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What is Increased House Efficiency Worth?

By Bruce Barbour - May 2021

I am not qualified as a financial advisor. Nothing on this page should be construed as financial advice. Please seek your own independent advice prior to investing/spending money.

A question that often comes up on forums associated with house energy efficiency is "is it worth spending (say) an extra $10k to get thermally broken window frames - upgrading from unthermally broken frames?" Or "is it worth increasing the energy efficiency of the new house I am building? I am on a tight budget - will the proposed efficiency improvement pay for itself?"

There has also been recent proposals to increase the minimum new house energy efficiency "Stars" from 6 to 7. Will the efficiency increase pay for itself? Or would a better return, financially and/or for the environment, be achieved by spending the money on some other improvements.

These questions are not straight forward to answer. However I will have a go.

Star Rating and Energy Use

The NatHERS Star ratings of all new houses in Australia is based on annual heating and cooling energy usage tables calculated for 69 regions (climate zones) in Australia. Consequently a six star rated building in Brisbane will use a different amount of energy for heating and cooling than a 6 star rated house in Melbourne. As I live near Melbourne I will use the figures for the Melbourne climate zone. If you live in a different climate zone you may want to adjust some of the figures.

The star ratings and energy usage for each climate zone can be found in this "Starbands" chart: -
https://www.nathers.gov.au/sites/default/files/2019-10/NatHERS%20Star%20bands.pdf

This chart gives the annual heating and cooling energy in megajoules (MJ) required per square metre of house floor area. Melbourne is listed as Climate Zone 21 and a 6 Star rated house should use 114 MJ per square metre for heating and cooling in a year. According to this rating system a 100 sqm house would use 11,400 MJ and a 200 sqm house would use twice that (22,800 MJ). A 7 Star house would use 83 MJ/sqm.

These figures are of course based on various assumptions about the way the occupant will heat and cool the house. If they don't conform to the assumed way of use the heating and cooling energy will be greater - or lesser - than the tabulated figures. For example an occupant might insist on heating the house to 25 degrees all winter, day and night, and be careless with leaving doors and windows open. Their energy usage would be higher than the tabulated figures. However the figures provided provide a common basis on which we can compare different Starband energy usages and costs.

With this basic information provide in the table it is straight forward to work out the amounts of energy likely to be used by a house constructed to different Star ratings and compare the costs. I have done this for a 200 sqm house in Melbourne in the table (created in MS Excel) below.

Energy Usage Comparison

I have provided the spread sheet here so the figures can be adjusted using the energy  per sqm usage figures in the Starbands pdf chart for different cities/areas/climate zones.

I have used an electrical energy cost of 30c per kWh. That will vary for different retailers and different regions. It is likely that this cost will go up over time. If the house has a rooftop photovoltaic system the cost of energy used for heating and cooling during the day will be less. I have not considered the use of "natural" gas as I believe all new houses the near future will be all electric and the existing stock will over time be knocked down and rebuilt or converted to all electric over the next twenty years. In general all electric houses have lower heating and cooling costs.

The comparison relies on the house being heated and cooled using a split system reverse cycle air conditioner with a coefficient of performance (and energy efficiency rating) of 4. This means that for every kWh of electrical energy put into the air conditioner 4 kWh hours of heat is produced (or heat removed for the cooling cycle). This coefficient of performance should be easily achievable with modern reverse cycle air conditioners using inverter technology delivered via split system air conditioner(s). (If the coefficient of performance is less then the savings would be higher. If gas is used for heating a higher cost could be anticipated.)

This calculation shows that in Melbourne increasing the Star rating from six stars to seven stars on a 200 sqm house would save $129 per year in heating and cooling costs.

If a common rule of thumb rate of return of capital in ten years was adopted that would indicate that a person should be prepared to spend an additional $1290 to improve the house's energy efficiency by one Star, 6 to 7 (for a 200 sqm house). However I would question whether that was a reasonable basis on which to decide how much more to spend. At the end of the ten years the value of the energy efficiency improvements will not have diminished (see below) - and the returns should continue long into the future - so to use a ten year return period you are wanting a 10% rate of return on your investment - tax free! There are very few other investment that would return that rate of return and probably none that would provide this risk and tax free, as this investment would. (One exception may be rooftop photo voltaic panels (PV) - see box.)
Is Installing a PV System Better Value?
As a comparison $3875 invested in a roof top PV system would probably buy a 3 kW (or more) system. In Melbourne that would generate at least 4000 kWh of electricity per annum. This is 10 times the amount of electric energy saved by the one Star energy efficiency increase in the example provided on this page. Even if all generated electricity is all sold back to the grid (no use within the house itself) it would currently generate $400 per year for the owner (at a 10c/kWh feed in rate), a rate of return of over 10%, well above the stated return for the house energy improvement.

However a couple of things to remember: If the energy efficiency improvements are not done at the time of construction then they may be much more expensive to implement at a later time. A rooftop PV system can usually be installed with relative ease long after the construction of the house is finished. Ideally the owner should be looking to carry out both improvements, so if funds are limited it may be better to do the house efficiency improvements - to the level decided - during construction and plan to install the rooftop PV system at a later time when more funds are available.

Perhaps a more realistic rate of return might be say a 3.3% return, tax and risk free. This returns the capital cost over 30 years, a lot less than the typical life of a new house (60+ years). And remember the capital is not lost. In the short term it should be returned - plus more (see below) - when the house is sold. (Though after 30 years it may have depreciated by say 50%, along with the rest of the house.) That would indicate a investment of $3875 was worthwhile to increase the house efficiency from 6 stars to 7 stars (200 sqm house).

Also consider that with today's (2021) low interest rates an additional home loan amount of $4000 would probably be available at an interest rate of less than 3.3% (and in fact home loan interest rates as low as 2% are available at present in Australia). In that way the additional energy efficiency upgrades would pay for themselves from the savings in electrical energy that would have otherwise been purchased for heating and cooling. Though always keep in mind that interest rates will one day increase from their current lows.

There are other factors to consider as well.

One important factor is that usually a more energy efficient house is a more comfortable house to live in. What this is worth to a person is subjective.

Price Premium?

When considering whether or not to include upgrades it should be kept in mind that some upgrades can increase the value of the house, what a potential purchaser may be willing to pay in the future to buy the house. If chosen correctly the money spent on some upgrades does not disappear but is added to the value of the house, and in some cases can add multiples of their cost to the value of the house.

The page link below reports on a study done by the University of Melbourne on prices of houses sold in Canberra between 2011 and 2016, though the link they provided to the original study did not work. The article also reports on various other studies from overseas that support the findings of the Canberra report.

https://discover.agl.com.au/your-home/increase-property-value-with-energy-rating/

They report that the Canberra study said: "The results suggest higher prices for higher star ratings. Five and six-star homes were worth 2% and 2.4% more than one-star homes, and homes with seven stars were worth an extra 9.4%."

The report suggests that buyers may be willing to pay an extra 7% for a 7 Star house over a 5 to 6 Star house in Canberra. Canberra being a colder climate the energy savings for each increased Star would be higher than in Melbourne. Canberra also has mandatory energy efficiency rating disclosure prior to sale. That is not the case in Melbourne where it is difficult to judge the energy efficiency of a house from simply looking at it and a seller of a 1 or 2 Star house is not going to disclose that fact unless forced to (as in Canberra). I am also mainly considering a one Star upgrade from 6 Stars to 7 Stars.

Another issue is that 6 to 7 Star rated houses will most likely be newer than 1 to 4 Star rated houses. Just the fact that they are newer houses may increase their value regardless of the energy Star rating of the house. This should have been factored into the study. Unfortunately I have not been able to view the original study to confirm this.

Due to these factors while the results may not be directly transferable to Melbourne or other places in Australia the study does suggest that additional value can be gained by undertaking energy efficiency upgrades. Another review also suggest a price premium for increased house energy efficiency, this time of the order of 5% (and possibly up to 10%).
Environmental Impact
In this page thus far I have concentrated on the cost impact. But as this site is primarily about what is best for the environment then I should look at this aspect.

After factoring in the use of very efficient split reverse cycle air conditioners (COP = 4) the additional energy use for a 200 sqm 6 Star house compared to a 7 Star house in Melbourne is 430 kWh per annum.

At present Victoria's grid electricity is the dirtiest in the country because of its use of brown coal to fire the majority of the generators. 430kWh of electricity equates to approximately 430 kg CO2 released into the atmosphere if all the electricity comes from the grid.

However in the future the electricity supply must be cleaned up if Australia is to participate in the global efforts to tackle climate change. Hopefully by 2040 grid electricity will be close to 100% renewable energy. Once the supply grid becomes 100% renewable then the amount of electricity used by the house for heating and cooling has a much smaller environmental impact. In this situation the energy saving from an energy efficient house is mainly about lowering the running costs, the financial return and possibly comfort.

There is evidence to suggest that there is a price premium for greater house energy efficiency - if the market is transparent. The quantum of that premium is more difficult to determine. Ultimately it is up to the home buyer to determine what having an energy efficient house is worth to them. If the main concern for the home owner is to save money on heating and cooling cost they might be prepared to spend a bit. If they also took into account that they may get a price premium for the house they might be prepared to spend extra. Either way I would suggest that any additional spending remain on the conservative side. If the price premium is taken into account spending an additional couple percentage points on energy efficiency upgrades to increase the Star rating from the mandatory minimum 6 Stars to 7 Stars may be justified on the basis of increased value of the home as well as the saving on running costs and possibly an increase the comfort of the house. If the new house owner just wants to get a very energy efficient house, and cost and financial return is not the main concern, then perhaps they would be willing to spend more.

Also note that there are some modifications that increase energy efficiency and save on construction costs or are cost neutral. An example of this is decreasing the size of windows on the South, West and Eastern facing sides of the house. Also changing the layout of the rooms so that living rooms are to the North (provided there is some capacity for solar gains through the Northern windows) is probably cost neutral. There are other modifications that are moderately priced. An example of this would be increasing the thickness of insulation in various areas. These very cost effective changes should be sought out and implemented prior to consideration of other more costly modifications. Resist the urging of ill informed designers who may say "You have decreased the size of the windows. Now we can make further cost savings by not putting in as much roof insulation and still meet the mandatory Star rating."

Zero Energy House

My house is rated at 7.3 Stars. While it is efficient it still requires some energy input for heating and cooling (though my need for cooling has so far been very minimal). I also have a 4.3 kWh photovoltaic system on the roof. This system generates about 2.5 times the amount of energy that I use in the house for all purposes - heating, hot water, lighting, cooking, etc. I consider the house to be zero energy even though I am connected to the grid and at night and on days of low sunlight I draw electricity from the grid. My annual electricity bill  - total household energy bill as I don't have gas connected - has so far been about $110 per annum, due to the quarterly connection charges.

Should The Mandatory Minimum Be Increased to 7 Stars?

The house energy rating system has a number of significant flaws. One of those deficiencies is that the rating only assesses the energy efficiency of the building fabric or building shell. It does not include consideration of the efficiency or otherwise of the various appliances used in the house - including heating and cooling, hot water system, lighting and cooking. A house that has been rated as 6 Stars can be using an inefficient gas ducted heating system and ducted evaporative cooling and an electrical resistance hot water system and the flimsiest window curtains without affecting its rating. It could rate the same as a house that is all electric and is using the most efficient heat pump technology for both hot water and air heating and cooling and really good quality window coverings. The second house would be using a lot less energy than the first house - and yet they are rated the same.

I guess that the reasoning behind not including appliances in the rating is that the appliances associated with the house can change over time - e.g. water heaters have a limited life and need to be changed over - and the efficiency of the new system would not necessarily be the same as what it replaced - higher or lower, a new owner could come in an take down the good quality curtains and put up prettier but less thermally effective curtains or the house is not sold with the curtains.

With this issue in mind, it would still be useful for the rating system to take account of the efficiency of the household appliances. I would suggest that as well as the current Star rating of the building fabric there could be a second rating provided that assesses the energy efficiency of the appliances included with the house. There might be the current building fabric assessment, tweaked as necessary to improve it as much as it can be, and then an appliances assessment. The two Star ratings would be reported separately but also added together to give a Star rating out of 20 or some other total score that may reflect the actual total estimated energy use of the house, not just the energy use for heating and cooling. (There is currently a "Victorian Scorecard" assessment which includes consideration of a wider range of items affecting the energy usage of the house. There is also talk that the current NatHERS Star rating and Victorian Scorecard might be combined in the future.)

Inclusion of appliances into the assessment would potentially be more effective than simply increasing the mandatory NatHERS Star building fabric rating from 6 to 7. But once that is done should the mandatory Star rating of the building fabric be increased? My answer is - it depends. It depends on what the estimated cost of increasing the house rating by that one Star is. If it is believed that a one Star (building fabric) energy efficiency increase can be achieved for a relatively small cost (see earlier discussion on financial return) then yes. If the cost of increasing the Star rating is higher, it may be counterproductive to impose a requirement that could increase house construction costs by tens of thousands of dollars. Often new home buyers are working on a tight budget. If the cost of the house goes up it may mean that they skimp on the quality of the appliances, buying cheaper less efficient ones or not installing good windows coverings or not installing a PV system. Spending on better appliances or a rooftop PV system could lower the total energy used in the house more than simply increasing the Star rating of the building fabric. Spending on the appliances could increase the house's appliances Star rating (if such a rating was implemented), perhaps by more than the one Star increase in the building fabric rating. When a combined building fabric and appliances rating scheme is introduced it would be better to set a mandatory minimum on the combined rating (while maintaining a mandatory 6 Star rating on the fabric) and then people can decide whether the combined Star rating is best achieved by installing better appliances or by upgrading the building fabric or a combination of both.

There are also a number of improvements that should be made to the building fabric Star rating system. One of those is that the Star rating reflect the potential lower energy use of smaller homes. Smaller homes will use less energy than a similar rated larger home, all else being equal. Also more benefit for implementing zoning in the house.

Mandating of all electric houses (in grid connected houses) and getting rid of natural gas should also be implemented in the near future.

Mandatory House Energy Rating Disclosure

I am also advocating for mandatory disclosure of a house's energy rating prior to the sale of the house, as is done in Canberra. (This would include the building fabric rating and the appliances rating, if that was introduced.) That will provide better transparency for buyers so the market can determine the additional monetary value of increased house energy efficiency. Also rating of houses that are being rented out should also be considered with a mandatory minimum being introduced in a number of years. 

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