Obama's "Cash for Caulkers" Yet Another Clunk Idea

Tuesday, December 15, 2009

Obama's "Cash for Caulkers" Yet Another Clunk Idea

Under President Obama's proposal, homeowners would be reimbursed for energy-efficient appliances and insulation. CNNMoney notes Cash for Caulkers Could Seal $12,000 A Home. http://money.cnn.com/2009/12/08/news/ec ... nt_energy/
President Obama proposed a new program Tuesday that would reimburse homeowners for energy-efficient appliances and insulation, part of a broader plan to stimulate the economy.

The administration didn't provide immediate details, but said it would work with Congress on crafting legislation. Steve Nadel, director at the American Council for an Energy-Efficient Economy, who's advising on the bill, said a homeowner could receive up to $12,000 in rebates.

The plan will likely create a new program where private contractors conduct home energy audits, buy the necessary gear and install it, according to a staffer on the Senate Energy Committee and Nadel at the American Council for an Energy-Efficient Economy.

Based on earlier bills, consumers might be eligible for a 50% rebate on both the price of the equipment and the installation, up to $12,000, said Nadel. So far, there is no income restriction on who is eligible. That would mean a household could spend as much as $24,000 on upgrades and get half back.

Homes that take full advantage of the program could see their energy bills drop as much as 20%, he said. The program is expected to cost in the $10 billion range.

It's not clear how the home efficiency plan would be administered - the government may issue rebates to consumers directly, homeowners might get a tax credit, or the program could be run via state agencies.

If consumers have to spend a lot of money up front to get the credit, it could throw a wrench in the works, David Kreutzer, an energy analyst at the Heritage Foundation, told CNN.

Fraud issues could also come up, Kreutzer said.

Nadel noted that as a way to guard against fraud, contractors would have to be certified to participate.

Fraud 100% Guaranteed

Kreutzer: "Any program that is going to run through a third party and is going to distribute billions of dollars needs to have lots of checks and balances to make sure there's not abuse."

How much will it cost to implement those checks and balances? Will they even work? Who gets paid to do the certification?

Does The Plan Make Any Economic Sense?

The first question to ask is "Does the plan make any economic sense?"

"EB" who sent me the link says:

Here is a present value calculation on spending $12k out of pocket to improve efficiency.

Average home KW/hr usage: 10,656 KW/hr
Average KW/hr cost: $0.113 KW/hr
Average yearly cost: $1,204
Estimated 20% savings: $240
Residential Energy Inflation: 3.3%
Full Program cost to household: $12,000
Discount rate: 7%

At the end of 20 years you have a Present Value of ($8614). Homeowners would have to save ~$850/yr from year one on their energy bills for this to make sense!

"EB"
Mr. Electricity On Energy

Mr. Electricity has an interesting article on How much electricity costs, and how they charge you. http://michaelbluejay.com/electricity/cost.html

The cost of electricity depends on where you live, how much you use, and possibly when you use it. There are also fixed charges that you pay every month no matter how much electricity you use. For example, I pay $6/mo. for the privilege of being a customer of the electric company, no matter how much energy I use.

The electric company measures how much electricity you use in kilowatt-hours, abbreviated kWh. Your bill might have multiple charges per kWh (e.g., one for the "base rate", another for "fuel") and you have to add them all up to get the total cost per kWh. ....

The average cost of residential electricity was 12¢/kWh (DOE) in the U.S. in April 2009.

http://4.bp.blogspot.com/_nSTO-vZpSg...Bper%2Bkwh.png

The cost of electricity varies by region. In 2009 the price ranged from 7¢ in Idaho to 22¢ in Hawaii. The map shows average rates in 2003.
Mr. Electricity gave this link for current rates: Average Retail Price of Electricity by State. Note that is for the month of August, not an average rate. Thus EB's estimate of 11.3 ¢ seems reasonable. http://www.eia.doe.gov/cneaf/electricit ... 5_6_a.html

What About Natural Gas or Heating Oil?

The flaw in EB's methodology is that it figures out the savings in electricity but that is likely to be valid only for houses with electric heat and/or for homes in the South that seldom use or need natural gas or heating oil.

In the Northern States one would need to figure out the savings on air conditioning during the Summer and add that to the savings in the Winter on heating.

How To Save Money On Heating Costs

Mr. Electricity has some tips on ceiling fans, rugs, and other ideas to save money on heating costs.

Bear in mind, he seems biased against natural gas and heating oil stating "Electricity is more expensive, but safer and healthier. (You're less likely to accidentally burn your house down, and you'll never be breathing the toxic byproducts of combustion.)"

Does Cash For Caulkers Make Any Economic Sense?

What makes sense is to caulk things yourself, fix any simple things you can, and try some of Mr. Electricity's simple solutions. Otherwise, one would have to do the math themselves, on a case by case basis, taking into consideration both electrical and gas savings to know if there was a benefit for major appliance upgrades.

Personally I highly doubt it, and for homeowners and businesses in the South, I am certain of it, unless of course there was work like replacing air conditioners that needed to be done anyway.

Shifting Demand Forward

If the bill passes, and you have major appliances that are going to need to be replaced in a few years, you may as well take advantage of half off.

Right now I do have 9-year old air conditioning units, and if Obama obliges I will likely replace them for half-off.

All this will do is shift demand forward. Without government handing out free money I would wait until they break rather than speculating on when they might.

On economic grounds the plan seems ridiculous, shifting demand forward, benefiting those lucky enough to need the work anyway, while openly inviting fraud from those who don't. Thus, I would advise Obama not to waste taxpayer money.

Yet, if the plan passes and I can get something I need for half-off I will do it and I recommend you do too (provided you needed the work done in the first place).

By the way, note the incentive that consumers and businesses have to not do anything until government hands out more free money to act.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

http://globaleconomicanalysis.blogspot. ... other.html