California’s massive computing industry faced the prospect of sweeping changes at the hands of Golden State regulators worried that idle devices are drawing too much power at too great a cost.

“All computers sold in California could be required to adopt stricter state energy standards by 2018, cutting computer energy consumption by as much as half, according to new regulations being proposed by the California Energy Commission,” the Sacramento Bee reported. “The standards would apply to power use settings on both desktops and laptops, monitors and signage displays sold in California,” requiring “software and hardware settings controlling the amount of power used by the machines, especially when not in use, in a power period called ‘idle load.'”

The regulations have already been pegged to make a decisive impact on the manufacture and production of electronic devices in the U.S. “Given California’s size, market share and influence, the rules adopted by the CEC expect to trigger changes across the industry by mandating changes even the federal government has thus far avoided tackling,” U-T San Diego noted. But the federal Department of Energy has been tipped as next in line to consider applying such rules, according to the Bee:

“The regulations would save 1,913 gigawatt-hours of power used by computers and 588 gigawatt-hours from monitors and displays yearly, said Andrew McAllister, commissioner for the California Energy Commission. That’s estimated to reduce utility bills by more than $400 million annually by 2024.”

Costs and savings

With little if any organized opposition to the rules, outside of industry negotiations, the California Energy Commission would become the first state body to codify an energy-reduction agenda — at an initial cost to consumers. “The agency estimates it will add about $18 to the price of a computer but promises it will save customers and businesses much more in energy savings,” reported U-T San Diego. “But the commission estimates consumers will save $75.53 over the computer’s 5-year lifespan, due to energy savings.”

“California businesses will pay up to $62 million more per year in incremental costs for installing more efficient computers, monitors and electronic signs, but the CEC said businesses will reduce their electricity costs by up to $290 million per year once their equipment has turned over.”

Hitting the wall

Environmentalist groups have spearheaded the push for the new regulations, insisting that the energy savings translate into air cleaner enough to justify big changes. “Roughly 300 million computers in the U.S. spend from 50 to 77 percent of their time ‘on but inactive’ and devour $10 billion a year worth of electricity, the equivalent of 30-large power plants spewing 65 million metric tons of carbon dioxide pollution that contributes to climate change,” the Natural Resources Defense Council claimed. 

But some industry analysts have cautioned that, regardless of environmental objectives, the need for energy efficiency standards could be driven by an even simpler problem: current limits on the global capacity to produce energy. “The anticipated and growing energy requirements for future computing needs will hit a wall in the next 24 years if the current trajectory is correct,” according to Semiconductor Engineering. “At that point, the world will not produce enough energy for all of the devices that are expected to be drawing power.”

“A report issued by the Semiconductor Industry Association and Semiconductor Research Corp., bases its conclusions on system-level energy per bit operation, which are a combination of many components such as logic circuits, memory arrays, interfaces and I/Os. Each of those contributes to the total energy budget. For the benchmark energy per bit, as shown in the chart below, computing will not be sustainable by 2040. This is when the energy required for computing is estimated to exceed the estimated world’s energy production.”

But on niche websites devoted to energy production and energy markets, the picture of how California is responding to its mandates is more muddled. A recent free report from SNL, the McGraw-Hill financial publication that typically charges for the proprietary information it provides to shareholders and potential investors, puts California’s progress in a different light:

Carbon laws are choking demand for coal-fired power in California, but the state still imports a large amount of coal-based power and is one of the nation’s top industrial users of coal, providing a needed market for Western producers facing dimming prospects elsewhere.

 

California’s carbon law AB32, which requires the state’s greenhouse gas emissions to return to 1990 levels by 2020, sets in-state plant performance standards that are too stringent for conventional coal units. But California is still importing coal-based power from neighboring states until current power purchase and plant ownership contracts expire.

 

In 2014, less than 5 percent of California’s total energy demand was served by coal and petroleum coke-fired plants, nearly all of it from plants outside the state, according to an Oct. 12 report from the California Energy Commission. By 2026, California will end virtually all its reliance on coal.

 

But at times, as much as 50 percent of Southern California’s electricity still comes from coal-fired plants, Steve Homer, director of project management for the Southern California Public Power Authority, or SCPPA, told SNL Energy.

 

The three main out-of-state coal plants serving California — the Intermountain Power Project in Utah, the San Juan plant in New Mexico and the Navajo plant in Arizona — together received 10.1 million tons of coal in the first seven months of 2015, according to U.S. Energy Information Administration data. …

 

California is also one of the country’s biggest industrial users of coal, although consumption for that sector is relatively small. In 2013, the latest year for state-level EIA data on industrial coal consumption, California was the eighth-biggest industrial coal user, burning 1.4 million tons.

How states game energy reports

The report is another interesting example of how states play games with energy exports and imports to make themselves look greener than they are. In 2010, Orange County lawmaker turned Austin policy wonk Chuck DeVore laid out how California and British Columbia benefit from this maneuvering:

California has become America’s largest electricity importer. With 37 million people producing about 13 percent of the U.S. gross domestic product, California imports about 23 percent of its electricity.  …

Complicating matters are a trio of California energy policy laws passed in 2006: AB32, SB1368 and SB107. AB32 mandates a 30 percent reduction in California’s greenhouse gas emissions by 2020 … . SB1368 outlaws the renewal of coal-fired electricity contracts — imported coal energy powered about 16 percent of California’s grid in 2008. While SB107 accelerated the requirement that California derive 20 percent of its electricity from renewable sources [in 2010], renewable being defined as small hydro, geothermal, wind, solar and biomass (we missed the target, meaning utilities, read ratepayers, get dinged).

Enter government-owned BC Hydro and its Powerex subsidiary. With abundant hydro power potential, British Columbia is seeking to become the Saudi Arabia of “green” energy.  … [But] in fact, BC Hydro has imported more energy than it has exported in 10 out of 11 years.

What’s going on here? British Columbia sells its clean hydropower to neighboring governments which need to meet renewable energy mandates. But then it doesn’t have enough power for its growing economy, so it imports power from coal and gas-fired power plants in Washington state and Alberta.

A California compromise — or a loophole?

A 2014 Los Angeles Times story raised similar questions about the gaming of the intention of the state’s landmark climate change laws. Its key conclusion:

California regulators say they have taken steps to prevent utility company executives from outwitting them and insist state rules will lead to real reductions in carbon dioxide, the main gas scientists blame for global warming. But officials concede their efforts have run up against the limits of California’s ability to control what takes place outside its borders, a point the utilities also emphasize. …

Originally, California’s climate-change policies included a provision that would have demanded utility executives swear under penalty of perjury that the actions they took to reduce emissions would not result in a spike in greenhouse gases someplace else.

 

But federal officials warned Gov. Jerry Brown that too aggressive an effort to control emissions across state lines would risk disrupting the complex interstate electricity system.

 

In the end, the California Air Resources Board — which oversees the state’s 2006 climate-change law — allowed utilities a dozen “safe harbor” conditions under which electricity companies would be permitted to shift emissions to nearby states.

 

Critics called the conditions loopholes. …

 

The exemptions are so broad, the board’s own advisory committee cautioned, that all the reductions in greenhouse gas emissions made by electricity companies could end up existing only on paper.

Brown also said the problem is so complex that it’s likely no one knows how to solve it.

Emissions Targeted

The governor conveyed his warning at the California Air Resources Board’s Oct. 1 workshop, “California Climate Change Scoping Plan: 2030 Target.”

The 2030 target reduces California’s greenhouse gas emissions to 40 percent below 1990 levels in the next 15 years. Brown also designated a 2050 target: emission reduction to 80 percent below the 1990 level.

The 2030 target is “the most aggressive benchmark enacted by any government in North America to reduce dangerous carbon emissions over the next decade and a half,” said Brown in an April 29 statement.

The governor began his remarks at the workshop with an admission of ignorance on climate change science.

“I come today because this is a topic that is not easy to grasp,” he said. “It’s complicated. The more you dig into controlling air pollution or measuring greenhouse gas emissions or attempting to understand the [climate] models that examine and attempt to predict how world climate patterns will change over time, it definitely is a very complicated science that we mere lay people just get little glimpses of.”

That complexity makes it easy for climate change skeptics to disseminate misinformation, according to Brown.

“It allows people who have bad motives or soft minds to then raise doubts that are not based on science or facts, but are able to be communicated without people reacting with total ridicule,” he said. “And it takes enough knowledge that it’s hard to be in this conversation at any level of depth.

Relying on Climate Scientists

Brown said we should rely on climate change scientists who “have clearly stated that human beings and the industrial activity of our modern lives is affecting climate by building up heat-trapping gases, and that the effects over time will be catastrophic.”

“When and how all of that unfolds is something that cannot be said on a precise date,” he continued. “But we know with a high degree of confidence that we are facing an existential threat to our well being and the well being of the generations that come afterwards.”

Brown acknowledged that the public has thus far been largely indifferent to the climate change issue, ranking it well below crime and jobs among issues they are most concerned about. That indifference or ambivalence may be due to the omnipresence of fossil fuels in the quality of our lives.

“What we are looking at is making a shift in the way life shows up,” Brown said. “We are who we are because of oil, coal and natural gas. Fossil fuels is what makes it. I assume that most of the people here are here because fossil fuels got you here, clothed you, medicated or whatever way you are functioning as a modern person, you are dependent on fossil fuels.

“So when we say we are going to reduce [emissions by] 10 percent, 20 percent, 40 percent, we are setting forth a huge challenge that is very easy to state. But anybody who has any understanding of what is implied by what is being called for, realizes this cannot be done lightly or without a mobilization globally that we have never seen before outside of time of war.”

Potential Economic Meltdown

Brown, citing a Sept. 29 speech by the Governor of the Bank of England Mark Carney, warned there is a potential for a global economic meltdown when energy companies are forbidden from using up to a third of their fossil fuel resources.

“Once it becomes conventional wisdom, once we get it that climate change is going to be catastrophic and that becomes clear and vast majorities of people at all levels of society agree with that, it may be too late because we’ll be too far down the road,” he said.

“If the oil and gas companies are undermined, the financial system itself can be undermined. We can’t wait until everybody gets it. We have to start now.”

Brown said the state’s current annual output of 460 million tons of carbon dioxide-equivalent emissions must be reduced to 431 million tons by 2020 and down to 260 million tons by 2030.

“To go from 460 where we are to 260, that takes heroic effort, scientific breakthroughs, massive investments, a lot of cooperation and a political understanding that does not exist today,” he said. “So this is not stuff for amateurs. This is quite challenging.”

“It’s a political problem,” Brown continued, “but also it’s a technical problem. And it’s going to require a lot of breakthrough, a lot of research and billions, tens of billions of dollars, invested by many, many different sources.”

It will also require Californians driving a lot less, he said, by living closer to where they work and telecommuting. “Californians drive over 330 billion miles a year – 32 million vehicles of various kinds moving around on almost entirely fossil fuel,” he said. “We’re going to reduce and take fossil fuels out of our lives and out of the economy.

“And we’re going to creep our prosperity and ability to keep inventing and improving the quality of everybody’s life. And not only here, but we’re going to do it all over the world. And we’re going to add a couple billion people besides and probably another billion cars.”

Changing Lifestyles

The governor admitted, “How the hell we do that, probably nobody knows. But the people who have the best understanding and the best capability to do things [are] right here.”

Brown acknowledged that it will be a big challenge convincing people to change their lifestyles. He also admitted that even getting the conversation started is tough:

In my world of politics this is … a dark reality that you just can’t even talk about. Because it’s too obscure, too complicated, it’s not high in the polls, “don’t bother me now.” But if that mood persists … it will be too late then, and there will be a real catastrophe.

People don’t like to think that something horrible could happen. We all like our happy time news in the morning. But you got to see it, and then we have to take steps to make sure it doesn’t happen.

This is about taking the steps to deal with fuels, the investment in biofuels, [energy] efficiency in appliances and buildings, across the whole range of how our modern civilization works, within the limited reach that the Air Resources Board has confidence and the legal authority to do, which is quite a lot. Everything that can be done will be done. California will do what it has to do.

Leading the Way

Brown believes California is setting an example other states and countries will follow.

“People know about California, people are watching what’s going on, and there’s a lot of goodwill to get us to the goal,” he said. “Of course, it’s going to take a lot more than goodwill. It’s going to take billions, trillions of dollars. And it’s going to take commitment all over the world.”

Brown’s pep talk received a standing ovation. After the applause died down, CARB Chairwoman Mary Nichols said, “You can see why I get up raring to go to work every morning.”

Facing Opposition

No one at the workshop questioned whether California’s efforts will do much to prevent the planet’s climate from changing, and whether the cost will be worth it.

But state Sen. Andy Vidak, R-Hanford, issued a statement on Oct. 7 in opposition to Brown signing into law Senate Bill 350, which mandates an increase in renewable energy among other emission reduction actions:

The district I represent is still reeling from the Great Recession and the devastating years-long drought. Too many people in rural and inland communities are impoverished; standing in food lines because they can’t find work to make ends meet.

Senate Bill 350 is a devastating measure that will force already-struggling families deeper into poverty by drastically increasing energy costs that are already some of the highest in the nation.

It’s wrong when parents have to choose between the necessities of keeping the lights on and feeding their children. The governor’s signature on SB350 kicks folks while they are down. It is a selfish gesture designed to fluff up his “legacy” and pander to coastal elites’ “environmental” self-righteousness.”

The impact on most Californians from the state’s climate change regulations has been minimal thus far. The state has been averaging a 1 percent reduction in greenhouse gas emissions annually. That pace is projected to continue through 2020, and is enough to meet the 2020 reduction goal.

But residents and businesses will be hit harder after that. Emissions will need to be reduced by at least 5.2 percent annually from 2020 to 2030 in order to meet the 2030 target.

“This gives an indication of the challenge of the work that we have ahead of us in the scoping plan to develop an approach, to develop a set of measures that can contribute to and achieve this ambitious greenhouse gas reduction level for 2030,” said ARB Assistant Executive Officer Michael Gibbs.

An analysis of the economic impacts of the climate change regulations will be conducted as a part of the scoping plan. No cost estimates were provided at the workshop, but several officials in addition to Brown said that billions of dollars in increased funding will be required.

“Investment in [energy] efficiency [in buildings] will need to be quadrupled or quintupled from today’s levels in order to reach the scale necessary to meet the 2030 and 2050 goals,” said Patrick Saxton, representing the California Energy Commission. “Clearly this is much more than ratepayers and taxpayers can fund on their own.”

Regional workshops on the scoping plan will be held this fall; the Air Resources Board will receive an update on Nov. 19. The draft plan is scheduled to be released in spring 2016. The final plan is expected to be approved in fall 2016.

“Buildings built in California starting in 2016 will have to comply with the nation’s toughest energy conservation standards,” the Central Valley Business Times reported. “The California Energy Commission has unanimously approved building energy efficiency standards that it says will reduce energy costs, save consumers money, and increase comfort in new and upgraded homes and other buildings.”

In single-family homes, that would amount to a drop in energy use by almost a third, relative to 2013 standards, the CVBT noted.

Cost and consequences

The New Residential Zero Net Energy Action Plan, as it has been dubbed, aimed “to establish a robust and self-sustaining market so that all new homes are zero net energy (ZNE) beginning in 2020.” Critics have reiterated longstanding objections to a statewide push of this kind, especially around the prospect of rising energy costs.

“The most complex issue will be valuing the homes, which will cost more upfront,” according to Greentech Media. “Currently, the CPUC is quoting an extra $2 to $8 per square foot after incentives. There will likely need to be incentives or creative utility billing, especially if the homes are providing demand-side services as the CPUC envisions. The CPUC says that the utilities are on board and will have to evaluate locational benefits of having net-zero homes on the system.”

As Greentech Media noted, planners have built in some would-be loopholes designed to make progress on ZNE without imposing the new standards too quickly: “Homes can be ZNE-ready, rather than actually being energy-neutral. That could mean they are solar-ready, for instance, but perhaps don’t have solar panels already installed.”

But even supporters of the plan have cautioned that executing on its goals may be a daunting challenge. At the Huffington Post, one analyst noted, “as California’s clean power goals rise, new capacity could begin to slow.”

“Some planned large projects are now on hold due to financial problems. Others face environmental challenges, such as threats to bird flyways and desert habitats. Large-scale solar plants, particularly those using solar thermal technology, are losing appeal to investors as photovoltaic panel prices plunge. And utilities, having largely reached their current renewable procurement targets, have few new projects in the pipeline. What’s more, the federal solar investment tax credit program for new utility projects drops from 30 percent to 10 percent after 2016, and ends completely for individuals.”

Unifying the grid

Nevertheless, optimism among policymakers and activists has remained high — largely because of the role of technological innovation centered in California. Apple and Google have embarked on so-called “grid-scale” renewable energy projects, while Tesla has pushed into the home energy storage business.

But some experts have implied that the problem of rising energy costs could best be addressed by linking up the net-zero energy industry with the zero-emission automobile industry. “A recent California study estimated that utility companies could earn $2.26 to $8.11 billion in net revenues from large-scale commercialization of EVs,” as reported in Fortune. “This is sufficient to allow utilities to invest both in installing charging infrastructure and return some of the revenues to their customers in the form of lower rates.”

By supplying ubiquitous EV charging stations, observers surmised, utilities could eventually recoup electrical power from cars embedded into the same flexible grid as homes. “The value of having a flexible load on the grid will grow even further with higher amounts of wind and solar,” Fortune continued. “Electric vehicles can be programmed to charge during peak solar or wind generation periods, preventing this valuable electricity from being wasted. In the future, electric vehicles could increase their value by putting electricity back into the grid as well[.]”

Research by UC Berkeley energy scholar Rebecca R. Hernandez and energy researchers Madison K. Hoffacker and Chris Field found that …

the amount of energy that could be generated from solar equipment constructed on and around existing infrastructure in California would exceed the state’s demand by up to five times. …

“Integrating solar facilities into the urban and suburban environment causes the least amount of land-cover change and the lowest environmental impact,” Hernandez explained.

Just over 8 percent of all of the terrestrial surfaces in California have been developed by humans — from cities and buildings to park spaces. Residential and commercial rooftops present plenty of opportunity for power generation through small- and utility-scale solar power installations. Other compatible opportunities are available in open urban spaces such as parks.

Likewise, there is opportunity for additional solar construction in undeveloped sites that are not ecologically sensitive or federally protected, such as degraded lands.

“Because of the value of locating solar power-generating operations near roads and existing transmission lines, our tool identifies potentially compatible sites that are not remote, showing that installations do not necessarily have to be located in deserts,” Hernandez said.

But the research paper doesn’t focus strongly on the costs involved. Even as they add renewable supplies, utilities continue to need inexpensive sources of power because of their obligations to shareholders and because of public pressure. Even as the cost of solar arrays comes down and their efficiency increases, natural gas has never been cheaper in inflation-adjusted dollars.

According to the California Public Utilities Commission, 35 percent or so of natural gas used in California in recent years has come from other states benefiting from the fracking-driven boom in energy exploration.

In 2050, state can’t “be burning much of anything”

At a January conference in Los Angeles, however, top state officials seemed of two minds about California relying on natural gas:

California has been one of the nation’s bigger users of natural gas, employing it as a bridge fuel for some time as it moved away from coal and oil, said Robert Weisenmiller, chairman of the California Energy Commission. The fuel accounted for 60.5 percent of in-state generation in 2013, the CEC has said.

“It’s certainly been a part of our strategy,” Weisenmiller said. “At the same time, we’re certainly looking at a stage now of saying, ‘What’s next?'”

At the same conference, Mary Nichols, the head of the California Air Resources Board had different views. Nichols …

… rejected the premise of the panel she was on, dubbed “Natural Gas — Part of the Problem or Part of the Solution?” ARB is “fuel neutral,” she said, when the agency looks at cutting greenhouse gas emissions. The Golden State aims to shrink those to 1990 levels by 2020, and 80 percent below 1990’s point by 2050.

Nichols added, however, that the state needs “to look at the full life-cycle picture of emissions when we talk about any fuel,” including production, transport and use.

“When we do that, we certainly find ourselves in agreement with the [state] Energy Commission that right now, it’s pretty hard to see how in 2050 we can be burning much of anything in the state of California to meet our carbon goals,” Nichols said.

That is from reporting by the Energy & Environment Publishing news website.

New retrofit mandates meant to lower energy use and eventually costs are leaving many California companies with an early case of sticker shock.

The state Energy Commission says part of that might be the businesses’ fault and that some are misinterpreting the regulations and overestimating what they must do to comply.

In July, the state updated lighting requirements in the building code as part of an effort to lower commercial energy use by 30 percent. Business owners, electrical engineers and landlords say the new standards could add tens of thousands of dollars to companies’ cost to move into or upgrade already existing buildings.

The new rules set a lower cap on lighting wattage per square foot and encourage commercial property owners to outfit their buildings with controls and sensors that automatically dim lights when a room is unoccupied, or if natural light allows for lower intensity.

So many rules we barely hear about

If you haven’t heard about these rules, that’s because California promulgates so many such rules that the media often don’t cover them — unless the fallout hits pretty broadly.

But because of California’s role as a global laboratory for environmental regulation, lots of people outside CA pay attention to our rule-making. This unfolding debacle has already been featured prominently on the Real Clear Energy website, which has an international readership.

Here’s one of the horror stories the VOSD report cited:

The mandate to make those upgrades [even at properties that have undertaken conservation measures] can result in higher rents and less favorable leases for businesses moving in, said … David Marino, executive vice president of Hughes Marino, a commercial real estate company. …

Jim Herr, president of commercial furniture supplier Parron Hall Office Interiors, is one of those business owners facing a larger bill.

Hughes Marino has estimated the new regulatory changes will translate into a $64,000 to $72,000 bump in electrical retrofit work at the Kearny Mesa building Herr’s hoping to move into.

Herr is still negotiating his lease but hopes to secure one for about seven years. He doesn’t expect to reap energy savings that come anywhere close to the expense during his lease.

It could scarcely be more obvious that these rules weren’t thought through to consider their short- and medium-term effects on renters and property owners — because who cares about their interests inside the state Energy Commission?

I’ll give the final word on the new rules to Marino: They’re “the stupidest thing I’ve seen in my 25 years of commercial real estate.”

By Joseph Perkins

If you build it, they will come.

That was the cockeyed reasoning behind a state grant program to encourage construction of hydrogen fueling stations long before hydrogen fuel cell vehicles are actually motoring along the Golden State’s freeways and roads.

The California Energy Commission recently suspended the five-year-old program. The agency’s official explanation was that it intends to “revise solicitation protocols.”

The program was created by a state law that aims to build momentum for the so-called California Hydrogen Highway Network, which was initiated by a 2004 executive order signed by former Governor Arnold Schwarzenegger.

Nunez and Schwarzenegger bought into the premise of renewable energy advocates that, with hydrogen fueling stations dotting the California landscape, the state’s motorists would willingly abandon their dirty, gasoline-powered vehicles for cleaner, environmentally-friendlier cars and trucks powered by hydrogen fuel cells.

But five years and $25 million later, the program has encouraged construction of few hydrogen fueling stations.

That is attributable in no small part to the fact that there is almost no demand for such stations. And that’s because there currently are almost no cars or trucks on California roads powered by hydrogen fuel cells.

And there won’t be any until at least 2017, when automakers are expected to bring their first hydrogen fuel cell cars to showrooms. But as experience has taught with electric cars, projected delivery dates are almost always overly optimistic.

Waste and abuse of grant money

So where has the state vehicle license fee money gone that was supposed to build so many hydrogen fueling stations?

Into the bank accounts of such out-of-state corporations as Pennsylvania-based Air Products & Chemicals, and the Germany-based Linde Group, which are members of a coterie, the California Fuel Cell Partnership, along with eight automakers.

All the grant money derived from vehicle license fees paid by California motorists went exclusively to members of the partnership.

The perverse thing is, while the state energy commission says it is “cancelling its grant solicitation for hydrogen fueling stations,” it has not altogether abandoned the ill-conceived program strange bedfellows Nunez and Schwarzenegger created.

“A robust hydrogen fuel station infrastructure is necessary,” explained a commission statement, “to support automakers’ rollout of fuel cell vehicles to comply with the state Air Resources Board’s Zero Emission Vehicle program.

Well, the issue is not about hydrogen fuel station infrastructure. It’s about the state government using public funds to pay for creation of that infrastructure.

Indeed, it’s patently unfair to require 99.9 percent of California motorists to subsidize infrastructure that will be used by the .1 percent that own hydrogen fuel cell cars. Let those motorists driving on hydrogen pay for their own infrastructure.

If the demand for hydrogen fuel cell cars grows to the level expected by the state energy commission and hoped for by automakers planning to unveil such vehicles five years from now, it will be unnecessary to proffer grants to corporations like Air Products = Chemical and the Linde Group to build hydrogen fueling stations.

The promise of profits will encourage those and other corporations to build the stations on their own nickels and dimes.

By Wayne Lusvardi

Wasn’t the sub-prime disaster of the last decade bad enough?

From 2003 to 2007, it was likely the Association of Community Organizations for Reform Now (ACORN) helping unqualified low-income renters fill out sub-prime home loan applications to buy homes at an inflated price. This may have resulted in a foreclosure or an “underwater” mortgage with more money loaned than there was actual market value in the home.

Now, the California Energy Commission is sending canvassers into single-family residential neighborhoods to offer homeowners one-stop home energy improvement loans with a rebate.  CEC will batch the names of interested homeowners and then find them a home energy improvement contractor, a lender and an appraiser, and do everything for them through its Energy Upgrade California program.  Several friends have already informed this writer that canvassers have come knocking at their front door offering such a package.  And the canvassers are apparently paid for by the CEC.

California politicians are in a panic. It is an election year.  Unemployment has barely ticked downward in California.  And worse: by 2015 California’s “Renewable Energy Portfolio” of 33 percent green power will lower every household’s income by $2,400 per year. Additionally, California’s Cap and Trade program, which requires industries and utilities to buy pollution permits, will cost about $500 per year per household loaded into the price of everything ($6.25 billion per year divided by 12,393,852 California households).

Dirty Secret: No payback on energy loans in down market

No matter what cost savings the contractors and loan brokers promise homeowners for taking out an energy improvement loan, they won’t tell them the dirty little secret about such loans.  There is no payback in a down real estate market.  Buyers won’t pay for upgraded energy efficient windows, solar panels, window caulking, or attic insulation when the market is depressed.  And economist Gary Schilling, who has predicted all the recent recessions, is forecasting that home values will drop another 20 percent this year.

But homeowners might say they don’t care as long as their power, natural gas and water bills can be lowered.  However, another problem is the payback period.  Most major energy improvements take seven years to break even with what they cost to install, plus the interest cost on a loan.  If a homeowner moves within that period, it would not be worthwhile to take out an energy improvement loan.  And if the home is so old that its highest and best future use is demolition for a new home, then spending on energy improvements would be a loser.  One might be restricted from demolishing one’s home within the period of the loan.

Most cost-effective energy-efficiency improvements do not need a contractor to install.  Using contractors picked by the state will only inflate the price of such upgrades because the contractors will likely have to comply with Davis-Bacon Act prevailing wage laws and other costly regulations.  And the $1,000 to $1,500 rebate will likely only cover the cost of the building permit. This would result in more jobs for municipal unions.  Most energy efficiency upgrades can be done more cost effectively by homeowners.  Any government inducements for home energy efficiency improvements will only result in an inflationary bubble, especially in a recessionary real estate market.

Many homeowners are fearful of pulling building permits for older homes because the homeowners would likely be forced to bring the entire structure up to code.  For example, this writer relocated an 82-year-old lady from San Marino, Calif. to San Antonio, Tex. this past year.  A prospective buyer of her California home wanted to install a new electrical panel with circuit breakers as a condition of sale.  The city of San Marino would not allow her to upgrade the electrical panel in her home unless she brought the entire structure up to building code at a cost over $150,000.  In a falling market, this was economically infeasible.

Local building code compliance is a barrier to energy-efficiency loans.  This is especially so for old commercial buildings, where it would be cheaper to demolish the structure than install any energy improvements that might trigger full building-code compliance or an Americans with Disabilities Act noncompliance lawsuit.

Older homes would be the best candidates for home energy loans.  New homes built after 1978 are constructed with modern energy-saving improvements to conform to Title 24 – Energy Efficiency Building Codes.  About 60 percent of California’s housing stock was built before 1978.  But the California Public Utilities Commission has been mandating electric and natural gas utilities to provide energy rebate programs for the past four decades. So the actual number of homes that might benefit from energy improvements is uncertain and likely over-estimated.

But not to worry: President Barack Obama has rigged the rules so that you can get a higher real estate appraisal for any energy improvements that you install.  Federal regulators might even take away an appraiser’s license if they have an independent opinion that such energy improvements don’t add value to your home.  Apparently, there no longer are independent real estate appraisers, bankers, contractors, or home energy payback consultants.

And federal tax credits for home energy efficiency improvements for home purchases in 2012 have expired.

Repeating the sub-prime loan meltdown

Evidently, we have learned nothing from the collapse of the national bank financing system in 2008. Opportunist legislators are still clamoring for bubble financing to create jobs and provide banks with loans that might save on energy costs that cannot be recouped upon resale of the home.  The California Energy Commission apparently has no conscience about proposing bubble financing for deadweight energy-efficiency improvements in a declining real estate market. And banks will probably have to comply with new energy loan quotas to keep their banking charters in the state of California or face penalties for discrimination.

As we can plainly see with the CEC’s Energy Upgrade California program, perverse incentives for “greed” start out as well-intentioned and slickly marketed proposals, fashioned by government and highly regarded academic institutions such as U.C. Berkeley, as well as by low income or green advocacy special interest groups. It does not start with banks.  Banks will be prone to being corrupted, but only to keep their bank charters.

Banks will be prone to securitizing such high-risk energy loans by slicing and dicing them to spread the risk of ultimate losses among many lenders. This is precisely what happened with sub-prime home purchase loans during the 2008 mortgage meltdown and bank panic. Banks were unjustly accused of causing the mortgage meltdown by securitizing their loan portfolio of what they knew to be high-risk loans. But it wasn’t securitizing such bad loans that caused the mortgage meltdown as much as it was government policies. The same situation will likely repeat itself with home energy loans in California.

Is California now a predator lender?

The state of California has now joined the ranks of the so-called predator lenders. Once again, low-income homeowners will be the likely targets of the Energy Upgrade program. This is because many middle class homeowners will be more likely to understand that utility bills may be reduced but home energy improvements won’t likely add value to their property.

Where are the Occupy Wall Streeters?   One of their demands was: “Begin a fast track process to bring the fossil fuel economy to an end while at the same time bringing an alternative energy economy up to energy demand.”  California’s Energy Upgrade California program is creating just such an artificial demand.  We can only imagine as homeowners later complain about unrecoverable energy improvement loans that the Occupy Movement will be protesting for debt forgiveness.

Conversely, the “fracking” energy boom -– hydraulic fracturing of rock formation to extract oil and gas –- is largely market based.  Any time government builds a “false economy” without market-based prices and economic feasibility, it is going to lead to economic busts, widespread corruption and suffering. Sub-prime home purchase loans, redevelopment, green power and now sub-prime home-energy loans are examples of false economies made by government jobs programs.

Note: The author was a real estate appraiser for a large utility for 20 years. Prior to that, he was the coordinator, for a short time, of a large solar hot water heating project for all public housing in Los Angeles County.