Memphis has the highest energy burden of US cities. MLGW and TVA propose a series of rate increases. A new City program to invest heavily in the energy efficiency of our homes can address the energy burden, reinvest in our communities and reduce poverty.
What is Energy Burden?
It’s a measure of the percentage of household income spent on energy.
Memphis scores worst across the board, by a large measure. In the “all households” category it scores 17% worse than Birmingham, the second worst performer. For low income households, it is 21% worse than Birmingham.
Factors in Energy Burden
The main influencers of energy burden are:
- Unit energy cost
- The energy efficiency of the housing stock.
To fix the energy burden, ideally we’d go at poverty, but this is a huge problem. We’ll see later that the poverty factor in energy equity is a classic vicious cycle. It can be disrupted by a workable energy burden program. Many attempts to address systemic poverty in Memphis have failed so let’s take systemic poverty off the table, for now.
Unit Energy Cost
MLGW‘s unit electricity cost is currently the lowest in Tennessee. MLGW claims its consumer cost per unit, at just 9.4 cents per KiloWatt hour (KWh or Unit) is in the lowest 30% nationwide, from MLGW’s latest annual report (pdf). (My latest bill shows 9.5 cents per unit).
Gas rates are responding to a large surplus of natural gas supply and have been stable. For heating, there are many available energy sources, including gas, oil and electricity. We believe, anecdotally, that many poor people use electric space heaters to heat single rooms of their home in an attempt to save utility costs, and many older homes have electric under-floor heating units.
In the case of the energy equity table above, the preponderance of sun-belt cities may reflect the dependence on electricity for air conditioning, as well as systemic poverty.
Poverty and utility prices seem to be outside our control. We are left with one option to address the energy burden problem. We need a large investment in improving the energy efficiency of our housing stock.
We’ll use the shorthand of Energy Equity to describe this effort. It will be the major subject of this article.
The scope of the problem is massive. However, because MLGW is under the control of the City, it is politically doable if a future Mayor and seven council members support the appointment of MLGW Board members and executives who will embrace the program. If necessary additional resolutions, Mayoral directives and ordinances may be applied, assuming the political will exists.
Why Energy Burden is on the agenda now.
The recently approved MLGW price increase has received a lot of attention. Southern Alliance for Clean Energy has two full time organizers in Memphis and is recruiting two more. Friends of the Earth is opening an office and recruiting an organizer here. Sierra Club is focusing on the issue, appointing Mia Madison to their board, and the Green Party also has a program. TVA is focusing on Memphis right now. Bill Johnson has visited the area twice and has been shuttling City Council members around in the corporate jet.
Insurgent candidates for 2019 City positions are focusing on this area, as are the media and opinion leaders such as Pearl Walker of the influential Facebook group “Memphis Raise Your Expectations”. The Trump-era anti-Republican electoral mood seems destined to produce a flock of insurgent candidates and most of them are interested in the utility rate hikes that are on the way.
The Scope of the Energy Equity problem.
Memphis had 257,000 occupied housing units in 2014. MLGW had 366,265 residential customers in 2016. The median age of a Memphis housing unit (house or apartment) is 45 years. This means that about half our housing stock dates from before the 1973 oil crisis, when building had very low energy efficiency standards. In addition, many of the newer housing suffers from deferred maintenance, outdated HVAC units and insulation deficiencies.
Based on some anecdotal evidence, a major energy upgrade with triple-pane windows replacing single pane, metal-framed windows, HVAC unit replacement, breach repairs and insulation improvements might cost in the region of $10,000. We think that a 50% reduction in utility consumption can be achieved in the worst 50% of the homes.
It follows that 130,000 to 180,000 houses and apartments might need more than $10,000 spent on each for a total expenditure of over one billion dollars. One of the first things that needs doing is a comprehensive survey of our housing stock to gain an understanding of the need. The cost is substantial, but if half our housing stock can get energy consumption cut in half, that represents an overall 25% reduction in citywide energy costs, or, roughly, $156M based on MLGW’s 2016 residential gas and electricity billing (pdf) in 2016. This omits any savings on commercial bills. The payback period is around six years. As there are several existing grant sources, which we’d hope to maximize, we’d anticipate some part of this cost will be grant-assisted, which should bring the payback period to around five years. In addition, some economies of scale in terms of equipment procurement should be possible.
It’s a billion dollar problem.
(Updated 4/17/2018) Studies are required to figure the number of dwellings, the amount of work these dwellings need and other data.
Anticipated Electricity price pressure at MLGW.
We know that MLGW will have a price increase in 2018. The 2% increase in gas and electricity rates will add $12.5M to utility bills. Council members who voted for these measures on January 23rd 2018 were: Boyd, Colvett, Conrad, Jones, Morgan, Morrison and Robinson. Voing against: Brown, Ford, Spinosa and Swearengen. Not voting that day: Fullilove, Hedgepeth.
Of those voting for, Martavius Jones had a nuanced reason. He wanted deferred maintenance of the utility infrastructure in his district addressed. Although Patrice Robinson voted for, her previous positions on energy equity, as shown in her support for MLGW’s “Share the Pennies” program, suggests an understanding of the problem, although her previous employment by MLGW clouded her judgement in this vote. Of the nay-voters, Philip Spinosa broke ranks with the other white and Caissa Councilors, Jamita Swearengen shows promise and the other two are term-limited.
It was stated in the Council debate that the 2% increase was the minimum amount possible, and that MLGW expects additional pricing pressure within a couple of years.
MLGW has an exclusive and restrictive contract with TVA to buy electricity. TVA has, in recent years, reduced prices for its direct industrial customers by 20% and compensated by increasing consumer rates by about 5%.
TVA CEO, Bill Johnson, visited Memphis in January, talking about adding a new fixed fee, which many believe will result in a price increase in the fall of 2019, on top of a 1.5% increase in the fall of 2017. In a time of steadily increasing TVA rates, we would expect further pressure on MLGW rates, and, even without a TVA increase, MLGW would likely need another increase in 2020.
TVA obstructing renewable power.
Many observers have reported TVA’s opposition to renewable power.
- TVA’s area lags behind Southern utilities with solar power.
- TVA let Clean Line Energy‘s proposed distribution deal for Oklahoma wind power die on the vine. This has apparently resulted in Clean Line withdrawing from the project and liquidating its assets for that proposal.
- The underlying reason for TVA reducing its industrial rates was to remain competitive with solar power for that scale of enterprise. As solar costs are still coming down, while hydrocarbons will likely increase, we can expect this pricing pressure to increase.
- TVA has traditionally used contractual restrictions in its distributor contracts to place obstacles, reduce incentives and apply restrictive quotas to renewable producers on its network. This has held back the Memphis solar contracting sector.
TVA’s CEO, Bill Johnson, was paid $44M for one day’s work as CEO of Duke Energy, a major coal supplier to TVA. TVA has favored fossil fuel and nuclear energy in recent years.
It seems that TVA has made large, losing bets on fossil and nuclear energy, and tried to stem the inevitable rise of renewables. Fossil fuel costs will inevitably rise as supplies run out. Solar power, on the other hand, even with the recent blip of import duties on solar panels, will continue to fall. It seems that we are past the point where large scale solar and wind power is cheaper than TVA power, and solar is becoming competitive at the rooftop solar scale. TVA has already started making consumers pay for their strategic mistakes, and we can expect this problem to spiral, with a series of price increases to come.
Existing Energy Equity schemes.
Now we review existing energy equity schemes and programs.
This ACEEE summarizes the energy assistance. 81% goes to bill assistance programs. Programs, mostly 100% grants, for energy efficiency projects, make up 14% of the expenditure.
The Federal Weatherization Assistance Program (WAP) enables low-income families to reduce their energy bills by making their homes more energy efficient. It is administered via the states. Tennessee operates through local entities, in our case Memphis Division of Housing and Community Development. (HCD). There’s a similar Federal program called Low Income Home Energy Assistance Program (LIHEAP), also administered through the state and HCD, with different means testing.
These are means-tested grant programs . In the first half of 2018, 80 WAP grants will be available, to qualifying applicants on a first come, first served basis. It would take 813 years at this rate to serve all the needful homes, assuming their owners qualified for the grant.
The scheme has these useful features:
- Professional energy auditors who study a home and recommend improvements.
- A stable of approved contractors to do the work.
MLGW and MIFA’s “Share the Pennies” program
This is another means-tested grant program, funded by an opt-out scheme where MLGW customers’ bills are rounded up to the dollar and the odd cents go to the program. The round-up feature is in place since this January, but the program is expected to fund dozens of projects. The maximum grant is $4000.
As well as the features listed for WAP, the MIFA-MLGW program has these useful attributes
- Accounting pass through feature at MIFA, which is a 501 (c) (3), enabling donors to claim tax deductions.
- Public-private partnerships.
MLGW’s Max Impact Home Weatherization Loan Program provides low-interest loans up to $2,500 for home weatherization improvements for low-income customers.
Tennessee’s Energy Efficiency Loan Program makes loans available to businesses for energy efficiency projects, and is also associated with training and certifying energy efficiency auditors.
There are federal tax incentives available for some solar work.
ACEE has studied energy equity programs in depth and suggest best practices(pdf).
An entity is created by City Council to manage a new weatherization program. This could be an independent commission with elected board members, with initial members appointed by the City. MLGW and the City Division of Housing and Community Development, as the major agencies administering the existing programs, will be represented ex-officio.
(Update 4/172018). Preliminary discussions with residents reveals that there is great mistrust of MLGW, because every poor person in Memphis has either been disconnected, been threatened with disconnection or has had that happen to a close associate. MLGW would be a very bad choice to administer any such scheme, and they should transfer all funds for weatherization to the new entity.
The program provides low interest loans and small grants to property owners in Memphis. The loans are financed by Federal, State, and City grants, private donations via a public private partnership, MLGW, TVA, commercial finance and new bond issues, to provide up to $200M in the peak year and a total of over $600M over the life of the entity. Grants will be provided by existing local, state and Federal funding sources.
The first step in the process is an energy equity audit, which provides a list of options for energy improvements and cost/benefit data. This is done by certified energy auditors. Energy auditors should be done free for all comers, in order to keep costs of entry as low as possible.
Based on the audit, the customer decides which fixes to implement and is offered a combination of low-interest loans and any grants he qualifies for. Approved contractors are engaged for the work. Grants would not fund all the work as at present, but will pay for a percentage of the work for means-tested applicants.
Loan repayments are paid via an added item on the customer’s utility bill.
Creditworthiness is not a factor. Anyone who is up to date on their utility bills qualifies.
The weatherization issues covered by existing schemes are incorporated, with the addition of other options such as solar and HVAC replacement. As the scheme progresses, the amount spent on bill assistance programs could be slightly reduced and the funds put into home upgrade grants. Existing grantors, principally the Feds and State, will be lobbied hard to provide the maximum funding possible.
To make the scheme attractive, the following guarantees are integral. The intention is to ensure that the projections in the energy audit are achieved in practice, with no surprise costs to the consumer. Poor people are averse to financial risk. People living paycheck to paycheck can’t afford unpredictable costs.
- The contractor warranties the work and guarantees the quoted price.
- The energy audit is guaranteed. If the work is done and the audit estimate missed by more than a given percentage, the customer gets a partial refund.
- Repayment terms are set to absorb 80% of the projected savings, and the customer is guaranteed that his utility bill will never exceed the bill for the corresponding month in the year before the weatherization work. The customer gets a small (~10%) reduction in her bill during the repayment period, and a much larger one (~50%) once repayments are completed. We think the instant gratification feature is vitally important.
The purpose of the system guarantees is to reduce barriers to entry for the scheme. Poor people, almost by definition, have very limited capacity for deferred gratification and need to see zero entry costs, zero financial risk and immediate reward in the form of reduced bills.
Around half of the substandard properties are rented. Landlords are currently subject to building codes. Tenants can report inefficient rental property to city and county code enforcement, which may mandate repairs. Our understanding is that landlords usually comply with Code Enforcement weatherization requirements when tenants officially report them.
The landlords take out the loan and make the payments. The current code enforcement practices should be re-examined and a regular inspection done on rental properties to include an energy audit
Landlords will want to raise rents to fund the loan repayments. As the energy improvements will increase the value of the property, the repayments are less an expense and more an investment in the property. It would be equitable to include a clause in the loan agreement that rents for existing tenants will not be increased. This would need enforcement and measures against landlords trying to make tenants move out so they can raise rents for new leases.
Rental properties qualify for low interest loans, but not grants, under this scheme. The current code enforcement processes may need realignment to the energy audit standards, and code enforcement will need additional manpower.
Predation or avoidance by landlords will need to be closely monitored and appropriate measures taken to ensure compliance. The poorest of the poor often rent, and landlords may use the aversion of undocumented people for authorities to avoid enforcement.
We regard the rental sector as a priority for energy efficiency and a good solution to the problems of landlord cost-shifting needs to be found. If renters can avoid rent increases and eviction, they should enjoy the full value of the energy savings in their utility bills.
Very likely, the code enforcement of residential rentals would need to be moved from the County code enforcement office to the new entity formed to administer the energy equity program.
An expanded list of permissible projects for the scheme will include solar and other renewable. Wind power is considered, even by local manufacturers of small wind generators, not to be viable in Memphis. This leaves photovoltaic and passive solar devices. The same criteria for energy efficiency apply to renewable energy. It reduces the utility bill, creates wealth, and, as part of an energy audit, solar may represent a more attractive return on investment to a homeowner than other efficiency measures.
In particular, the addition of renewable energy options to the scheme improves its impact. When most available efficiency options are exhausted, there should be remaining opportunities to add renewable energy to the mix.
Currently, installed residential solar at $2.50/watt pays for itself in about 8.4 years at 9.5 cents per watt. Future grid power increases will shorten this repayment period. We only have 178 installations in Shelby, panel prices continue to fall and increased competition should bring installation costs down.
TVA establishes quotas for the amount of renewable power MLGW can attach to the grid. MLGW has onerous design requirements for grid ties for solar installations. The requirements for an MLGW grid tie need to be streamlined and all charges eliminated. The TVA restrictions and quotas on renewable energy should be eliminated.
Shortages of trained energy auditors and qualified contractors will need to be addressed, which will require a gradual ramp-up over the first couple of years. Initial financing would be under $100M in the first year, peak around $200M in the third year, and gradually be replaced by loan repayments which would peak around the fifth year. We’d estimate a total financing requirement of around $600M over ten years.
Sources for this finance:
- Bonds issued by City, MLGW and possibly Shelby County and TVA.
- Existing grant schemes like WAP should continue to contribute
- Creditworthy customers should be able to get competitive financing. Allowing commercial banks to offer financing, with the energy audit, scheme guarantees and MLGW collecting repayments, should tap into additional private financing.
- Property owners who can pay cash for their own improvements can benefit from the audit and contractor warranties.
- Private and foundation grants. Housing initiatives already attract considerable private funding and existing initiatives like CDC home rehabilitation and housing activist groups already funnel grant funds which partly pay for upgraded weatherization and even solar panels. The weatherization component of these projects could be tied to additional financing. This would make more high quality housing available.
- As outlined in the Economic Impact paragraph, this program creates wealth throughout the local economy, and this wealth is manifested in cash, when a house is sold or lower utility bills are paid. That makes energy equity a good and safe investment. A microloan bank, to capture some of this cash flow and finance economic development in the community, and energy equity itself, would allow beneficiaries an opportunity to participate in the industry.
- It would be possible to create securities based on the debt in the system.
- As also outlined in the Economic Impact paragraph, rising property values will increase City and County tax revenue, which will allow the permanent funding of the ongoing project and the retirement of bond financing initially used for the project. The county would also attract rising tax revenues and may be motivated to take part in the bond financing.
Current schemes are lightly promoted, because funding is limited, essentially rationing the service. The new scheme will need to be widely promoted for the first several years, emphasizing the risk-free nature of the scheme and the guaranteed, immediate reductions in utility bills. The additional bill reduction after repayments, and the improvement in the equity value of the home are also featured. Immediate relief from utility bills is the most important feature for the poor, while the more well-off will welcome the longer term wealth benefits.
The type of improvements envisioned in this scheme are basic items which usually show up at an 80% level in the home’s resale value. In this case, a home with a recent utility audit showing superior energy values probably gains value based on an actuarial calculation of the saved utility costs. Assuming a five year payback, and bearing in mind that some proportion of the cost is grant-funded, we’d guess that the value of the improvements will largely show up in the resale price.
The first impact will be an improvement in the value of the properties. This directly increases the wealth of the owner, the taxable valuation and city and county taxes collected. This is the opposite of PILOTs, which reduce the value of the taxes collected. Blight is also countered, as a more valuable house is less likely to be abandoned and blighted.
The workforce and contractors required to do the work will create direct jobs and opportunities for small and minority contractors. These will be skilled and semi-skilled jobs so the level of training of the workforce will increase. The resurgence of the solar industry will generate additional opportunities. This, in turn, will create demand in the community and foster economic development.
Rising tax revenue can be used to refinance the system and retire bond debt.
Energy Equity versus PILOTs
Memphis and Shelby County are heavily invested in PILOTs for residential developments. Most communities don’t do residential PILOTs, and instead use zoning and other inducements to promote residential development.
In August 2017, Memphis announced the end of new sewer connections in the County, which caps the available development land. You’d expect this measure to increase demand for existing development sites in the City, but it is a long term development and its future effect on rents and property values are unpredictable on the high side. Given that the grant of a residential PILOT requires the developer’s affirmation that the project would not be feasible without the PILOT, adding the residential PILOT scheme to EDGE is an invitation for the developer to lie on the affirmation. There is no economic basis for making the EDGE move so soon after the sewer connection development.
Residential PILOTs generate wealth only during the construction phase. All other profits from such schemes are rental income and speculative capital gains on resale. These just move wealth around, from renters and purchasers, and don’t generate new wealth.
On the other hand, wealth generated in the energy equity schemes is in the hands of private homeowners and landlords. It’s in the form of wealth not spent on utility bills, and equity in the homes which are upgraded. It is in the hands of thousands of contractors and workers. It’s in the form of increased job skills in the workforce and a rejuvenated renewable energy sector. It includes over a hundred thousand upgraded and more valuable residences. The increased cash flow is in the hands of people who will spend it locally. The economic uplift is felt in the community and in the tax coffers.
PILOTs reduce future tax revenues. Energy equity increases future taxes. Eliminating residential PILOTs and letting energy equity raise all boats will pay for itself.
Reducing the energy burden requires reducing poverty, utility rates or poorly weatherized structures. We initially chose energy efficiency programs as the most likely means of improving energy equity. We discounted the reduction of poverty as a means of addressing the energy burden, but we now see that the expenditure of upwards of $1B on energy equity programs also makes inroads into the poverty problem. That’s a huge bonus.
Other benefits include the elimination of some carbon emissions, and increased renewable energy production. Energy efficient houses are also healthier for residents. The US Department of Energy estimates that the economic payback for energy efficiency projects is 2.2 fold to the household, and 4.2 when health and other benefits are taken into account.
How this would be done is by a future mayor and seven or more City Councilors making it happen via the City’s control over MLGW. This is the stuff of politics at its purest. Will the people of Memphis care enough about the specter of rising utility costs to elect a City government which is committed to this program?
The cost per unit was not discussed here, but is there a way to also address this third factor of the energy burden? We think there is, and that’s a story for another day.
To City candidates.
This is the only sane approach to the energy burden and the prospect of a steady stream of increased energy costs. It is also an anti-poverty and community investment program that eventually pays for itself. Put it on your platform and create alliances.
This plan, as a new approach to sorting the poverty problem, will attract a lot of attention and should get foundation funding and media kudos. That will put our local insurgent Councilors in the national spotlight.
Friends of the Earth are currently establishing a staffed Memphis office to work on this issue.