Reducing America’s dependence on imported oil will not only enhance our national security; it will create substantially more jobs than continuing on our current path of waste and unsustainable resource use.  CAP has teamed up with the Natural Resources Defense Council and the United Auto Workers to produce a new study on the clean car revolution that is already underway. The executive summary is below, and you can access the full report here. In the photo, Workers in a Detroit, Michigan plant stand by a newly produced Chevy Volt plug-in hybrid electric vehicle.

Reengineering the U.S. automobile fleet to use energy more efficiently will require new investments in advanced technology, increasing demand for skilled labor. Instead of presenting a threat to the auto industry, reigning in reliance on oil and cutting pollution from fossil fuels can demonstrably create jobs, accelerate innovation, and increase demand for advanced manufacturing.

It is clear that increasing America’s fuel economy can create more jobs, but which nations will capture the economic benefits of this shift to a more fuel-efficient fleet has yet to be determined. How Congress chooses to address comprehensive clean energy and climate legislation will strongly shape whether American workers enjoy the good jobs, competitive advantage, and sustained economic growth that will come with the move to a new clean energy economy.

This study offers two key insights on the nature of clean energy jobs in the automobile sector, each with profound implications for policymakers and the economy.

First, this paper documents that saving oil will create good jobs, not in the abstract, but directly by driving demand for specific additional manufactured components. The move to greater fuel economy means greater labor content per vehicle and higher employment across the fleet. This will include new investment in a host of incremental improvements to conventional gasoline powered internal combustion engines, from new controls for valves and timing, to variable speed transmissions and advanced electronics. It will also include entirely new systems like hybrid drive trains and advanced diesel engines.

Together these investments add up. By 2020 this analysis shows that, all things being equal, supplying the U.S. automobile market with more efficient cars could provide a net gain of over 190,000 new jobs from improvements to fuel economy alone.

The second finding is equally profound. While it is certain that the production of new technology will create demand for workers, where those jobs are located will be the product of policy choices. Of the over 190,000 jobs anticipated by 2020, the number of domestic jobs created could vary greatly. Fewer than 50,000 jobs might go to American workers, or, with different incentives, more than three times that number, as many as 150,000 U.S. workers, could find employment as a result of new investments in the engineering and production of the technology needed to improve fuel economy. It’s up to us which path we take.

Many factors will shape where individual firms decide to produce fuel-efficient vehicles and their key components and whether this new demand will be met through domestic sourcing or imports. But it is clear that specific incentives can work to promote domestic production and drive new investment into existing plants and the skills of workers.

Strong comprehensive energy and climate legislation will ensure sustained reductions in oil use and carbon emissions. At the same time, it can capture economic growth through specific manufacturing conversion incentives funded through dedicated carbon allowance revenues. Legislation that sets a firm declining limit on global warming pollution is uniquely suited to this task for two reasons. First, it sends a critical message to markets and investors. Second, it provides a steady revenue source to drive long-term economic and environmental gains in the domestic auto sector and to assist in retooling assembly lines and retraining workers so that the United States continues to have a globally competitive auto industry that produces advanced clean vehicles. This integrated clean energy and jobs approach can expand opportunities for both U.S. firms and American workers, particularly in hard hit industrial states such as Michigan, Indiana, and Ohio.

It is also worth noting that while the analysis undertaken in this paper shows substantial positive economic and jobs impacts from pursuing improved fuel economy, many additional benefits of energy independence do not even figure in this calculation. Therefore, as positive as this opportunity looks on paper, the real benefits go further.

Avoided fuel costs put real dollars back in the pockets of consumers, increasing consumption and economic benefits. At the same time, reducing demand for oil helps buffer price volatility, while decoupling the growth of the economy from rising energy imports reduces vulnerability to price spikes and supply disruptions. And by pursuing the high-efficiency and low-carbon emission technology path outlined in this report, U.S. auto makers will preserve access for American-made cars to global markets, to serve the rapidly growing consumer demand for cleaner cars. As Americans use less oil to fuel our cars, we can also slow the flow of resources overseas to unstable and undemocratic nations, and invest instead in American jobs. By acting quickly, we can help to make the country less vulnerable to rising prices when global economic growth returns.

Clean energy manufacturing can drive the future prosperity of American workers if we creatively engage this opportunity. Our closest economic competitors in Asia and Europe are investing today in diversifying and expanding their manufacturing of clean energy technology. If the U.S. fails to make the same transition, we risk being left behind. However, climate legislation that includes manufacturing conversion incentives could help drive economic recovery and restore American leadership in the global automobile market and the global economy.

Which choice we make has yet to be determined. The future remains to be written.

Read the full report (pdf)

For more information, see:

• Clean Energy Investment Agenda
• Out of the Running?

This report was prepared for the Natural Resources Defense Council, United Auto Workers, and Center for American Progress by Alan Baum of The Planning Edge and Daniel Luria of the Michigan Manufacturing Technology Center

At a quiet lakeside retreat house in Potsdam, Germany, 35 people met this month to discuss the future of nuclear power.

Guest blogger and nuclear economics expert Craig Severance was one of the attendees.   He discusses his presentation in this repost.

Severance is co-author of “The Economics of Nuclear and Coal Power” (Praeger 1976) and a former Assistant to the Chairman and to Commerce Counsel, Iowa State Commerce Commission.  Last year, Severance did an Exclusive analysis for CP on the staggering cost of new nuclear power.

Among us were representatives from governments, academia, think tanks, the nuclear power and utility industries, and independent writers and researchers.  We came to talk, and not necessarily to agree.  Nevertheless, the discussions were brisk and a wealth of valuable information was shared.  The Brookings Institution and the Global Public Policy Institute with support from the European Commission sponsored the conference, entitled “Towards a Nuclear Power Renaissance?  Challenges for Global Energy Governance“. (The insights I share below are my own perspective.  The conference followed rules where each of us is free to publish our own talk and perspectives but cannot report on what others said, so as to promote the free exchange of ideas.)

Potsdam Historically Significant. Potsdam seemed particularly appropriate for such an important conference.  Though it is a relatively small community 24 km southwest of Berlin, it has served an important role in history.  It was the home of the Prussian kings until 1918, a place where decisions could be made in an idyllic setting.   These same qualities attracted the Allies after WWII to meet in Potsdam to determine the future of Germany and postwar Europe.  Today, it has become an important scientific and research center.

Nuclear Power Decisions Will Determine Much. Though nuclear power may seem a limited issue — related only to energy, and only one of several energy sources at that – the decision whether to pursue nuclear power may prove to be the most important decision now before world leaders.    Consider the following:

1. Capital Needs. Expanding nuclear power requires enormous amounts of capital,  For instance, some members of the U.S. Congress have said the U.S. should build 100 more new nuclear power plants.  Yet, building 100 new nuclear power plants would require a capital investment of at least one trillion dollars, and this would still meet only only a fraction of U.S. energy requirements.  In the throes of a world financial crisis, will economies have the resources to devote such enormous resources to just one industry?  Where will the funds come from?  Will other energy priorities such as energy efficiency, the Smart Grid, and expansion of renewables be eclipsed by nuclear power’s needs?  Even more broadly, is it ethical or wise to devote so much of an economy’s total resources to just electricity production?  For instance, do we really want the elderly who now struggle to pay $100/month electric bills to now have to find a way to pay $200/month?  Or, would it be better to limit the share of resources devoted to electricity by helping electric customers cut their usage?  Also, on the societal level, capital is limited.  In many developed countries key needs such as roads and bridges, public water and sewer systems, basic scientific research and development, and schools are all falling into decay because of a lack of capital investment.  In developing countries, these key infrastructures are not yet even in place.
2. Climate Change. Amory Lovins of the Rocky Mountain Institute has said for many years that the pursuit of nuclear power will make climate change worse – because adopting it as a climate protection strategy simply won’t work.  It will be too expensive and too slow to get the job done.  This would not be such a disaster (many things don’t work) if nuclear power didn’t take all the money away from doing the things that actually do work.  Also, as Dr. Benjamin Sovacool of the Lee Kuan Yew School of Public Policy published here in 2008, nuclear power “is in no way carbon free or emissions free” even though it is better than coal, oil, or natural gas.  Because of carbon emissions needed for uranium mining and milling, uranium enrichment etc., Dr. Sovacool concluded after reviewng 103 studies on the topic, that nuclear power produces significantly more emissions than renewable energy technologies.  Putting most of your money into a technology that is more costly, slower, and less effective is a strategy for failure — and climate change is an issue where the world cannot afford to fail.
3. Employment. Finding a solution to crippling unemployment is now an urgent matter for many countries.  We cannot ”stimulate” forever – it is crucial that limited capital resources are invested most effectively.  Investments in efficiency and renewables will create more jobs than investing in new nuclear power plants.  The jobs created in new nuclear power are so highly technical there may not even be a trained nuclear work force available to fill those jobs.  As reported by the World Nuclear Industry Status Report 2009, the nuclear industry is already facing critical shortages of the nuclear engineers needed to keep today’s existing fleets of nuclear power plants operating safely, let alone having the added staff needed to expand.  It is not nuclear engineers who are out of work — there aren’t even enough ot them — but the construction workers we all know in our own families and communities.  Jobs are needed in every community, not just a few concentrated locations where a massive new power plant may be built.  Efficiency and distributed power sources spread more new jobs, to those who need them, in more places.
4. Economic Dependence . America, most of Europe except Russia, and in fact most countries of the world other than oil exporting nations are all suffering from a major drain on their economies due to the need to pay for imported energy.  Nuclear power won’t help most countries become energy independent,  because only a handful of nations in the world possess significant uranium resources.  Nuclear power is actually just another form of imported energy.  Is it wise for a country to invest tens or hundreds of billions of dollars in new power plants that depend on fuel imports from often unstable countries, and countries within the former Soviet sphere of influence?  Efficiency and renewables (and for some nations natural gas) utilize a country’s own resources.  Keeping dollars from leaving a country can create just as much economic activity as bringing new dollars in.
5. Military Security. America and the EU nations have invested major military resources to protect access to imported oil.  Nuclear power does little or nothing to reduce oil dependence to lessen the need for the military resources devoted to oil.  Far worse, however, is that nuclear power creates stark new military security threats of its own that may require investment of major military resources to keep terrorists and weapons-intent countries from building nuclear weapons.  Nuclear power grew out of the nuclear weapons program, and the nuclear fuel cycle still produces the elements — uranium and plutonium — which can be used to make nuclear weapons or radioactive “dirty bombs”.  The nuclear industry argues that any nation or terrorist does not need a nuclear power plant to make a bomb,  they just need uranium enrichment.  This is true.  However, the only “legitimate” reason to enrich uranium is to use it in a nuclear power plant. The continued promotion and sale worldwide of “civilian” nuclear reactors thus gives nations the excuse to operate uranium enrichment programs, as we have seen in Iran.  In addition to this looming threat of new nuclear states, an even more frightening prospect is that weapons grade material will fall into the hands of terrorists. Terrorists are not deterred by Mutually Assured Destruction as are nuclear states.   Some nations are separating out the plutonium from spent nuclear fuel and mixing it into new fuel, and also stockpiling huge quantities of plutonium.  The unused fuel containing plutonium is shipped to nuclear plants, making it vulnerable to attack in transport.  The large plutonium stockpiles may also be attacked with the purpose of either seizing the material for bomb making or contamination of populations with radiation.   Western nuclear plants cannot explode with an atomic Hiroshima-style blast.  However, the continued sale and use of nuclear power plants may allow those intent on creating such horrendous destruction to gain access to exactly the  materials they need..

Nuclear Power Makes No Business Sense. The above problems are very serious in nature.  To address them however may require some simple common sense.  What is the purpose of nuclear power: simply to boil water to make kWh’s.  It is not the only way to make kWh’’s.  Thus, if nuclear power makes no business sense, and there are alternatives to nuclear power, the problems noted above can be avoided except for existing plants.  We won’t need to make things worse by builiding new nuclear power plants.

Free market economies eventually pick winners and losers. There are clear indications the financial markets have already picked new nuclear power as a loser.  Those who watch the financial news on nuclear power have seen major institutions state again and again that new nuclear power makes no economic sense and is too risky to garner private investment or the support of private lenders.   Major cautionary reports have been issued by Moody’s, Citi, and Simmons & Co, among others.

Remember: Promoter’s Business Plans Always Look Good. Some may wonder why they can hear nuclear promoters’ numbers that show new nuclear power is economical, yet the financial industry remains so skeptical.  The reason is simple:  all promoters in any industry know they must develop business plan proposals that look good.  That is the job of the promoter.

Due Diligence Asks the Right Questions. It is the job of the lender or investor to be skeptical of any promoter, and to put a proposal to the test by a process known typically as the “Due Diligence” process.

Core questions asked in the Due Diligence Process include:

1. Does the proposal actually meet customer needs?
2. Can the company afford the project?
3. Are Cost Projections Reliable?
4. Assessment of the Competition
5. Are Revenue Projections Reliable?

Due Diligence for New Nuclear Power. This was my contribution to the Potsdam Conference — a paper showing a sample analysis of new nuclear power as a “business proposal”  and applying the five “Due Diligence” tests above.  The presentation is posted here.

The conclusion is that new nuclear power does not meet any of the five tests, so it would fail as a business proposal.  The financial institutions mentioned above seem to have come to the same conclusion.   New nuclear power likely cannot succeed as a business proposal and thus would require massive government support.

This begs the question however — should not Due Diligence also be applied to the proper use of taxpayer monies?  If so much is at stake for the U.S. and the world, should the U.S. really be leading the way in throwing taxpayer monies at an industry without asking the right questions?

Related Posts:

• Intro to nuclear power
• Nuclear Bombshell: $26 Billion cost — $10,800 per kilowatt! — killed Ontario nuclear bid
• Turkey’s only bidder for first nuclear plant offers a price of 21 cents per kilowatt-hour
• Areva has acknowledged that the cost of a new reactor today would be as much as 6 billion euros, or $8 billion, double the price offered to the Finns.

President Obama has made two major announcements in recent weeks regarding loan guarantees for nuclear power. Loan guarantees commit the government to repaying a loan if the original borrower can’t pay back the loan. His proposed fiscal year 2011 budget would triple nuclear loan guarantees to $54.5 billion. And on February 16, the Department of Energy issued an $8 billion guarantee for two proposed Southern Company nuclear reactors in Georgia. Both of these measures will help utilities finance new nuclear reactors, but the underlying terms of the guarantees will determine the risk to American taxpayers and the number of new nuclear plants that will be built.

Building a nuclear reactor today will involve dealing with tremendous financial uncertainty. Cost projections for nuclear plants keep going up because of variability in material costs, a new licensing process, limited suppliers for key parts, and inevitable delays in construction projects. The projected cost for two new reactors in Canada shot from $7 billion to $26 billion in just two years. And in the United States, costs for two new reactors at the South Texas Project have ballooned from $5.4 billion to an estimated $18.2 billion since 2007. Neither of these reactors has been built, so there’s no way to predict what the final cost will be. But cost overruns are virtually certain in nuclear construction, which greatly increases the risk the nuclear companies will default on their loans. Private lenders are well aware of the risk of building new reactors, which is why they’re unwilling to finance the projects without government support.

The huge cost of nuclear power means that taxpayers will have to provide nuclear loan guarantees to finance new projects if the president and Congress are serious about building new reactors. The terms on these guarantees must include adequate protections for taxpayers. Most important, the so-called “credit subsidy cost” must be calculated accurately. The credit subsidy cost represents the price tag of the guarantee to the government, and in the case of new reactors, must be paid by the utility company borrowing the money. Estimates of what this cost should be run the gamut from 1 percent or less to 30 percent of the total guarantee. If the cost is too low, then it will increase risks for taxpayers. If the cost is too high, then it will unnecessarily decrease the number of reactors financed. Surveys of outside estimates and calculations detailed below indicate that the cost should be at least 10 percent and possibly much more.

Loan guarantees, a valuable tool for borrowers

When the government issues a loan guarantee, taxpayers are assuming the risk if the borrower is unable to pay back the loan. Most borrowers under the nuclear loan guarantee program will get a loan from the Federal Financing Bank, which will now charge a much lower interest rate and provide more favorable terms. In exchange for this valuable service, the guarantor (the federal government) has to account for the risk of default. They do this by calculating the “credit subsidy cost.”

The exact credit subsidy cost is impossible to project because it is determined by an Office of Management and Budget model that is not made public, but it is essentially the present value of the expected payouts that the government will have to make on the loan. This is determined by estimating a likelihood of default—the “default rate”—and the amount that the lender will recover in bankruptcy proceedings—the “recovery rate.” The government makes up the difference so the lender receives all that is due. The pay out is then discounted back to present dollars, taking account for the time value of money. The total cost is usually quoted as a percentage of the guarantee.

The nuclear loan guarantee program

There were no loan guarantees available for nuclear reactors until 2005. Title XVII of the Energy Policy Act of 2005 provided significantly more protection for lenders. According to the program rules, the government can guarantee up to 80 percent of the cost of the project, and the borrower has to find at least 20 percent elsewhere. This remaining 20 percent can either come from 1) raising equity, potentially through utility customers who pay higher rates before the reactor is actually built, known as “construction work in progress” or 2) debt financing, potentially via French or Japanese Export-Import Banks that will provide loan guarantees and/or loans for the portion not covered by the U.S. government.

Debt holders get paid first in bankruptcy proceedings, but DOE has changed its loan guarantee rules and no longer requires the U.S. government to hold a “right of first lien,” which means that the U.S. government doesn’t necessarily get paid before other debt holders. The result is that in the event of a default, taxpayers would have to share proceeds from a liquidation with other creditors, such as the French or Japanese Export-Import Banks.*

Just like under other loan guarantee programs, the government has to have the credit subsidy cost in hand before issuing a loan guarantee. This cash can come from one of two places: an appropriation from Congress or a cash payment from the borrower, known as a “credit subsidy fee.” U.S. government rules require the government to have the credit subsidy fee on hand before it can issue the loan guarantee. And the nuclear loan guarantee program mandates that because there hasn’t been a congressional appropriation to cover the credit subsidy cost, the Department of Energy must charge a credit subsidy fee.

Since this fee must be paid upfront, it can add significant costs to the project. Utilities that borrow money obviously want to keep this fee as low as possible, but responsible government management dictates that the fee must reflect the true likelihood of default. Not surprisingly, the nuclear industry wants the fee to be 1 percent or less, while the Congressional Budget Office has estimated that it should be 30 percent, which reflects the CBO’s 2003 determination of “risk of default on such a loan guarantee to be very high—well above 50 percent.” In a blog on March 5, CBO declined to refine this estimate to reflect any specific projects, but reiterated that “it would be difficult to set the fee so as to entirely cover the estimated cost to the government.”

These two are bookend estimates, but they are hardly the only ones. For example, Standard and Poor’s thinks it should be at least 4 percent to 6 percent, with the potential to be much higher, depending on the borrower’s credit rating. The Government Accountability Office has estimated the loss rate at 25.42 percent. This loss rate is different from a true estimate of the credit subsidy cost in important ways—primarily, it doesn’t involve discounting to present values—but it does give some guidance in calculating the true cost. Unfortunately, none of these estimates is perfect:

• The nuclear industry’s 1 percent doesn’t seem to be based on any calculation that includes all appropriate risks. If this estimate reflected the true risk, utilities would probably be able to get traditional financing without the guarantee. Indeed, the added benefit of the guarantee probably wouldn’t outweigh the transaction costs of getting the guarantee.
• The Congressional Budget Office assumptions on recovery and default rates aren’t clear, but appear to be extremely pessimistic. And the assumption of very low construction costs is extremely optimistic. This estimate was constructed while analyzing a bill that never became law and assumes the guarantee only covers 50 percent of the project—today’s program allows for loan guarantees to cover up to 80 percent of the project. Because none of these assumptions fully represent today’s financing or regulatory environment, this estimate needs to be updated.
• The Government Accountability Office helpfully estimates the loss rate, but hasn’t discounted the payouts or otherwise constructed an estimate of the credit subsidy costs.
• Standard and Poor’s assumes lower capital costs than current construction costs, and assumes a 70 percent recovery rate on bankrupt plants. This is not only higher than other estimates, but seems especially unrealistic given that some reactors will likely default while under construction and may have no salvageable value.

None of these estimates is the “right” credit subsidy cost, but each gives helpful guidance in calculating a credit subsidy cost that more accurately accounts for the risk of default and the value of any unfinished reactor.

A new model for estimating the appropriate credit subsidy fee for a nuclear loan guarantee

Our new model employs a simplified framework for estimating the appropriate credit subsidy fee for a nuclear loan guarantee. The model doesn’t give a precisely correct fee that a borrower should pay, but it provides a ballpark estimate and is useful for showing how the fee is sensitive to changes in major inputs.

The model is based on a series of assumptions:

• Every project is different and should be evaluated independently, but the generic default rate is 50 percent. This serves as a proxy for the credit rating of the borrower, which will vary dramatically from project to project.
• The recovery rate in liquidation is 50 percent. This is the GAO estimate, and it is also implied by Standard and Poor’s.** But this may be optimistic since DOE no longer requires that the U.S. government have a right of first lien.
• The loan term is 30 years, the maximum term allowed under the law; the discount rate is 4.7 percent, based on current yields on 30-year Treasury notes; and the guarantee covers 80 percent of the project, the maximum amount allowed under the law.
• The default risk is spread evenly over the life of the loan, even though it’s more likely that a project would default early in the loan rather than later. This has the effect of underestimating the actual credit subsidy cost.

These assumptions indicate that the credit subsidy fee on a nuclear loan guarantee should be at least 10 percent. The fee goes up as the guarantee is for a greater portion of the total project cost, as the default rate goes up, as the recovery rate goes down, as the discount rate goes down, and as the risk of default is concentrated earlier in the loan. For example, just changing the recovery rate to 40 percent leads to a fee of about 13 percent. If the projected recovery rate is 40 percent and projects only default in the first year of the loan, the appropriate credit subsidy fee would be about 24 percent.

The following table illustrates how the credit subsidy fee depends on both the default rate and the recovery rate. Estimates in this table assume that the guarantee is for 80 percent of the cost of the reactor, that DOE does maintain a right of first lien, and that the risk of default is spread evenly over 30 years. These last two assumptions have the effect of lowering the credit subsidy cost, so these are low-end estimates.

To put this in perspective, if a developer gets a guarantee for 80 percent of the cost of a $10 billion plant, the loan guarantee is for $8 billion. A 10 percent credit subsidy fee means that the utility has to pay an extra $800 million to the government at the start of the project.

There are very serious questions about a developer’s ability to pay that sort of fee. If the administration decides to explore financing options for the fee, it must make absolutely certain that the financing doesn’t place the guarantee’s cost back on taxpayers.

Without looking at details of specific nuclear projects, it’s impossible to say with 100 percent certainty what the credit subsidy fee on these loan guarantees should be. But based on these calculations, the credit subsidy fee should be at least 10 percent, which would be $800 million for a loan guarantee for a $10 billion reactor.*** The administration must keep in mind, however, that credit subsidy fees should be set at a rate that protects taxpayers, not at an artificially low rate as a handout to big utilities.

Notes

*If the United States guarantees either the only creditor or a creditor with a right of first lien, taxpayers will not have to pay any money for the defaulted loan if the reactor brings in 80 percent of the value of the reactor in a liquidation sale. Another way to think about this is that even if there’s a 100 percent chance of default, the credit subsidy cost would be 0 percent if selling the reactor would generate more money than the value of the loan.

**Standard and Poor’s assumes a 70 percent recovery rate on a reactor that costs $6,000 per kilowatt, or a liquidation value of $4,200 per kilowatt. Recent estimates of new nuclear construction are roughly twice that liquidation value, ranging all the way up to $10,800 on the high end (implying a 40 percent recovery rate).

***Assuming a loan guarantee for 80 percent of the reactor, $10 billion x 80 percent guaranteed x 10 percent credit subsidy fee = $800 million.

Related Posts:

• Intro to nuclear power
• Obama’s nuclear error
• A quarter of U.S. nuclear plants leaking

The hearing broadly addressed recent criticism of the DOE’s slow initial allocation of funds and implementation of American Recovery and Reinvestment Act (ARRA) programs.  In particular, the DOE’s Weatherization Assistance Program (WAP) has recently come under some scrutiny due to its slower than expected deployment of funds and pace of home retrofits in 2009.  Critics of WAP are attributing the slow start to bureaucratic red tape, but this paints an incomplete picture of the DOE’s program and undermines why it is and will continue to be effective.

Indeed there are reasons that WAP did not allocate all $5 billion in federal funding awarded under ARRA in the first year of the program.  The primary reason is that this was never the plan.  The Recovery Act was designed as a two year program, with some faster acting investments that would hit the ground running in year one, and some longer term measures that were smart investments for creating jobs in year two.  Weatherization and a number of the other clean energy investments were understood from the start to require an initial period of scaling and ramp up to have their full impact.  The DOE’s goal of weatherizing 593,000 homes was carefully set to be accomplished by March 2012, not September 2009 when the Government Accountability Office issued a report on the status of WAP. It should come as no surprise that the impact in year one was modest.  The real impact is just getting under way.

Second, the budget for WAP, which amounted to between $200 and $250 million for each of the previous 3 years of the program, increased 20 fold with the injection of ARRA funds last year.  Because of the magnitude of the retrofit scale-up that WAP seeks to achieve, it was crucial for the DOE to carefully scale infrastructure to handle the influx of capital and lay the groundwork for ARRA spending, including hiring and training new workers, purchasing equipment, and putting in place the transparency and accountability measures that are central to ARRA.  In yesterday’s hearing, Vice-Chair of the National Association of State Energy Officials Malcolm Woolf explained such a measure:

“For illustrative purposes, the vast majority of the states utilize private sector companies to conduct the energy efficiency activities.  In the case of an energy service company (ESCO) that has received a contract to undertake energy efficiency upgrades in a school building, the contract generally provides that payments are not made until the work is actually completed or milestones under the contract are satisfied.  In general, the ESCO begins hiring upon contract execution and conducts the work.  The economy is directly and indirectly impacted.  However, the spending or “costing” (in federal parlance) does not occur until the work is completed, the state is satisfied that the work is done properly and then the payment is made.  Payments are not generally made up-front in order to protect the public against waste, fraud and abuse.  Our ability to enforce the terms of these agreements are greatly enhanced if the state is holding the money, not the contractor.  So, while the “costing” figure is low, the work conducted and jobs created is accelerating.  We will not waste federal or state dollars by changing these contract terms.  However, businesses can add employees and receive financing once the binding contracts are executed, with appropriate performance guarantees.”

Third, when Congress passed ARRA, they included provisions that subjected WAP to the Davis-Bacon requirements for the first time which meant that the Department of Labor had to determine the prevailing wages for weatherization workers in each state.  This was a protective measure for a new “industry” meant to stabilize and make equitable wages for workers performing weatherization activities, which required several months to properly establish.

These measures that critics call red tape in reality were provisions, which were designed to put in place a program that not only created jobs, but quality jobs with decent wages.  In passing the Recovery Act, Congress realized that they were setting standards for a rapidly expanding industry, and they wanted to set the terms and conditions for long term job growth built on quality work by skilled workers.  Scaling up weatherization in this way was prudent, and it means that stimulus funds are setting the stage for a more competitive industry over time.  When commenting on the current status of WAP, Cathy Zoi, Assistant Secretary for Energy Efficiency and Renewable Energy, said:

“As a result of the Department’s efforts to address challenges in the program’s implementation – including resolving Davis-Bacon wage determinations in all 50 states and clarifying how states should handle historic preservation – states weatherized more than 125,000 homes by the end of 2009 and are on pace to do at least 250,000 homes this year.  In fact, since September 2009, we have tripled the pace of Recovery Act-funded home weatherization.”

The DOE’s program has already put 8,500 people to work in the weatherization effort and was a necessary first step in the effort to scale up energy efficiency and create jobs.  The path to retrofitting millions of American homes will require a series of policy initiatives that will build off one another to lay a foundation for a truly robust energy efficiency industry that will create jobs and drive long term economic recovery.

ENR Chairman Senator Jeff Bingaman closed yesterday’s hearing with a final question: what happens when the money is gone?  Since the government cannot be expected to maintain such high levels of funding for these types of programs, how do we transition from copious amounts of government funding for energy efficiency and clean energy stimulus programs – which were necessary to drive economic recovery in the right direction in 2008 – to a longer term solution?

A logical next step is a complementary, market-based solution that utilizes existing state programs to deploy capital and stand up a greatly expanded national energy efficiency “industry.”  The HOME STAR program, which President Obama announced earlier this week, is just such a program.  HOME STAR is a consumer-based program that builds off of and supplements existing markets, making it efficient and easy to implement.  It is a cost effective way to create good, high-paying jobs for idled construction workers, boost sales of American-made building materials, and reduce household energy costs for American homeowners.

The public servants and community based professionals that are cutting consumers bills and creating new jobs for construction workers every day, as they administer the Federal low income Weatherization Assistance Program, deserve our praise and support.  Moving forward we need to build on their hard work with innovative programs to build the private sector market for energy efficiency through programs like HOME STAR.

Building an energy efficiency industry through an innovative combination of market based and government programs is essential to ensure that the United States does not fall behind the rest of the world in transitioning to a clean energy economy future.

Related Post:

• Why the NYT’s criticism of DOE’s weatherization program misses the point

Yesterday President Barack Obama announced details of his proposed $6 billion energy efficiency rebate program, known as Home Star, at Savannah Technical College in Georgia. Informally known as “Cash for Caulkers,” the Home Star program would provide immediate rebates of up to $3000 to homeowners who invest in making their homes more energy efficient. President Obama described how Home Star helps Americans on several fronts:

Now, we know this will save families as much as several hundred dollars on their utilities. We know it will make our economy less dependent on fossil fuels, helping to protect the planet for future generations. But I want to emphasize that Home Star will also create business and spur hiring up and down the economy.

With unemployment in the construction industry at almost 25 percent, it is imperative that the Obama Administration implement innovative, effective programs to spur job creation in what has been termed the tool-belt recession. The tool-belt recession has a deep and far-reaching impact on communities. Construction job losses touch every state in the union and hit local economies hard, spilling over to other parts of the economy as well. Job loss in manufacturing industries tied to construction is higher than in manufacturing as a whole. Many construction related industries have shed 20 percent to 30 percent of their jobs since the recession began. Jobs in the construction sector and related industries are suffering more compared to other parts of the economy. It is time for a national response to this tool belt recession. Here are some of the numbers:

• The unemployment rate for experienced workers in construction was 24.7 percent in January 2010.
• Total construction payroll employment has dropped by 2.1 million jobs since 2006, with residential construction down by 1.3 million, or 38 percent.
• For 2009, 12.4 percent of all unemployed workers were previously employed in the construction industry.
• There have been 134,000 jobs lost (10 percent) in construction-related retail, such as building supply stores and lumber yards, since December 2007, with 186,000 lost (14 percent) since July 2006.

With demand for construction jobs at near depression levels, stimulating consumer demand for residential energy efficiency is a smart business. It creates high-paying jobs for idled construction workers, boosts sales of American-made building materials, and saves consumers money. American companies are ready to hire back crews if we can jumpstart demand for projects. Home performance contracting for energy efficiency is one bright spot on the horizon for the building trades today.

Matt Golden, CEO of home performance retrofit contractor Recurve, and co-author of our study explains:

The tool belt recession is devastating. There is an urgent need in every state of the union to generate skilled, high-paying, long-term construction and manufacturing jobs to grow our economy. But there is hope. As an employer in the hard-hit state of California, I have seen my efficiency business grow by 60 percent, even as the construction industry has lost over 35 percent of construction jobs, around me.

It’s time to launch a national Home Star program which includes incentives for homebuyers to invest in the energy efficiency of their homes, which will jumpstart demand for labor. Congress can quickly create jobs with policies to expand investment in commercial and industrial energy efficiency and financing for retrofit jobs.

Read the whole memo about taking on the tool belt recession here.

But thanks to conservative opposition to clean energy from Reagan to the Gingrich Congress to Cheney/Bush, the U.S. share of the PV market has plummeted.  By 2008, America had under 6% (!) of the world market (see AllBusiness’s “United States is a bit player in global solar industry“).

Now the Department of Energy is taking steps to improve the domestic manufacturing base, as guest blogger Jacob Abraham, an intern with CAP’s Energy Opportunity team, reports.

Businesses are stepping up to the plate to harness the economic opportunity that solar photovoltaics (PV) offer.  The Department of Energy reports that four new solar manufacturing plants are making their way to states around the country.  New solar manufacturing facilities will bring both jobs and solar power to Michigan, Arizona, Pennsylvania, and Oregon.

Dow Chemical Company launched its solar project in Midland, Michigan earlier this month to launch its first full-scale Powerhouse solar shingle facility, which will help homeowners reduce electricity costs and green their homes using innovative solar shingles.  Michigan Economic Development Corporation (MEDC) just announced that it will award Dow Chemical $61.3 million in tax credits over 15 years to be used in a variety of projects.  Dow’s expansion into Michigan will create over 6,900 new jobs, and the increased funding will allow Dow to move the project up to full scale plant.  Governor Jennifer Granholm praised the clean-energy explosion:

We have worked hard to make Michigan the clean-energy capital of North America and focused our initiatives to grow these industries here.  Dow’s decisions to locate these facilities here demonstrate that our investments in green, clean-energy manufacturing are creating jobs and helping Michigan transition to a new 21st century economy.

The Arizona project, estimated to create between 30 and 120 MW of solar power per year and employ local residents of Goodyear, Arizona, is actually funded by the Chinese company Suntech Power, the world’s largest manufacturer of crystalline silicon PV modules.  Mayor Jan Brewer applauds the new plant as a crucial step toward making Arizona a leader in the clean energy economy:

I commend the company for choosing Goodyear as the site for its solar manufacturing operation.  I am very serious about establishing Arizona as a leader in the renewable energy sector — we offer a strategic location with a highly skilled workforce, low payroll taxes, and, now, the right incentive program to make business sense.

Other states, too, will gain new capacities as a result of new business incentives.  Heliosphera US plans to build a thin-film solar plant in Philadelphia’s Navy Yard using a $49 million incentive package of loans and grants provided by the State of Pennsylvania.  In Oregon, SolarWorld is bringing a new solar module assembly line to its manufacturing plant in Hillsboro, Oregon increasing the plant size 210,000-square-foot building, with the capacity to produce 350 MW of solar modules per year

These manufacturing plants come just as Obama’s Savannah speech on Tuesday promoting HOMESTAR, a program designed to incentivize home retrofitting, government funding for investment in renewables.  Just as hopes for home energy efficiency are on the upswing after President, Americans will soon be able to use products such as Dow’s Powerhouse solar shingles to retrofit their roofs, increase their energy efficiency, and cut energy costs.

With solar giants like eSolar making deals with Google, China, and the German company Ferrostaal, the industry’s capacity is growing rapidly.  Additional U.S. companies need to step up and invest, or risk being left behind. Many states and individual Americans have found ways to integrate solar power into their energy systems, and now it’s time for businesses to do the same.

JR: Ultimately, of course, The only way to win the clean energy race is to pass the clean energy bill.  As Lindsey Graham (R-SC) said earlier this year, “Every day that we delay trying to find a price for carbon is a day that China uses to dominate the green economy.”

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Yesterday President Obama announced details of his proposed $6 billion energy efficiency rebate program called the HOME STAR program at Savannah Technical College in Georgia.  Tina Ramos, a Special Assistant for Energy Policy at CAP, has the details.

Informally known as “Cash for Caulkers,” the HOME STAR program would provide immediate rebates of up to $3000 to homeowners who invest in making their homes more energy efficient:

“Now, we know this will save families as much as several hundred dollars on their utilities.  We know it will make our economy less dependent on fossil fuels, helping to protect the planet for future generations.  But I want to emphasize that HOME STAR will also create business and spur hiring up and down the economy,” said President Obama.

With unemployment in the construction industry at almost 25 percent, it is imperative that the Obama Administration implement innovative, effective programs to spur job creation in what has been termed the “tool belt recession.”  Manufacturing employment has dropped 16 percent since the recession began, and the numbers are far worse in construction-related manufacturing.  In addition, many building materials manufacturers are operating at 50 percent capacity, meaning that they are producing only half of the materials that they have the potential to.  In Georgia, where construction job loss reached 28.2 percent in December since peak construction employment, Obama addressed how HOME STAR would jump start assembly lines in the building materials manufacturing sector:

And here’s one of the best things about energy efficiency — it turns out that energy-efficient windows or insulation, those things are products that are almost exclusively manufactured right here in the United States of America.  It’s very hard to ship windows from China.  So a lot of these materials are made right here in America.

The HOME STAR program is a cost effective way to create good, high-paying jobs for idled construction workers, boost sales of American-made building materials, and reduce household energy costs for American homeowners.  HOME STAR is a consumer based program that builds off and supplements existing markets, making it inherently efficient to implement.   “Retrofitting America’s 128 million homes will be the work of private companies, but market forces alone will not move fast enough to avert the crisis at hand,” wrote Matt Golden, founder of a San Francisco home energy retrofitting company, in a recent commentary in Forbes. “The legions of unemployed contractors and factory workers desperately need jobs now to pay their mortgages and feed their families. While the private sector is ready to step up and invest in long-term growth, near-term incentives will generate immediate demand and allow private businesses to start hiring again, right away.”

“This is not a Democratic idea or a Republican idea,” President Obama said of HOME STAR yesterday.  “This is a common-sense approach that will help jumpstart job creation while making our economy stronger.”

Related Posts:

• HOME STAR: Putting Americans Back to Work

The rolling home foreclosure crisis continues to haunt homeowners facing foreclosure, their neighbors due to falling home prices, and of course the broader U.S. economy. Relief programs initiated by the Obama administration and Congress are making a difference, but we at the Center for American Progress believe policymakers need one more arrow in their quiver—a targeted program to convert already foreclosed homes owned directly by the federal government into thoroughly energy efficient, affordable rental homes that can be resold as portfolios of rental properties to private investors.

Huge numbers of foreclosed homes are already falling into the hands of the Federal Housing Administration from the rising number of foreclosures from mortgage guarantees it made before the housing bubble burst. Over the next several years, many more single-family homes are likely to do so also, recognizing that even if foreclosure rates return to historical norms, FHA’s increased role in supporting housing finance during the crisis will translate into additional properties in absolute terms.

Rather than quickly selling these foreclosed houses off individually at depressed prices, which drives down the value of other homes in the neighborhood and does little to minimize the ultimate losses to FHA’s insurance fund, policymakers should instead maximize the value of these homes for taxpayers over the long term.

How? By pooling these houses by location, renting them out affordably, and then selling them in as a portfolio of already-occupied rental properties to institutional investors. Retrofitting and weatherizing these homes before renting them out provides even more value to taxpayers by reducing operating costs in the form of lower energy bills. Because the value of rental properties is driven by the net cash flow from the properties, demonstrable cost savings on operations increase the portfolio’s value.

In 2009 alone, FHA paid insurance claims and then took title on 75,000 single-family houses. As increasing numbers of foreclosed homes come into the possession of the FHA, the federal government could create long-term affordable rental housing in communities across our nation while minimizing losses to taxpayers who stand behind FHA mortgage payment guarantees. By repairing these foreclosed homes to meet the highest energy efficiency standards and then renting them out, taxpayers may well recover the most value after foreclosure.

Foreclosed homes, known as “real estate owned” or REO in real estate parlance, are most often sold off one house at a time in their current condition. The aim is to move them off the books as quickly as possible, and this has typically meant finding a new homeowner to buy the house. But with homeownership rates falling significantly as a result of the foreclosure crisis and many properties in disrepair, there aren’t enough of these ideal buyers in the market, leaving too many opportunistic investors who are only interested in flipping these homes to homeowners or other investors.

When REO properties are auctioned off in bulk, the buyers are nearly always investors with a short investment horizon. To the extent these investors make repairs to the property to improve the chances of sale and increase their returns, the repairs are often largely cosmetic and can saddle unwary buyers with significant maintenance costs. Indeed, these kinds of investors have little regard for the long-term habitability of the homes they bought and sold. This market reality was the impetus for the Department of Housing and Urban Development’s Asset Control Area program, which offers housing-related nonprofit organizations the first right to purchase HUD properties in their communities.

So instead of valuing an REO property based on the price it might fetch at auction through sale to investors looking to hold until they can resell for a quick profit, the federal government should consider the value of these properties for sale as packaged rental assets. Specifically, REO properties held by FHA should be thoroughly retrofitted, rented out, and then aggregated by location for sale to private investors as rental portfolios complete with tenants.

In many cases, the value of the cash flow from these properties as rentals will be greater than what individual homebuyers would be willing to pay for the houses in the aggregate, which means the federal government should receive more from the sale of these foreclosed properties than would otherwise be the case. What’s more, investing in energy efficiency retrofits and then renting these properties would help stabilize local housing prices by keeping these properties out of the market not only while FHA prepares them for sale as bulk rental portfolios but for the foreseeable future.

This policy is designed not only to help rebalance housing policy to reflect increased demand for rental housing and to optimize the disposition of FHA properties, but also to help drive a true economic recovery that will not happen without job creation. As such, it complements the strategies laid out in Vice President’s Middle Class Task Force report, “Recovery through Retrofit.”

In this policy memo, we will examine the details needed to inaugurate such a green rental conversion program in communities across our country. Our proposed new program on the face of it seems complex, but once the different facets of the program are considered together it becomes clear this green rental home program would help mitigate the home foreclosure crisis, improve rental opportunities for families in need of better rental homes, and boost jobs growth at a critical time in our economy’s nascent recovery.

How to create green rental home investment portfolios

There are several steps that must be taken to convert some of the federal government’s stock of foreclosed homes into portfolios suitable for sale to institutional and other large private investors as rental properties. First, the existing stock of REO homes needs to be catalogued by geography. Not all FHA-owned properties would necessarily make for good rental housing. Rural and exurban homes, for example, are likely to have less rental demand as potential residents choose to live closer to where jobs are and incur lower commuting costs. Suburban properties, however, particularly in good school districts, will likely have stronger rental demand.

The cost of managing a widely scattered portfolio of rental properties may deter private investors from bidding on such a portfolio. This is why the government must be strategic in identifying appropriate homes to aggregate, retrofit, and rent. But in rental housing submarkets with stronger demand, assembling green rental home portfolios can create value. The volume of properties falling into the hands of FHA control creates an opportunity to identify concentrations of properties that would make narrowly scattered rental management more realistic. As of the end of 2009, there were more than 30 metropolitan areas where FHA paid claims on 50 or more mortgages issued in the past two years alone.

Second, many properties that ultimately become REO properties when mortgage holders or mortgage insurers such as FHA take title after foreclosure have significant damage, either as a result of outright vandalism or simply through neglect and abandonment. Simply selling them “as-is” almost guarantees a steep discount to market value and, by extension, results in significant losses to FHA, which already paid a claim based on the outstanding mortgage balance and not the current property value. Regardless of the reason for the damage, these properties will need rehabilitation to be suitable rental properties. So just as under the Neighborhood Stabilization Program, which provides funds to local governments and nonprofit groups to buy and rehab REO properties in an effort to put the houses back into productive use, select REO properties held by FHA should be rehabilitated according to the Department of Housing and Urban Development’s Housing Quality Standards, which establish a baseline for health and safety standards.

Further, these REO properties should be retrofitted consistent with green building and weatherization programs. In addition to demonstrating the feasibility of moving toward a low-carbon economy, greening and weatherizing these properties ultimately lower the cost of operating the properties in exchange for a marginal increase in the capital costs of the rehabilitation. A 20 percent improvement in efficiency directly translates into a 20 percent reduction in utility bills over the long term—and potentially even greater savings where deep, whole-home, verified retrofits are conducted. Indeed, $2,500 spent on green retrofits can save, on average, $900 annually on energy costs.

Once these retrofits and weatherizations are completed, a property manager should be identified who will handle leasing these properties on behalf of FHA prior to their resale in bulk as rental portfolios to private investors. Rents would be capped at HUD-determined Fair Market Rents to ensure long-term affordability for the tenants. Given that these properties are already in public hands, we should take the opportunity to ensure that when they are sold, the sales are done with public purpose in mind. Because of the energy efficient green retrofits, these properties would also be more affordable for tenants due to lower utility costs. In turn, vacancy rates would be lower than in comparable houses that have not been retrofitted. The anticipated lower long-term vacancy rate would increase the portfolio’s value, again minimizing losses to FHA.

Despite pooling these properties into small geographies, these new rental homes ultimately will remain scattered throughout neighborhoods and communities, which means rental management companies with specific expertise in scattered-site rental housing must be found to manage these portfolios for private investors interested in purchasing these portfolios of rental properties. Scattered-site rental management can be difficult to do, particularly to do well at scale and at a modest cost. In some markets, contracting out to public housing agencies may be an option, as some of them have expertise in this line of business. Public housing agencies also may also be interested buyers of the portfolios, particularly those looking for a way to deconcentrate their housing stock, which is often found in only a handful of neighborhoods within their jurisdictions.

The operating costs for these single-family green rental portfolios will be somewhat higher than for an equal number of units in multifamily rental buildings. Consider a 50-unit multifamily building. It probably has one roof and one boiler. Not so for the single-family homes in this portfolio. They will have 50 roofs and 50 hot water heaters, so reserves for future capital expenditures will be somewhat higher on a per unit basis.

Despite these additional costs, bulk purchases and maintenance contracts for 50 roofs or hot water heaters make it relatively less costly than rehabilitating and maintaining 50 houses under 50 different owners. Moreover, while the per-unit labor costs for managing a handful of scattered houses are high, they decrease significantly with scale, arguing in favor of a portfolio-based approach to selling these properties.

Once the properties in these new green rental portfolios are rented out to families, the portfolios can be sold off to private investors. Given the public funds that are going to go into the properties to retrofit and weatherize them, it is only reasonable to expect public purpose in return. Specifically, the properties should have long-term affordability obligations attached to the deeds.

The portfolio’s value will ultimately be determined by the net cash flow from the rents. This is why reducing vacancy rates by virtue of the green rehabilitations and lowering operating and management costs by working at scale will add value to the properties and minimize losses to FHA. Possible buyers include life insurance companies and other institutional investors with long-term investment horizons.

Expanding the green rental home portfolio investment model

While the policy as proposed above specifically relies on FHA’s portfolio of REO properties, the policy could potentially be expanded to include foreclosed homes held by Fannie Mae and Freddie Mac as well. In the first nine months of 2009, Fannie Mae and Freddie Mac took possession of almost 160,000 single-family homes. In that instance, it may be necessary to establish a separate limited-purpose public corporation capitalized with public dollars—perhaps funds drawn from the Troubled Asset Relief Program if it is deemed an eligible vehicle for the acquisition of these troubled assets—to acquire foreclosed properties from FHA, Fannie, and Freddie so that the capacity to pool properties and identify true concentrations would be greatly enhanced. This new corporation would retrofit the properties it acquires, find tenants, and then sell them off in portfolios by location.

Additionally, this new public corporation could also acquire already rehabilitated properties from nonprofits participating in the Neighborhood Stabilization Program so nonprofits would not be left with long-term liabilities from stabilization activities—allowing them to recycle NSP funds much faster than if they retained ownership rights in rental properties. This is particularly important given the mandate of using 25 percent of the funds for low-income households, which are unlikely to be appropriate candidates for homeownership. These acquired properties would be added to the portfolio, rented out, and sold alongside the other properties in the area.

There is some historical precedent for a policy of renting foreclosed properties rather than selling them off immediately. During the Great Depression, properties acquired by the Home Owners Loan Corporation after borrowers defaulted on their HOLC loans were often rented out for a period of time through local brokers until the market value of properties improved. The policy of renting prior to resale was intended to minimize losses to HOLC that they otherwise would have realized on a postforeclosure sale in a depressed market.

Similarly, over the past year, both Freddie Mac and Fannie Mae have implemented small-scale rental initiatives, wherein they negotiate deed-for-lease arrangements with existing owners on the brink of foreclosure. When launched, these programs only offered month-to-month leases as Fannie and Freddie expected to sell the houses to owner-occupants in the near term. More recently, however, they began to offer year-long leases, implicitly recognizing that renting may be more valuable than selling under current market conditions. The ultimate disposition strategies for foreclosed properties owned by Fannie and Freddie is not clear, but at this point there is no broader program for creating rental portfolios to be sold to larger investors.

In short, our proposed policy consists of aggregating, retrofitting, leasing, and selling government-owned REO properties, first those held by FHA and if successful, potentially those held by Fannie and Freddie. In addition to creating many new green-collar jobs, this program will begin to rebalance housing policy to provide additional family rental homes at a time when homeownership may not be appropriate for many households. Given the confluence of the location of many hard-hit communities and high unemployment rates, this policy can both stabilize neighborhoods as well as provide much-needed jobs.

Download the memo (pdf)

In 2009, Wal-Mart received the Aspen Institute Energy and Environment award for Corporate Energy Efficiency.  To build on this success, Wal-Mart just announced its new sustainability goal: to eliminate 20 million metric tons of greenhouse gases from the supply chain by 2015.  This amount, roughly equivalent to the company’s total corporate emissions last year, is “the equivalent of taking more than 3.8 million cars off the road for a year.”  Efforts to reach this goal involved extensive collaboration with the Environmental Defense Fund, ClearCarbon Inc., the Carbon Disclosure Project, PricewaterhouseCoopers, and the University of Arkansas’ Applied Sustainability Center.

Mike Duke, President and CEO of Wal-Mart, noted that the carbon reduction goal represents one and a half times the carbon growth of the company over the next 5 years.  He said this effort would help customers because “there are millions more people around the world who want to save money so they can live better.”  Duke adds:

Reducing carbon in the lifecycle of out products will often mean reducing energy use. That will mean greater efficiency and, with the rising cost of energy, lower costs, making our business stronger and more competitive. And, as we help our suppliers reduce their energy use, costs and carbon footprint, we’ll be helping our customers do that same thing.

Senior Vice President of Sustainability for Wal-Mart, Matt Kistler, explained how the efficiency measures will play out in several key target areas:

Over the next five years we’re going to be focusing on certain categories, certain businesses where the biggest opportunity exists, where it’s the most efficient and most cost-effective to remove that greenhouse gas from that supply chain. Whether it be in apparel, whether it be in food, whether it be in home line products, we’re looking at the category of products where there’s great opportunity, but where its at a low cost to remove.

Wal-Mart’s latest environmentally-friendly initiative builds on several years of its investment in energy efficiency and renewable energy.  Wal-Mart introduced three goals in 2005: to be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain people and the environment.  Their work accelerated in 2006 when Wal-Mart made a big push to go organic and embrace other environmentally friendly policies.

Their sustainability goals include designing and opening, a “viable store prototype that is 25-30 percent more energy efficient and will produce up to 30 percent fewer GHGS emissions,” as well as “reduc[ing] greenhouse gases at… existing store, club and distribution center bases around the world by 20 percent by 2012.”

Another focus is increased truck fleet fuel efficiency.  In 2008, Wal-Mart achieved a fleet efficiency improvement of 38%, beating the 25% target.  In addition to this, by reducing “empty miles” driven and maximizing space in trailers, trucks logged 87 million fewer miles, saving 15 million gallons of diesel fuel.  Increasing fuel efficiency allowed the company to avoid emitting 200,000 metric tons of CO2, drive 7 percent fewer miles, and save nearly $200 million in 2009.

Wal-Mart is well on its way to its goal of achieving 100 percent renewable energy production.  The company currently boasts 29 solar installations, which generate up to 32 million kilowatt hours of energy per year and prevent 22,500 metric tons of carbon dioxide pollution annually.

Its current wind capacity provides up to 226 million kilowatt hours of energy per year, enough to provide 15 percent of the electricity for 350 stores and facilities in Texas and avoid the production of 139,000 metric tons of carbon pollution per year.  Wal-Mart hopes to expand its wind electricity by testing 17 small wind turbines mounted on light poles in the parking lot of a Sam’s Club in Palmdale, California.

Labor, human rights, and environmental organizations have raised legitimate concerns about Wal-Mart business practices over the years.  At the same time, the world’s largest publicly traded company is implementing a very aggressive clean energy plan.  More remains to be done, of course, but Wal-Mart’s transformation demonstrates that a clean energy future is technically and economically achievable.

Wal-Mart is a supporter of the Center for American Progress.

– Sarah Collins is a graduate of the University of Michigan Gerald R. Ford School of Public Policy

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The HOME STAR program is a new initiative to create jobs in the construction industry and make it easy for every American homeowner to quickly and immediately cut their rising monthly energy bills by improving the energy efficiency of their homes. HOME STAR will empower homeowners to seize control of skyrocketing energy costs, create good living-wage jobs, and drive economic recovery in the United States.

CAP’s Bracken Hendricks and Tom Kenworthy explain HOME STAR in this repost.

As the nation struggles to recover from one of the worst economic recessions in decades, unemployment has recently shown some marginal improvement, falling below 10 percent in January. But for workers in the construction and construction-related manufacturing sectors, there is little relief as jobless rates remain at near-Depression levels.

Total construction payroll employment has fallen by 2.1 million since 2006, with residential construction jobs down 38 percent and the jobless rate among experienced construction workers stuck at nearly 25 percent. Overall manufacturing employment has dropped 16 percent since the recession began in December 2007, but for manufacturing tied to construction the numbers are far worse: 30 percent in wood products, 22 percent in items such as window glass and fiberglass insulation, and 19 percent in fabricated metals and heating, ventilating, and air conditioning equipment. With credit still tight and the housing industry still in the doldrums, waiting for market forces to spur a recovery in construction could condemn hundreds of thousands of American families to years of continued economic struggle.

Fortunately, help is on the horizon. This week a bill establishing a HOME STAR program of consumer rebates for home energy efficiency retrofits will be introduced in the Senate thanks to the leadership of Sens. Mark Warner (D-VA) and Jeff Bingaman (D-NM), among others. Concerned members of Congress, with the Obama administration’s support, have crafted an incentive program to make millions of U.S. homes more energy efficient, swiftly create 168,000 jobs in construction and manufacturing among other industries, save homeowners nearly $10 billion over a decade through lower energy costs, and make a dent in global warming pollution.

The proposal for a $6 billion HOME STAR program enjoys broad and bipartisan support. It is backed by the President’s Economic Recovery Advisory Board and is part of a jobs agenda endorsed by some Senate Democratic leaders. A large and broad coalition including major corporations, organized labor, and energy nonprofits supports the initiative as well. In President Barack Obama’s State of the Union address he said that rebates for Americans who retrofit their homes should be part of a clean-energy agenda. “We should put more Americans to work building clean-energy facilities, and give rebates to Americans who make their homes more energy efficient, which supports clean-energy jobs,” he said. The Senate will soon consider jobs legislation and HOME STAR should be a key component.

HOME STAR, sometimes called “cash for caulkers,” is a proposal that makes sense. It makes economic sense because it can provide a quick employment stimulus putting 168,000 people to work—the overwhelming majority of them in jobs that can’t be outsourced overseas. It makes sense for homeowners who will be able to afford home improvements that will pay real dollar dividends for many years by reducing their energy bills 20 percent or more forever. It makes sense for businesses who will see demand for their products increase. And it makes sense for a more secure energy future since increasing the number of homes with energy efficient retrofits from 200,000 a year to 3 million a year will cut global warming pollution by the equivalent of taking 615,000 cars off the road or decommissioning four 300-megawatt power plants.

As important as these energy benefits are, however, HOME STAR is clearly a job creator and the right medicine for the economy.

The program will be simple, streamlined, speedy, and effective. It will use the market to build demand for the construction industry by offering homeowners rebates for installing appliances, mechanical systems, and products that cut energy use—everything from simple duct sealing to whole-house retrofits. Administration of the program will involve a minimum of new government bureaucracy and will rely to a great extent on existing state programs. Quality assurance of work performed will be a priority to make sure that the savings promised to homeowners are realized. It will take advantage of skilled labor that is now sitting on the sidelines and eager for work. And it won’t strain manufacturing facilities, many of which are now operating at near half of their capacity because of the economic downturn.

Consumer incentives

The program gives homeowners a choice of incentives: the SILVER STAR and GOLD STAR paths.

The SILVER STAR incentive provides rebates for purchasing and properly installing specific energy-saving equipment such as furnaces and water heaters, or changes to a building’s envelope such as insulation and duct sealing. Rebate amounts are up to $1,500 per qualified installed measure, capped at 50 percent of project costs or $3,000—whichever is less.

The GOLD STAR incentive goes a step further and rewards whole-home or office building retrofits. This performance‐based incentive is based on predicted energy savings determined by a thorough energy audit performed before the work begins. The auditor tests the home’s energy performance using proven building science methods, designs a customized retrofit plan in consultation with the homeowner, and calculates the energy savings that will result from the recommended measures. Homeowners can receive $3,000 for modeled savings of 20 percent, plus $1,500 for each additional 5 percent of modeled energy savings, with total incentives of up to $8,000, not to exceed 50 percent of total project costs. This will encourage homeowners to invest in the most cost-effective technologies, which are often the simplest and most labor-intensive investments.

Economic benefits

HOME STAR will create 168,000 jobs according to independent analysis by Climate Works using respected economic models from REMI and McKinsey & Co. Those jobs will be heavily concentrated in the hard-hit construction and manufacturing sectors of the U.S. economy and will benefit every state and both urban and rural communities.

The program will help create long-term construction industry careers by increasing demand for home energy retrofits roughly 15 times, rising from current rates of 200,000 homes a year to close to 3 million retrofits annually. It will also provide much-needed help to the retail sector where overall jobs have fallen 7.5 percent since December 2007 but 10.4 percent for building materials and garden supply stores. Jobs in the wholesale sector have declined 22.5 percent for construction supplies compared to 8.1 percent overall.

The HOME STAR program dedicates $200 million to increase consumer access to financing, which further boosts job creation by leveraging additional private capital investments, and helps homeowners overcome upfront cost barriers to paying for these energy-saving home improvements.

What’s more, HOME STAR investments are cost effective, creating an additional economic benefit by saving homeowners as much as $9.4 billion over 10 years. HOME STAR will also affordably reduce carbon dioxide emissions by 4 million tons per year, or 40 million tons by 2020. That helps the economy by reducing our vulnerability to energy price shocks and getting a head start on driving down the production of greenhouse gases—changes we know we need to make anyway.

Good jobs here at home

One of the most exciting things about a recovery plan built on home energy retrofits is what it does for American jobs. HOME STAR supports domestic job creation by investing in skilled construction, which results in good American jobs that can’t be outsourced. But it can have tremendous benefits for other hard-hit sectors of the U.S. economy, too, especially manufacturing industries.

The majority of manufactured goods used in HOME STAR retrofits are already made in the United States, averaging well over 90 percent domestic production in most major goods, with all categories included in the Senate HOME STAR bill reporting above the national average for domestic production. A focus on home energy retrofits will therefore by its very nature disproportionately support American industries and target its benefits to help American workers.

Table 1 (right) shows data from the International Trade Commission and NAICS on the share of domestic production for products used in energy efficiency retrofits. For many of these products the share is over 90 percent.

Plenty of capacity

American construction and manufacturing companies can rapidly absorb large amounts of new demand because current manufacturing capacity has fallen so low. Capacity utilization—the level at which a factory is operating compared to its potential—for all U.S. manufacturing plants is already low across the board, with the average U.S. plant only working at 66.6 percent. Put differently, fully one-third of all U.S. manufacturing capacity is sitting idle today. But in construction-based industries the situation is even worse, with many building materials manufacturers operating at less than 50 percent of their capacity.

As a result, these firms will rapidly absorb any new demand for their products by putting people back on the job. This means that investments in construction, building materials, and manufactured systems are all well-targeted strategies for rapidly creating domestic jobs in impacted industries.

HOME STAR focuses on an area of tremendous unmet need with over 1.7 million members of the construction trades and supporting industries unemployed since 2007. The current proposal for HOME STAR is an important step toward putting America back to work, and it invests in building a sustained market for energy-related home construction jobs that will keep producing economic benefits well into the future.

Quality work

The installation of energy efficient measures would be backed by a quality assurance program that would guarantee sound work and offer an additional incentive to contractors that invest in a trained and certified workforce. HOME STAR requires appropriate licensing and certification for all participating contractors, and a percentage of all jobs will be inspected by a third party within 30 days of completion to verify proper installation. This safeguards against fraud and improves consumer confidence that a HOME STAR seal is backed by quality work.

The quality assurance program can involve labor unions and other training providers to ensure a well-trained and certified workforce as the foundation of quality work. It will involve the financial industry in making sure high-quality work backs up the consumer financing they offer to further reduce upfront payments for homeowners. And it will create a standards-based industry so when people buy an energy-efficient home retrofit in the future they can be confident they’ll be saving money, saving energy, and cutting pollution for years to come.

Everyone benefits

In addition to all of the real jobs benefits mentioned here, energy efficiency retrofits are a proven and cost-effective way to reduce the household energy use that accounts for one-fifth of U.S. carbon emissions—roughly twice the global warming pollution produced by passenger cars. Basic efficiency improvements can cut energy waste and carbon emissions by 20 percent to 40 percent, while actually saving money instead of costing the economy.

HOME STAR would be effective if all it did was save energy and cut global warming pollution. But the economic case for HOME STAR is just as compelling because it will quickly create tens of thousands of jobs and breathe new life into struggling manufacturing and retail sectors.

“Retrofitting America’s 128 million homes will be the work of private companies, but market forces alone will not move fast enough to avert the crisis at hand,” wrote Matt Golden, founder of a San Francisco home energy retrofitting company, in a recent commentary in Forbes. “The legions of unemployed contractors and factory workers desperately need jobs now to pay their mortgages and feed their families. While the private sector is ready to step up and invest in long-term growth, near-term incentives will generate immediate demand and allow private businesses to start hiring again, right away.”

Below is a repost of HOME STAR 101.

The HOME STAR program is a new initiative to create jobs in the construction industry and make it easy for every American homeowner to quickly and immediately cut their rising monthly energy bills by improving the energy efficiency of their homes. HOME STAR will empower homeowners to seize control of skyrocketing energy costs, create good living-wage jobs, and drive economic recovery in the United States.

The program is designed to jumpstart construction and manufacturing jobs by offering rebates to consumers who invest in home energy improvements and energy efficient products and services. HOME STAR will simplify and lower the cost of home improvements such as fixing drafty windows and leaking ducts, installing insulation and high-efficiency heating and air conditioning equipment, replacing inefficient hot water heaters, or undertaking a whole-home energy efficiency retrofit to cut energy bills by 20 percent or more. HOME STAR delivers a triple dividend to the American economy in the process:

• American workers in industries hit hard by the economic downturn benefit from new demand for their essential skills and experience.
• U.S. businesses benefit from increased demand for advanced manufactured products and building materials.
• Consumers benefit from reduced energy bills and more comfortable homes.

Why we need a HOME STAR program

There is an urgent need in every region of the country to generate high-paying, long-term construction and manufacturing jobs to grow our economy. The recession continues nationwide with unemployment holding steady at just under 10 percent, but fully one in four construction workers remains unemployed. The Bureau of Labor Statistics estimates that construction employment has dropped by 2.1 million jobs since 2006, with residential construction alone down by 1.3 million. That’s a 38 percent job loss for that workforce. Every unemployed and underemployed worker in the construction and manufacturing industries represents a squandered resource that our economy and our nation can ill afford.

The HOME STAR program will work through existing businesses to leverage investment in energy efficiency and create strong market demand for home energy retrofits that will put approximately 168,000 Americans back to work over the next two years and stimulate demand for building materials almost entirely produced and sold in the United States by U.S. workers. These are construction, manufacturing, and retail jobs in the heart of our communities that cannot be outsourced overseas.

HOME STAR has other benefits, as well. It will help over 3 million American families retrofit their homes for energy efficiency and save them as much as $9.5 billion over 10 years. Better use of energy in our homes raises the resale value of property in a recovering real estate market, and offers an opportunity to confront climate change as it continues to threaten our environment and our national security. Household energy use accounts for more than one‐fifth of U.S. carbon emissions—roughly twice the emissions produced by passenger cars. HOME STAR will remove the equivalent of 615,000 cars from the road, or four 300-megawatt power plants from operation.

Basic efficiency improvements can reduce energy waste and greenhouse gas emissions in most American homes by 20 percent to 40 percent. Smart investments in energy efficiency made today will pay for themselves through long‐term energy bill savings.

How it works

HOME STAR would establish a $6 billion rebate program to encourage immediate investment in cost-effective energy efficient products and services as well as whole-home energy efficiency retrofits. The program is now before Congress and is designed to minimize government involvement by taking advantage of existing institutions and markets. The program will be facilitated and coordinated through existing state programs, using federal standards and incentives as a common platform to keep program costs as low as possible.

HOME STAR gives homeowners a choice of two types of incentives: the SILVER STAR and GOLD STAR incentive paths.

The SILVER STAR incentive provides rebates for the purchase and proper installation of specific energy-saving equipment such as furnaces and water heaters or changes to a building’s structural envelope such as insulation and duct sealing. Rebate amounts range from up to $1,500 per qualified installed measure, capped at 50 percent of project costs, or $3,000—whichever is less.

The GOLD STAR incentive goes a step further and rewards whole-home or office building retrofits. This performance‐based incentive is based on predicted energy savings as determined by a thorough energy audit performed before the work begins. The auditor uses proven building science methods to test the home’s energy performance, design a customized retrofit plan in consultation with the homeowner, and calculate the energy savings that will result from the recommended measures. Homeowners can receive $3,000 for modeled savings of 20 percent, plus $1,500 for each additional 5 percent of modeled energy savings, with incentives up to $8,000, not to exceed 50 percent of total project costs. This will encourage homeowners to invest in the most cost-effective technologies—innovations that are often the simplest and most labor-intensive investments.

HOME STAR will ensure verifiable work and energy savings. The installation of energy efficient measures in homes and commercial properties is backed by a quality assurance program that will guarantee good work and offer an additional incentive to contractors that invest in a trained and certified workforce. HOME STAR requires appropriate licensing and certification for all participating contractors, and a percentage of all jobs will be inspected by a third party within 30 days of completion to verify proper installation. These safeguards will eliminate fraud and raise consumer confidence that a HOME STAR seal is backed by high-quality work.

The quality assurance program will deliver lasting benefits. It will encourage a well-trained workforce by engaging labor unions and other training providers. It will ensure that retrofit financing is backed by the highest home improvement standards. And in the long term HOME STAR will create a standards-based industry that will ensure quality throughout the supply chain so that when people invest in a home energy retrofit, they will know that they are saving money, using less energy, and reducing global warming pollution.

How it would help

HOME STAR will create jobs, cut energy costs, and reduce greenhouse gas emissions today. The program will be simple to join and implement, and will help Americans pay for cost-effective home improvements that will deliver permanent reductions in household energy bills and higher home values.

HOME STAR puts Americans back to work now. Demand will rise for skilled construction labor and for advanced building materials as homeowners make new energy efficient investments in their homes. Manufacturing inventories will be restocked and assembly lines for advanced materials and U.S. technology will begin rolling again. Investment and capital will begin to flow to millions of idled construction and manufacturing workers and create new demand to retrofit homes for energy performance and for the future.

HOME STAR is a timely program that creates good, well-paying jobs immediately in the hardest-hit parts of our economy. The program lowers home energy bills and pays for itself in cost savings. It unites every region in the nation around the common goals of job creation, economic recovery, and a healthier planet. Now is the time for HOME STAR.

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