savings (at least during the MESA term) and can rather easily repay a significant portion of loan charge out of future savings; and 2) to provide a more persistent and longer-term antidote to the unfortunate post-retrofit rebound problem in California, whereby households experience energy consumption increases after a retrofit because the energy bill is lower. For a fuller discussion of the account structure and design considerations, please review Appendix A and Appendix B at the end of this paper.

MESA: SIX SOLUTIONS TO REACHING UNDERSERVED MARKETS

he MESA was developed to address the challenge of reaching underserved home-owning populations and incentivizing them to engage in energy upgrades and, if cost-effective and otherwise appropriate, in energy efficiency financing vehicles through which energy upgrades can be paid for over time out of energy savings. At the intersection of energy efficiency and asset building, the MESA aims to capture this lost potential in both energy savings and household savings by promoting the following outcomes: 1.

Reward Behavior Change

Lessons from behavioral economics show that repeated actions create habits. By rewarding reduced energy consumption – through what is essentially a performance-based rebate– the MESA fosters

PG&E has a 4-tier rate structure where each additional increment, or tier, of use beyond the baseline level is charged at a higher price. The more energy you use, the more you pay per kilowatt hour. Electric tiers work like many mobile phone plans – you get a low rate when your phone use stays within certain limits. If you go over your tier 1 allowance, you will be charged a higher rate, just as if you went over the allotted minutes in your mobile phone plan.

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habits that continue long after the matching program ends. The energy arena in California has been searching for a solution to persistent energy saving behavior, especially after a retrofit. We think the MESA is that solution. The MESA also provides regular opportunities to influence consumer behavior through regular “nudges” via text message, newsletter, or other social media. Importantly, the MESA is a performance-based rebate designed to change consumption behavior. It can also help counter the “rebound effect,” which too often occurs when households use more, not less, energy after their energy upgrades. The current rebate model helps offset upfront costs for one-time only, but does nothing to incentivize persistent energy savings behavior overtime. In contrast, the MESA uses a performance-based model that makes energy savings persist. 2.

Generate Household Savings

Reducing energy consumption by 15-40% can have a significant impact on a family’s bottom line. Estimated annual energy savings –from $250 to $1200– can be redirected toward areas where families want to invest: education, paying off debt, savings for retirement or other important family expenses. 3.

Catalyze Demand for Energy Efficiency

When paired with energy efficiency financing, the MESA can catalyze demand for the upgrade and for the partnering financial product. The MESA, which promises immediate cash rewards post-retrofit, is the final nudge that can tip households, who didn’t think they could afford the cost of financing, to take action. It can attract and meet the needs of first-time homebuyers, seniors on fixed incomes, working-class families who want to invest in their homes and their health. It can provide access to savings for families who thought that energy efficiency was limited to people who could afford Solar PV or a Prius. And, it can make the difference between replacing a broken furnace or hot water heater with an efficient model. 4.

Offset Loan Cost

The upfront cost of home energy upgrades is a significant market barrier for many consumers. Faced with using credit cards or taking out a personal loan, these potential customers may decide to postpone or reduce the scope of an upgrade. And while financing alone is no panacea, it does open a door for homeowners who lack sufficient cash or home equity, to pay for desired upgrades. By matching immediate energy savings with a financial reward, the MESA reduces the effective cost of financing energy efficiency loans. Families can reduce their loan costs through the MESA, and realize the financial savings associated with reduced energy consumption earlier in their loan terms. In the

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world of on-bill repayment financing, the MESA can help move a loan that is not bill neutral to bill neutrality.13 5.

Increase Home Affordability and Neighborhood Stability

Energy upgrades can have the twin outcomes of reducing energy consumption and stabilizing homeownership and, thus, neighborhoods. These outcomes occur because energy efficient homes result in lower utility costs immediately and hedge against future utility rate increases. Owners of efficient homes have been shown to be less likely to default on their mortgages,14 contributing to more stable tenure and overall neighborhood stability. 6.

Create Healthier Homes

Energy upgrades can reduce the adverse health impacts from inefficient, old homes. These effects include, as examples: poor air quality, toxic materials like asbestos-covered heating ducts, insufficient heat or cooling, and ineffective barriers from outdoor air pollution.15 These adverse health impacts are compounded in vulnerable populations, such as seniors and families with young children.

Bill neutrality refers to the outcome in which an energy efficiency loan is sized at an amount that is no greater than the savings achieved over the loan term. As an example, a house that pays $200/month in energy, and is estimated to achieve a 30% reduction over 10 years would end up with a $140/month bill. To be bill-neutral, the monthly loan payment, including interest, is no more than the savings, or $60/month. 14

Bob Sahadi, et al., Home Energy Efficiency and Mortgage Risks, Institute for Market Transformation, http://www.imt.org/resources/detail/home-energy-efficiency-and-mortgage-risks (March 2013). 15

Health Outcomes and Green Renovation of Affordable Housing, http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3072905/ (2011)

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MESA: FINANCIAL SNAPSHOT

his section illustrates how the MESA would work using a household with an “ultra-high” and “moderately high” monthly utility bill. It also depicts the MESA both as tied with a loan product such as on-bill repayment (OBR), and as a stand-alone product. In reviewing the figures in this section, note that the average utility bill in California is $1,980 per year, or $165 per month. Our first example, an “ultra-high” utility bill, amounts to $350/month, or more than double the state average. Our second example, the “moderately-high” utility bill, amounts to $250/month, approximately 50 percent more than the state average. We know that over 2 million Californians fall into this ultra- and moderately-high utility bill burden categories, including nearly 400,000 California households who are very low-income.16 Our expectation is that the MESA should be deployed for households who consume energy at a rate that is well above average, even though, for stand-alone purposes, the MESA could work to change behavior no matter how low the starting point. To achieve maximal savings, it helps if consumption (and inefficiency) is high.17 EXAMPLE A: ULTRA-HIGH ENERGY CONSUMER Table 1 illustrates the MESA’s impact on the household savings of an ultra-high energy consumer. In this example, a household, with an average monthly utility bill of $350 (Tier 4 rates), obtains a 10-year loan of $10,000 with a 5.9% interest rate to undertake a whole-house energy efficiency upgrade. Typically consisting of any or all of duct sealing, new insulation, air sealing, a new HVAC (heating, ventilation, and air conditioning) system or hot water system, a whole-house energy upgrade would likely result in postretrofit savings of 10 to 20 percent. These savings would arise merely from the more efficient installations, assuming behavior is at least constant. However, in our example, these savings will not fully offset the cost of the monthly loan.

Note that while 400,000 very low-income families use Tier 4 and Tier 5 levels of energy consumption, their CARE rates are discounted, so they do not pay the same prices for the same consumption. Note that our LMI targets are low- and moderateincome families whose incomes exceed CARE rate eligibility. Our data on the population in tier rates comes from: Lori Bamberger, Ellen Avis, Chris Busch, and Bernard Lam, “Pulling the Trigger: Increasing Home Energy Savings,” CalCEF, July 2012, pp. 17-18, and background PowerPoint presented by CalCEF on 10/27/2011. 17

Note that there are 813,000 households in California with ultra-high energy consumption (Tier 5), at approximately double the state average. Of these 110,000 families receive discounted rates due to very low incomes below 50% of the area median income. There are also approximately 1.4 million households, including nearly 300,000 very low-income families at discounted rates, at Tier 4 consumption rates, which, for non-CARE LMI families, are approximately 40% higher than the average California bill. While these figures don’t separate out based on whether or not the occupant is renting or owning, it’s clear that MESA could be targeted to help the LMI portion of the 2.25 million Californians who pay unnecessarily high utility bills.

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Table 1 depicts financial savings that can be achieved via an energy upgrade based on energy efficiency gains ranging from 10 to 40 percent. Not surprisingly, the greater efficiency gains result in greater the savings. Table 1: High Energy Consumer with OBR Impact of OBR Financing with a $10,000, 10-year, 5.9% Loan18 on Monthly Bill Old Bill

Monthly EE Loan

% Energy Efficiency Gains

$ Financial Savings

New Bill

Net Monthly Difference

Net Annual Difference

$350

$111

10%

$35

$426.00

-$76

-$912

$350

$111

15%

$53

$408.50

-$59

-$702

$350

$111

20%

$70

$391.00

-$41

-$492

$350

$111

25%

$88

$373.50

-$24

-$282

$350

$111

30%

$105

$356.00

-$6

-$72

$350

$111

35%

$123

$338.50

$12

$138

$350

$111

40%

$140

$321.00

$29

$348

However, this household will not achieve “bill neutrality” (when energy savings equal or exceed loan charge) until it reaches 35% in achieved monthly energy savings. Although reaching bill neutrality is not required by law or design,19 SNE’s leadership is cognizant of its dual mission of helping families reduce energy consumption and building household assets (or financial savings). The latter goal —helping underserved families save money by engaging in meaningful and cost-effective energy upgrades— is better addressed, we think, in Table 2 with the introduction of a Matched Energy Savings Account.

This loan interest rate is modeled on interest rates found in energy efficiency loan programs already deployed in California including: Clean Energy Upgrade Financing Program (ABX 114), administered by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), Marin Clean Energy’s OBR (6.5%), and the Sacramento Municipal Utility District’s recent energy efficiency loan (5.9%). On a relatively small loan (e.g. $10,000), the interest rate has less significance than the loan term. Portland OR’s Clean Energy Works Oregon OBR program features a 5.25% or 5.99% 7- to 15-year term, while NYSERDA offers a 3.49% 5- to 15-year OBR loan. Marin’s OBR program will feature 5- and 10-year terms. 19

SNE has not supported mandated bill neutrality because we believe that low- and moderate-income people deserve access to financing for energy systems that break down and need to be replaced, even if replacement is not bill neutral. As an example, in those parts of California where climates are moderate, HVAC systems would not be able to be installed in a bill-neutral manner. However, for this very reason (that EE loans could exceed savings), SNE has been leading the development of borrower protection strategies to accompany OBR. One of these strategies is the MESA, a behavior-changing incentive designed to bring a non-billneutral loan into (or closer to) bill neutrality.

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Table 2: High Energy Consumer with MESA Impact of MESA with a $10,000, 10-year, 5.9% Loan on Monthly Bill Old Bill

Monthly EE Loan

% Energy Efficiency Gains

$ Financial Savings

MESA match

(loan - energy savings + MESA)

Net Monthly Difference w/MESA

Net Annual Difference w/MESA

Annual MESA Distributed

$350

$111

10%

$35

$391

-$41

-$492

$420

$350

$111

15%

$53

$356

-$6

-$72

$636

$350

$111

20%

$70

$321

$29

$348

$840

$350

$111

25%

$88

$285

$65

$780

$1,056

$350

$111

30%

$105

$251

$99

$1,188

$1,260

$350

$111

35%

$123

$216

$135

$1,620

$1,476

$350

$111

40%

$140

$181

$169

$2,028

$1,680

New Bill

Table 2 begins with the same household scenario introduced in the previous table. It then delineates the impact on the household budget of layering a MESA on top of new energy efficiency gains. How do the numbers work? Let’s assume this family is able to reduce its energy consumption by 25 percent post upgrade. Their new monthly OBR loan adds $111to the monthly utility bill. However, thanks to efficiency gains achieved through the upgrades, the family is now saving $88 on energy each month. This energy savings is then matched $1 for $1 by the family’s MESA account, bringing its total monthly financial savings to $176 (or, $88 energy savings + $88 MESA). After subtracting the cost of the loan from the family’s new savings, the household in Table 1 actually nets $65 each month, or $768 annually, when they reduced their energy consumption by 25 percent. If these upgrades are combined with significant behavior change, this motivated household could experience even greater savings. As an example, assuming an additional 5% efficiency gain, for a total of 30% energy savings, this former high energy consumer would realize over $1,100 in annual household savings net of loan charges. These financial savings could be used to gain significant traction in paying down the energy efficiency loan or for other pressing household expenses. EXAMPLE B: MODERATELY-HIGH ENERGY CONSUMER Table 3 shows the MESA’s impact on household savings of a moderately-high energy consumer. This household averages $250 on monthly utility bills, obtains a 10-year loan of $10,000 with a 5.9% interest rate to undertake an energy retrofit. This household would need to exceed 40% efficiency gains in order to reach bill neutrality, which we know to be nearly impossible. However, with the addition of the MESA (see Table 4), this family is able to start saving $15 monthly when it reaches 25% in efficiency gains.

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Table 3: Moderate Energy Consumer with OBR Impact of OBR Financing with a $10,000, 10-year, 5.9% Loan on Monthly Bill Old Bill

Monthly EE Loan

% Energy Efficiency Gains

$ Financial Savings

New Bill

Net Monthly Difference

Net Annual Difference

$250

$111

10%

$25

$336.00

-$86

-$1,032

$250

$111

15%

$38

$323.50

-$74

-$882

$250

$111

20%

$50

$311.00

-$61

-$732

$250

$111

25%

$63

$298.50

-$49

-$582

$250

$111

30%

$75

$286.00

-$36

-$432

$250

$111

35%

$88

$273.50

-$24

-$282

$250

$111

40%

$100

$261.00

-$11

-$132

Table 4: Moderate Energy Consumer with MESA Impact of MESA with a $10,000, 10-year, 5.9% Loan on Monthly Bill

(loan - energy savings + MESA)

Net Monthly Difference w/MESA

Net Annual Difference w/MESA

Annual MESA Distributed

$25

$311

-$61

-$732

$300

$38

$285

-$35

-$420

$456

20%

$50

$261

-$11

-$132

$600

$111

25%

$63

$235

$15

$180

$756

$250

$111

30%

$75

$211

$39

$468

$900

$250

$111

35%

$88

$185

$65

$780

$1,056

$250

$111

40%

$100

$161

$89

$1,068

$1,200

Old Bill

Monthly EE Loan

% Energy Efficiency Gains

$ Financial Savings

MESA match

$250

$111

10%

$25

$250

$111

15%

$250

$111

$250

New Bill

EXAMPLE C: MESA AS A STAND-ALONE PRODUCT The MESA can also be used to incentivize savings through behavior change only, and not as an accompaniment to a financed energy upgrade. Though the impact of behavior-only (and no whole-house upgrade) energy saving is markedly lower —usually ranging from 2% to 7%20— the MESA still rewards

Overview of Residential Energy Feedback and Behavior‐based Energy Efficiency, February 2011. (http://www1.eere.energy.gov/seeaction/pdfs/customerinformation_behavioral_status_summary.pdf)

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active savings among households21. In fact, absent a loan charge, the savings are available for immediate use and asset building. The household in Table 5 would save $25 each month it reduced its energy consumption by 5 percent, which could add up to $300/year with consistent behavior toward energy reduction.

Table 5: MESA as Stand-Alone Incentive % Energy Efficiency Gains

$ Financial Savings

New Bill (minus energy savings)

MESA

Old Bill

New Monthly Energy Expense

Net Monthly Difference

Annual MESA paid

$250

$12.50

$237.50

$12.50

$225

$25

$300

$250

10%

$25.00

$225.00

$25.00

$200

$50

$600

$250

15%

$37.50

$212.50

$37.50

$175

$75

$900

$250

20%

$50.00

$200.00

$50.00

$150

$100

$1,200

$250

25%

$62.50

$187.50

$62.50

$125

$1,500

Today, the vast majority of behavior change incentives the utilities invest in are data and software tools, helping families learn about their energy use. As a performance-based incentive, the MESA is unique, whether stand-alone or paired with financing. As the American Council for an Energy Efficiency Economy puts it, “EVERYTHING always comes back to behavior, even when the discussion turns upon the installation of technology: No matter how efficient the light bulb standard is, people still need to get to the hardware store, select the right bulb, take it home, install it, and use it properly before the benefits can be realized.”22

MESA: KEY ATTRIBUTES A well-designed matched savings account product would have these key attributes: ● ADAPTABLE While originally designed to complement the OBR financing mechanism, the MESA is not limited to OBR and could fit seamlessly into other energy efficiency financing or outreach programs. It can be used as a post-

Note that a family might install a whole-house energy upgrade without financing, and still use a MESA. Our assumption is that that is less likely among our target population. 22

American Council for an Energy Efficiency Economy (http://aceee.org/portal/behavior).

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retrofit rebate with any energy efficiency financing tools. Or it can be used as a stand-alone program to incentivize behavior-based energy savings.23 The MESA rewards only a predefined eligible household’s energy savings for up to two years, ensuring that conscientious energy savings behavior is habituated. In addition, scarce utility subsidy (the PGE Winter Gas Savings program spent $43 million per year) can be targeted to underserved, and relatively lower income, households. The MESA is designed for maximum programmatic flexibility, enabling program managers to adjust match rates or program run-time based on differing climates, funding sources (some that might target specific populations), and differing end goals (i.e., catalyze neighborhood energy saving campaigns). Though beyond the scope this paper, the MESA could also be developed to serve the multifamily rental market, where energy bills can easily add up to 12 percent or more of a low-income family’s budget.24 In the multifamily arena, the MESA can help address the split incentive concerns where buildings are master metered, or it can galvanize participation for an efficiency project when units are individually metered. ● SCALABLE The MESA product has the ability to scale-up to encourage energy savings across the state. By partnering with the IOUs, and the intermediaries managing energy upgrade and finance programs, the MESA could help leverage millions of dollars in private capital to catalyze home energy upgrades. ● MEASURABLE The MESA, by its nature, is nested in data. Program managers will be able to track the energy savings patterns of participating households over time and then compare the data by designated cohorts (i.e. zip code, square footage, original billing tier, community affinity group, etc.). Program managers will also be able to track daily usage to see if certain “tips for saving energy” nudges (via text, email, mail or social media) succeed at increasing energy savings. It will be Important to engage evaluators on the front-end of the MESA pilots to capture data effectively to measure impact.

The stand-alone option is notably different from a performance-based strategy administered by PG&E in previous winters, referred to as the PG&E Winter Gas Savings Program, in which participating households received up to a 20% bonus credit toward future energy bills if gas was conserved during December and January (compared with the prior year’s consumption). Anecdotally, we have heard that families who received this credit had no idea why, or what behavior contributed to it. PGE’s Winter Savings Program (http://www.pgecurrents.com/tag/winter-gas-savings/).PG&E spent approximately $43 million on this program, serving 1.9 million customers in 2013. It was not income targeted in any way. The vast majority of recipients who received the maximum 20% credit lived in one of three counties: Calaveras, King, and San Bernardino. 24

On-Bill Programs that Advance Multifamily Energy Efficiency, September 2013. (http://greenforall.org/resources/reportsresearch/on-bill-programs-that-advance-multifamily-energy-efficiency/)

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CONSIDERATIONS: IS MESA REALLY AN ASSET BUILDING TOOL?

he MESA is a promising tool that serves the dual purpose of helping meet California’s aggressive goals for residential energy savings, while helping build the savings and averting unnecessary energy expenses of low- and moderate-income families. However, the following three concerns were raised during interviews with leaders in the asset-building field: Are we asking LMI families to take on more debt?25 This simple answer is no. The stand-along MESA does not require any upfront energy efficiency investments. In addition, the MESA is intended to incentivize moderate- and middle-income homeowners with aboveaverage utility bills to reduce their energy consumption. The OBR-MESA model, however, is predicated on obtaining a loan to finance energy efficiency upgrades, some of which may be for immediate needs (a broken furnace), and others of which are important for whole-house energy upgrades which can pay for themselves over time. For urgent needs, access to a low-cost, long-term loan is critical. In addition, this household investment/savings accounting depends on accurate estimates and easy-to-understand presentations from contractors. MESA program implementers would do well to employ measures that facilitate prudent financial management and energy savings decision-making. For example, energy efficiency contractors should be trained to provide realistic estimates26 for potential energy savings during home energy audits and not up-sell or increase project scope beyond a family’s means. They should be trained in explaining the difference between modeled savings and actual savings, and in describing how appliances and behavior can thwart estimates. Is the MESA just too complicated? Combined with a financing product like OBR, the MESA risks losing its target audience because the triplelayered solution – energy efficiency upgrades + OBR financing + MESA – is too complicated to easily understand. Explanations of one of these solutions can be overwhelming and potentially intimidating.27 All

Concern raised by Reid Cramer, Director of the Asset Building Program at the New America Foundation.

SNE has been informed that current auditing tools result in severe miscalculations of estimates. For these reasons, the vast majority of energy upgrades have not resulted in energy savings that have met estimates. SNE hopes that the State will recalibrate estimates so that they can be more accurate. 27

Princeton economist Dean Spears published a series of experiments that each revealed how “poverty appears to have made economic decision-making more consuming of cognitive control for poorer people than for richer people.” (http://www.princeton.edu/chw/events_archive/repository/Spears120110/Spears120110.pdf) Forthcoming feedback from Richmond focus groups should provide more accurate feedback on this potential concern.

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three packaged together could be a deal-breaker28 – especially to homeowners shouldering daily demands of “getting by” with little disposable income. MESA project implementers can mitigate this concern by testing key marketing messages, and training energy efficiency contractors on the tool as well as providing clear collateral that the contractors can distribute. Can we counter funding fatigue for the matched account model? The MESA has two major hurdles to overcome among funders in the asset-building arena. First, many of the foundations that helped seed and nurture the asset-building field are moving away from funding matched savings accounts.29 Traditional Individual Development Accounts (IDAs), with a $2-to-$1 match and goals of investing in homeownership and small businesses, are giving way to smaller savings goal for more immediate needs, such as savings for citizenship tests or applying for the “Deferred Action for Childhood Arrivals.”30 Of course, the MESA could be designed to be more akin to new generation IDA programs, with much smaller matches.31 Matching funds have historically been difficult to secure, and current shifts in the asset-building field are not promising for raising funds for the MESA. However, a MESA match does fall solidly within goals of some of the utility ratepayer funded behavior initiatives, and a match would be an innovative and complementary approach to the typical use of those funds today. Second, MESA’s target population doesn’t meet most philanthropic funding priorities from the community development and asset-building arenas, which focus typically on renter households earning less than 60% of Area Median Income and homeowners at risk of (or after) foreclosure. MESA would need to attract philanthropic, public, and ratepayer funds that seek energy consumption reduction among homeowners who are underserved, even if their income is above the lowest income levels. We think the MESA could be funded from utilities and public benefit funds that currently fund rebates and other low-income and energy incentives. By making the MESA a performance-based rebate it could supplement existing rebate programs or be tested in lieu of others. Since States and utilities already spend millions on rebates and other incentives, changing the form to a MESA may prove extremely cost-effective, especially if MESA can be structured to avoid the rebound effect.

Comment by Eric Weaver, CEO of Opportunity Fund. He cautioned about trying to solve too many problems with a single solution, noting that SNE may run the risk of diluting the impact of any single goal. 29

Comment from Ben Mangan, CEO of EARN, a leader in providing innovative products and services to low-income families in the SF Bay Area. (www.earn.org). 30

Conversation with Pat Krackov, former Program Officer at Silicon Valley Community Foundation, referencing the SF-based group, Mission Assets Fund (www.missionassetsfund.org). 31

See Appendix B Design issues.

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Do they need a MESA - Can’t families build assets just from their energy upgrades? It is true that the numbers show that families with deepest savings can build significant assets without the MESA. However, based on statistics from the energy efficiency field, upgrades that generate between 10 and 30 percent efficiency gains in moderate climates are likely to need an extra incentive to achieve real net savings after an energy efficiency loans. Likewise, these same families, absent an upgrade, will be limited to a 3 to 7 percent efficiency gain. The MESA, offering a 1-to-1 match is critical to help catalyze participation at the outset, and moderate the loan charge effects. Perhaps MESA should taper down with greater efficiency achieved, as a way to protect scarce public, utility, and philanthropic resources. We believe, however, that some form of MESA match, beyond the efficiency of an upgrade, is necessary to change borrowers’ behavior, ensure loan affordability, and help LMI families build assets out of energy savings.

CONCLUSION

he Matched Energy Savings Account (MESA) is an innovative product that rewards energy savings with financial savings. By layering an asset-building strategy on top of the energy sector’s efficiency goals, the MESA is a first-of-its-kind “double green bottom line” helping to reduce millions of tons of greenhouse gas emissions, while providing California homeowners with financial savings. MESA savings would be a welcome addition to a family balance sheet, especially here in California where over 20 percent of homeowners still have negative equity in their homes. And 44 percent of our state’s residents are liquid asset poor, meaning they lack the necessary savings to cover basic expenses if unemployment, a medical emergency or other crisis severed their cash flow). This finding is amplified in minority neighborhoods, where fully 50% are liquid asset poor. It’s these hardworking, but struggling, Californians who are living in the 5.8 million old, energy inefficient homes. For them, basic efficiency upgrades like duct sealing, attic or crawl space insulation, air sealing, and an HVAC upgrade could provide enough annual savings to jump start an emergency savings account, pay down debt, or invest in delayed car maintenance. The MESA was designed with the average California homeowner —living in drafty, old houses— in mind. The person who earns enough money to pay high utility bills, but not enough to pay for efficiency upgrades out of pocket. And there is a continuing reticence to spend cash or take on debt in the current economic environment. The MESA, alone or paired with OBR, addresses this concern by generating immediate financial savings (from reduced energy costs and the MESA match) and hedging future rate increases. It can provide more comfortable homes, healthier homes, and new habits around energy use and consumptions. Importantly, it provides these LMI homeowners with access to the financial savings from energy savings that are often limited to wealthier households. The MESA was also designed with the IOUs in mind. It is a nimble product that has the ability to scale to meet programmatic needs and fits squarely into the CPUC’s new push to create a more diverse mix of residential behavior programs. The MESA/OBR combo is a cost effective and performance driven solution to the “rebound effect” because it only rewards if energy savings occur, unlike a rebate model that provide a 20 | P a g e

one-time payment for energy efficiency upgrades, with no assurance that homeowners will not “run up their bill” to their pre-retrofit usage amounts. It complements IOU behavior incentives that have prioritized data and smart technology. The MESA/OBR combo also provides one more tool in the state’s energy efficiency arsenal to help meet our huge goals for emissions reductions. It can help market OBR, while providing extra security that family will actually meet their savings through this new behavioral incentive. And, it helps the IOUs and state reach underserved markets, through targeting to LMI communities in partnership with community organizations, including those that already administer IDA programs. Another way the MESA benefits utilities and IOUs stems from lessons garnered from the asset-building field. What was learned – and what financial services sector already knew – is that families who were introduced to the financial mainstream – thru savings accounts – were more likely to partake in other savings products. The more sophisticated the IDA (matched savings account) participant became, the more financial services they felt able and confident to access.32 This same strategy can hold true for energy consumers – as they enter the “energy efficiency mainstream” with their MESA, they will be more likely to participate in other energy saving behaviors, programs, or outcomes. Matching energy savings with financial savings is a win-win-win for all involved. Homeowners benefit by saving energy and shoring up savings. Utilities benefit because high-use customers reduce their energy consumption, and in some cases, are incentivized to get deeper savings through energy efficiency upgrade financing. And the third winner is the local economy: housing stock is stabilized, energy jobs are created, and homeowners are likely to spend their MESA savings locally. Our bottom line: the MESA builds assets for families, communities, and the environment.

Current research with Duke, UNC and Intuit is also looking at the behavior prompts needed to have people save during tax time, increasing take-up rates for retirement & education savings products. Michal Grinstein-Weiss, Dan Ariely and Clinton Key, Refund to Savings: Exploring the Intersection of Behavioral Economics and Asset Building at Tax Time, February 2011 (http://assets.web.unc.edu/files/2011/07/Proceedings-Report.pdf)

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APPENDIX A: ADMINISTRATIVE STRUCTURE BANKING During the pilot period, the MESA account can reside in a regular business banking account at SNE’s bank of choice. Because these accounts are not depository accounts – in that participants will not be depositing any of their own money – there is no need for a specialized account (i.e., an escrow) structure like those used in IDA programs. If SNE partners with a third party (i.e., a utility) that decides to fund the match, but not administer the account, SNE may need to utilize an escrow-like account structure so that a third-party entity can transfer money directly into an individual account (vs. SNE’s general fund). These escrow accounts provide a higher level of fiduciary accountability. ELIGIBILITY AND TARGET MARKET We recommend aligning MESA eligibility requirements with SNE’s values and missions, targeting an underserved market of low- and moderate-income homeowners, as defined by HUD, with above average energy consumption. For a pilot in the SF Bay Area, homeowners earning up to 120% of Area Median Income will be eligible to participate in the MESA. Income verification would be accomplished either as part of the bank intake and underwriting process or by SNE or an intermediary that verifies that customers are accurately reporting their income by screening a sample of applicants, and closing accounts if people are ineligible. Currently, the MESA enjoys product flexibility and is not constrained by a funding source that requires specific income, demographic, or geographic requirements. MARKETING MESA implementers will need to work with PG&E (or other utility provider) to identify these higher energy consumers in the MESA’s targeted zip codes. Getting traction in targeted neighborhoods through traditional marketing efforts may be challenging. New discovery and understanding is needed in the underserved neighborhoods. It will be important to know how information is distributed and shared, who the “trusted messengers” are in each targeted community and how to engage them in MESA’s efforts. Partnering with local community groups and city staff will be critical for establishing local credibility. In California, wherever MESA is deployed, marketing should link in with other Energy Upgrade California marketing so that it becomes a routine offering for those households who qualify. The MESA administrative organization should be prepared to provide small pass-through funding or outreach grants to community organizations to engender goodwill and recognition for the efforts. Additionally, face-to-face outreach may be as important as technology in the start-up phase when targeting underserved communities. In a similar savings program, the Green Energy Match (“GEM”) program in the City of San Jose realized it was not getting sufficient traction in lower-income

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neighborhoods.33 To reach more households, the GEM program hired and trained college students to go door-to-door in these communities promoting the GEM’s energy saving program. The in-person strategy had a greater impact with community than the online tool. Ultimately, community residents will need to see the MESA as something validated, and the MESA may need a formal “blessing” from the utilities, Energy Upgrade California partners, or other major influences (city government or leading community) in the markets it explores. ACCOUNT MANAGEMENT The start-up phase will likely involve one full-time employee dedicated to a seamless roll-out of the MESA product. Responsibilities in this start-up phase will include partnership development, contractor training, marketing, and ultimately, participant enrollment. This role should be filled by a mid- to senior-level professional who can navigate the challenges of new product implementation. Ongoing account management should be divided into two primary segments – operational and communications – over the life the MESA. This role could be managed by a single person working up to 50% FTE during the pilot phase. These hours are specific to MESA account management and do not include additional research, business development, fundraising or other external affairs necessary for growing the product. MESA’s specific operational needs focus primarily on the back-end data management. These tasks include, but are not limited to:   

  

Managing the customer database. Ensuring participants are accurately enrolled in the system. Establishing consumer-permissioned access to usage data via Green Button or from another online provider. Energy savings will be measured by comparing actual current usage data with data from the same month of the previous year. 34 Determining start/end dates for the participation – drawing down previous year’s usage data. Downloading and analyzing usage date each month to establish MESA match amounts. Provide quarterly data reports to SNE leadership to track household savings, and to inform midcourse adjustments, if necessary.

Shayna Hirschfield, ENERGY Watch Program Coordinator at City of San Jose; and partner the Green Energy Match (GEM), public private partnership between WattzOn and the city of San Jose, CA. (www.greenenergymatch.org). The GEM program rewarded household energy savings with discounted coupons to local businesses. 34

Our initial design recommendation is to administer the pilot as simply as possible. Unless there is an easily available, low-cost weather adjusting software available, or unless we can tie into the OBR program’s metrics, we will not weather adjust energy data in the pilot phase due to initial operational cost. That feature will likely be added in a future product roll out.

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Communications needs for the MESA will likely evolve during the course of the pilot, as SNE leadership determines the most effective strategies for targeting households more effectively and efficiently. Some of the primary communication needs will include: 

    

Develop online/print marketing materials energy efficiency (EE) contractors, community nonprofit partners, Energy Upgrade California marketing hubs, and other potential marketing channels. Provide training for EE contractors on understanding and selling the OBR/MESA loan product. Manage the publication of monthly MESA newsletter (email and/or text), which should include monthly energy savings, MESA savings, tips for conservation, and any relevant local information. Serve as Customer Service Representative, responding to phone calls, email or other queries about the account. Using quarterly usage reports, determine if/how we can nudge consumers to realize deeper energy savings. Maintain the website to ensure basic programmatic information is available, including FAQs, contact information, terms of use, etc.

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APPENDIX B: MESA DESIGN ISSUES

The following issues were addressed by SNE’s product design team and culminated in the product described above as our best reflection of a functional, meaningful product. The following are design issues that should be addressed by any entity wishing to create a MESA:

DESIGN ELEMENT

Utilization

DESIGN OPTIONS

Summary of the Design Decision issue: Should the MESA be tied to a financing program or operated as a stand-alone program? Also, can this concept be exported to renters and multifamily housing? Design Options:     

DECISION RECOMMENDATION

Stand-alone tool Paired with a financing mechanism (OBR, etc.) Single-family residence Multifamily-Owned: Condos, Coops Multifamily-Rental: Apartment buildings

The MESA will have the greatest financial impact on LMI homeowning families when it is paired with EE financing, such as OBR. The MESA can provide a financial incentive to undertake the investment in an upgrade via a loan, while helping to offset the added cost of the loan during the program tenure. In this model, the MESA essentially serves as a post-retrofit, behavior-based rebate. If the behavior changes (e.g. energy use spikes), the MESA reward is reduced or eliminated entirely. Thus, there is no financial benefit for increased energy consumption. Because a financing-plus-MESA combination has the potential to result in greater assets saved over time, we recommend this design. As a stand-alone tool, however, the MESA can also be an important mechanism to incentivize behavior that can lead to savings. The stand-alone MESA may be more interesting to lower-income families since energy savings are available immediately for any use (as there will be no outstanding debt servicing from an energy loan). Because behavior alone, without an upgrade, does not usually offer savings greater than the 3-to-7% range described earlier, the MESA-standalone option is not our design recommendation to start. The MESA is also a tool that could be used to address the important split-incentive issues for owners and renters of multifamily housing. Whether a MESA can work with owners of condos and coops depends on issues of data and separation of energy meters. Details surrounding the application of MESA to multifamily are beyond the scope of this paper.

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DESIGN ELEMENT

Match Baseline

DESIGN OPTIONS

Summary of the Design Decision Issue: The MESA depends on measuring energy conservation performance against a baseline of energy consumption. The choice of baseline, and the adjustments made to baseline, will influence MESA outcomes and success, as well as program costs. Possible options include:  Actual prior year month  Actual prior annual total (average monthly)  Seasonal average (e.g. 3 months) for each season  Average of prior two years  Energy audit predicted (modeled) savings  For the second year, first year actual could be the baseline.  Weather-adjusted data

DECISION RECOMMENDATION

SNE recommends using a baseline of the actual prior year’s energy consumption, measured monthly or quarterly as depicted on the utility bill. For example, the energy consumption portion of the utility bill from January through March 2014 would be measured against January through March 2013. This design decision necessarily depends on household utility bill data made available by the utility or a utility data aggregator to a third-party MESA intermediary, such as SNE. We do not recommend using a baseline of modeled energy savings because of concerns to date about model accuracy. Also, not everyone enrolled in a MESA will have had an energy audit. In order to include families with do-it-yourself energy improvements or stand-alone MESAs, we think prior month or quarter from the prior year is the best option. We would prefer including weather adjustment to the measurement, especially in less temperate climates, but this depends on the ease and cost of access to that adjustment. We also recommend trying to integrate the MESA baseline decisions with the data used by the relevant lending or upgrade rebate program, which may already be developing weather-adjusted metrics, or a more robust set of data generally than prior year utility bill.

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DESIGN ELEMENT

Match Rate

DESIGN OPTIONS

Summary of Design Decision Issue: The MESA is a subsidy in the form of a performance-based rebate. How rich the subsidy is may influence how effective the rebate assists in marketing the program, and also in achieving persistency of savings gains. Possible options include: 35  $1 MESA for every$1 energy saved (a 100% match)  $1 MESA for every $2 energy saved (a 50% match)  $1 to $0.50 (a 200% match)  Percentage of energy savings = tiered reward rate (e.g. progressively higher matches for higher energy saved, or declining rate over more energy saved)  Rate that changes over time

DECISION RECOMMENDATION

This design element is variable and can be adjusted to best reflect primary programmatic goals. If the primary goal for the MESA is asset-building with a stated outcome that households should be able to pocket at least some net savings (or achieve bill neutrality), the $1-to-$1 match rate should be utilized. This match rate would be effective in targeting LMI homeowners, in best protecting borrowers using OBR or other financing (to achieve bill neutrality or better), in helping families accumulate real assets, and in encouraging realizable, immediate savings from behavior change. Remember also that the MESA has a 2-year horizon, while the typical energy loan is 5 or 10 years (or greater). Therefore, the relative depth of the MESA and resultant savings should ideally help soften the loan costs during non-MESA years. If the primary programmatic goal is energy savings – with the MESA being used as a post-retrofit rebate – then a less robust MESA, or a declining MESA, could still encourage the desired outcomes. If MESA is a stand-alone product, and it’s not necessary to help borrowers achieve bill neutrality then there is no need for such a high match rate. In this case, a 50% match rate, or a rate that declines over 2 years would be sufficient.

Energy bills really would measure the dollar equivalent of kWh or therms reduced.

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DESIGN ELEMENT

Account and Match Tenure

DESIGN OPTIONS

Summary of Design Issue Decision: This issue consists of determining the programmatic period for providing the MESA match. Behavioral economics would position the tenure in one position for behavior change (approximately 4 months to 1 year), while a borrower protection approach (helping meet bill neutrality over the term of a loan) would favor longer terms. Options considered:  One year  Two years  Three years  Full term of loan

DECISION RECOMMENDATION

This element is also variable and can easily be adapted to funding capacity. We recommend using an 18 month to 2-year tenure for this account in order to realize total possible savings per household. When partnered with OBR (or other financing), MESA savings beyond the first year will be a better indication of how the household has adapted its post-upgrade consumption. The questions become: how deep can savings go, and how to make savings persist over time despite the new reduction in utility bills due that those savings. With access to sufficient funding, it might be instructive to run parallel pilots – one using the MESA product as outlined above, and a second one with greater MESA savings ($2 to $1) over a shorter duration (12 months). It is not clear the results would differ, but a possible divergence may result in faster and higher take-up rates for the “double MESA” because of its higher match reward. In contrast, the “regular MESA” might actually provide greater final pay-outs because participants have more time to capture total savings. In addition, when paired with a loan, the longer MESA has a greater potential to reduce loan costs (protecting borrowers) over the long run.

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DESIGN ELEMENT

Delivery Mechanism

DESIGN OPTIONS

Design Decision Issue Summary: In addition to how much match to offer, the program must decide how frequently to fund and distribute the financial savings, and the vehicle through which the borrower will receive and accumulate any match. Options include: Timing:  Monthly  Quarterly  Annually

DECISION RECOMMENDATION

Vehicles:  Savings Accounts  Checks  Debit Cards reloaded each disbursement period  Applied directly to utility bill

Timing Recommendations: During the pilot phase, SNE recommends issuing MESA match benefits monthly (or quarterly if the baseline is quarterly), and directly to the consumer. The monthly choice is selected because it provides an opportunity for monthly contact, such as a “thank you for savings” note and tips for increased energy reduction. The monthly MESA touch can therefore serve as both a reward and a reminder to continue to reduce energy consumption. Other considerations: a) If asset-building is the primary goal, quarterly or annual match funding should be considered because they essentially create a forced savings account. b) If MESA is part of a financing program or is otherwise partnered with a utility, then applying the MESA directly to the bill would the most seamless for program participants. It is currently unknown whether the match applied to the bill would be as effective in changing behavior since its one-step removed from the borrower’s pocket. Also, a MESA match on the bill, when coupled with an OBR loan, could complicate the messaging on the bill around the OBR line item. c) Some stakeholders SNE has convened on this issue recommend requiring the homeowner to put the dollar amount of the energy savings into a savings account before the match, making the program more akin to an IDA which requires a “saver’s” deposit prior to the match. We think that is unnecessary – we are trying to shape the behavior of energy savings, not depositing energy savings into an account. Vehicle Decisions: The savings account offers the benefit of accumulation, most akin to an asset-building IDA. On the other hand, a check or debit card approach can be used most easily by the participant for any purchase whatsoever. Finally, applied to the utility bill or coupons for retailers are the least flexible of vehicles. We recommend choosing a vehicle with the most flexible use options – a check or a debit card. We have begun to undertake focus groups to determine the most desirable disbursement vehicle and match rate to prospective MESA participants Our recommendation may change as we finish these surveys.

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ABOUT US Saving Neighborhood Energy (SNE) is an innovative financing and asset-building intermediary catalyzing energy efficiency among ordinary Californians. Our community-based pilots enable low- and moderateincome families who own homes in California to finally access the home energy savings available to wealthier households, while reducing harmful carbon emissions. SNE’s pilots use California’s first-ever CPUC-approved authorization for Onbill Repayment Financing (OBR) for homeowners in partnership with investor owned utilities and a community choice aggregator. SNE’s pilots will access $2 million in utilityfunded credit enhancement to leverage $20 million in private capital.

LEARN MORE Contact: Lori Bamberger Founder & Executive Director 131 Steuart Street, Suite 300A San Francisco, CA 94105 Lori@EnergyIntoAssets.org Website: www.EnergyIntoAssets.org

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