Energy efficiency retrofits

Overview

Some states, local housing finance agencies, and localities offer financial support to help homeowners and owners of multifamily rental properties serving low- and moderate-income households cover the cost of energy-efficient retrofits.

These upgrades and modifications are intended to lower utility bills, reduce greenhouse gas emissions, and improve building performance. Support may come in the form of grants or rebates, low-interest rate loans, or interest rate buy-downs, where the jurisdiction provides a subsidy to reduce rates on loans originated by private lenders. Localities can also offer free or low-cost energy audits. Some localities work with utility companies to offer energy audits or retrofits and partner with these companies to provide “on-bill” repayment options that facilitate repayment.

This brief describes some of the considerations for localities interested in developing an energy efficiency retrofit program.

Approach

Modifications to existing buildings can improve energy-efficiency and significantly lower overall energy use. Potential savings may be particularly significant in older structures that were not built to modern energy efficiency standards. Many incentive and financing programs have been developed by local governments and utility companies to encourage energy-efficiency retrofit projects in existing buildings. Some programs focus on homeownership, while others focus on multifamily property owners whose properties house low- and moderate- income households.

Some local programs provide energy efficiency advice or testing to help building owners plan for improvements. Most programs direct residents to approved inspectors. In an inspection often called an energy audit, inspectors typically examine a building’s heating and cooling systems, assess the building envelope for leaks, and look for opportunities to address inefficiencies in plumbing, lighting, appliances, and other mechanical systems. Localities can provide free or reduced cost energy audits to encourage homeowners to learn about energy-efficient improvements and the likely savings that will result.

Some community programs provide cash rebates for qualified projects. These programs repay owners a portion of the cost for materials and installation. Common qualified projects include upgrades to energy-efficient heating and cooling systems or higher-rated insulation, roof repair, or installation of solar panels and solar hot water heaters. Smaller projects, like programmable thermostat installation and energy-efficient lightbulb swaps, can also qualify for rebates. The amount of the rebate is set by the program and residents may be limited to claiming a certain overall amount each year. Utility companies also have developed similar rebate programs which can sometimes be combined with government rebates.

Some municipalities offer low-cost financing options for qualified higher-cost projects. Like the rebate programs, these programs typically limit the financing to particular upgrades and may be very specific about which projects qualify. Financing can be low or no-interest with loan terms that range from 5 to 20 years. For larger loan amounts the lender may put a lien on the property.

There are also a number of private sector lending options for financing energy-efficient retrofits. Localities wishing to promote energy efficiency may want to educate homeowners and multifamily property owners about local financing options. For example, Fannie Mae’s HomeStyle Energy Mortgage is offered by many lenders across the country and can be used to finance many kinds of projects including weatherization and renewable energy.Freddie Mac also offers GreenCHOICE, a mortgage product that covers the cost of energy-efficient home improvements.

Property-Assessed Clean Energy (PACE) loans provide another potential source of financing for energy improvement projects. These loans are funded by private sector lenders, but paid back through increased local property taxes. In general, local governments that choose to offer PACE financing must be authorized to do so by state law. Residential PACE programs may be used to finance energy efficiency retrofits as well as conversion to renewable energy sources such as solar. While popular, the loans are also controversial. Generally, the loans are not underwritten based on the consumer’s ability to repay the loan, as repayment is tied to the property and not the borrower. Additionally, Fannie Mae and Freddie Mac will not purchase a mortgage if the property has a PACE loan due to concerns that the PACE loan takes precedence over the first mortgage in the event of foreclosure.

Some localities work with utility companies to implement “on-bill” financing programs to facilitate repayment of loans for energy-efficient retrofits. With on-bill financing, the company completing the retrofits receives an upfront payment from the program sponsor. Property owners then pay back that amount through monthly or annual installments on an existing utility bill. In many cases, the cost savings resulting from the improvements are equal to or greater than the added expense of the installment payment, resulting in a utility bill that is the same or lower than it would have been without the payments. Once the energy-efficient improvements have been paid for, the owner(s) and/or resident(s) benefit from lower utility bills.

Among other issues, administrators of these programs need to determine how the loan will be repaid if a home is sold (e.g., will the remaining payments be the responsibility of the next homebuyer or due in full upon the sale). Smaller or low capacity localities should consider their administrative capacity for oversight of these types of programs, and consider potential regional or state partnerships to reduce the administrative burden of an energy efficiency retrofit program.

Eligibility

Energy efficiency retrofit programs vary in their eligibility standards for homeowners and projects. Some programs are targeted to commercial buildings, others to single-family homeowners or to owners of multifamily developments. Some programs place restrictions on participants’ incomes, limiting eligibility to low- or moderate-income households, although many do not have any such income limits.

Most programs specify the types of projects that qualify for assistance, although terms and details vary. For example, some programs simply list the types of activities that may be supported while others are more detailed; for example, specifying a minimum energy-efficiency rating for materials like air conditioners and insulation. Programs may also stipulate qualifications for contractors who can work on projects receiving funding. For example, some jurisdictions maintain a list of approved local contractors with specific certifications or experience.

In addition to government programs, many utility companies offer rebate programs and free or low cost energy inspections. These programs are often limited to utility customers.

Examples

The Energy Smart program in Boulder, CO, provides advice about energy efficiency, rebates for retrofit projects, and financing through local lenders to help businesses and homeowners finance energy-efficient retrofits. Eligible projects include insulation, heating and cooling systems, and windows, and the program does not have income restrictions.

The Milwaukee, WI, Energy Efficiency Program (ME2) provides a fixed-interest loan of up to $20,000 to eligible homeowners regardless of household income levels. Financing is only available to owners of single-family homes, duplexes, and triplexes for energy efficiency improvements and some supporting safety improvements.

The Green Cost Share program in Minneapolis, MN, offers funding for energy efficiency upgrades for homeowners and owners of commercial, industrial, or multifamily properties. The program prioritizes projects in communities most impacted by climate change and air pollution, such as Green Zones, income-qualified housing, residents with low incomes, and nonprofits that serve low-income households.

Seattle, WA’s HomeWise program offers free weatherization services to low-income homeowners and owners of rental properties. These weatherization efforts include energy audits, insulation, pipe wrapping, air sealing, furnace repair, and enhanced ventilation. 

Related resources

• The Clean Energy Financing Programs guide, developed by the EPA, provides an overview of funding mechanisms for renewable energy at the local level. The guide includes a Microsoft Excel decision tool that helps decision-makers find the best option for their community.
• Database of State Incentives for Renewables & Efficiency (DSIRE), maintained by the North Carolina Clean Energy Technology Center at North Carolina State University, is a comprehensive source of information on incentives and policies that support energy efficiency in the United States.
• The C40 Cities Climate Leadership Group published a report in 2023 that features a methodology and toolkit for cities to quantify the benefits of building retrofits.
• PACENation promotes PACE loan programs across the country. Their website includes a map identifying states and localities where PACE loans are offered. This article raises concerns about PACE loans, which are discussed in more detail in a brief written by the National Consumer Law Center.
• The federal Weatherization Assistance Program provides weatherization and energy efficiency upgrades for low-income homeowners and renters. The programs are administered by the states and different states have different standards and processes. Generally, once approved for the program, locally-based and professionally trained crews complete an energy audit and make changes to improve energy efficiency. The crews then complete the work which averages over $4,000 per unit and yields an average annual savings of nearly $300 per unit.