An Exclusive Interview with Secretary Chu

We at State & Local Energy Report are working to sponsor dialogue between different levels of government on issues of energy efficiency, technology, and economics, in order to foster communication and support progress in this important field. State & Local Energy Report was pleased to host a discussion this past month between US Energy Secretary Steven Chu and Malcolm Woolf, Director of the Maryland Energy Administration, on the ramp up of weatherization, stimulus funding, energy efficiency financing, and more.

Dr. Steven Chu is an American physicist and currently the 12th United States Secretary of Energy. As Secretary of Energy, he is helping to implement President Obama’s ambitious agenda to invest in clean and renewable energy, end our addiction to foreign oil, address the global climate crisis and create millions of new jobs. Dr. Chu has devoted his recent scientific career to the search for new solutions to our energy challenges and mitigating global climate change – a mission he continues with even greater urgency in his current position as secretary. Prior to his appointment, Dr. Chu was director of DOE’s Lawrence Berkeley National Lab, and professor of Physics and Molecular and Cell Biology at the University of California. Dr. Chu received a Nobel Prize in Physics in 1997, for his research in atomic physics and the development of methods to cool and trap atoms with laser.

Malcolm Woolf, currently serving as the Director of the Maryland Energy Administration, is an energy expert with experience at the national level and in the private sector. He was most recently the Director of the National Governors Association’s Natural Resources Committee. Woolf was Counsel to the U.S. Senate Environment and Public Works Committee, working on energy and environment issues, and a Senior Attorney with the U.S. Environmental Protection Agency.

Woolf: We are now over a year through the implementation of stimulus, so I thought a good place to start would be to discuss your sense of the successes and challenges a year into stimulus.

Chu: Well, there have been challenges. No one anticipated some of the starting pains, the federal requirements that were put into the statutes. Weatherization in just this last month has weatherized 18,000 homes, rising very rapidly with a target between 20,000 and 30,000 homes per month, which would be great.

The challenges—we didn’t fully anticipate that Davis-Bacon had to be negotiated from county to county throughout the entire country. Some of the NEPA [National Environmental Policy Act] requirements—for example, historical preservation. And so we at the [Department of Energy] were trying to work through this by, for example, saying, if you do these things, you don’t require a NEPA ruling, categorically excluded, also for historical preservation. Even among our people in the Department of Energy we were realizing that the NEPA requirements weren’t usually of the people doing these types of programs, so we formed these SWAT teams, saying okay, we were going to rush through NEPA, they were going to be the experts in NEPA.

Woolf: Which has been really helpful for the state office in getting the answers and solving the problems.

Chu: Right. And so, we are now, at a minimum, talking weekly to people, and we’re going to try to up that. So that people in the state program who are saying there are problems—tell us about them, we’ll try to fix them.

Woolf: Have the opportunities and successes that you imagined when we were talking about stimulus—are you beginning to see them? Is it the size and scale that you’d hoped for?

Chu: Well, it’s a beginning. I think when you’re doing 20,000—and let’s say we get up to 25,000 or 30,000 weatherization homes per month—that’s great. But one of the other things we’re also very interested in—and states have taken the leadership role in this—are these programs like revolving loan funds, where a barrier to improving the energy efficiency of a home is capital, but it really saves money, so if you can give the homeowner some money up front or a low-interest loan, then the money they save from the utility bills every month would more than cover the interest on that loan. And that makes it self-starting, it makes it perpetual, and instead of doing three-quarters of a million to a million homes, now you’re talking about tens of millions of homes.

Woolf: Right, and that actually is a question I know state energy officials have given a lot of thought to. We’re going from thousands of homes to tens of thousands of homes, but we’ve got millions of homes that could be retrofitted—literally—each year. My personal view is every home should probably be retrofitted each decade, and we could keep getting advances. Stimulus gets us a huge ramp-up, but there’s also going to be a huge cliff when the stimulus money is gone. So I wanted your thoughts on how to survive that post-stimulus transition in order to keep making progress.

Chu: There are two ways that we are piloting—one is these revolving funds that I just talked about. You get it going now, and as the income comes in, . . . or another mechanism is the so-called PACE [Property Assessed Clean Energy] tax. Now in the PACE, the city might say, okay, put it on your property tax and we’ll charge you 6 percent, 7 percent, but you can do a lot more if they were charging you 3 percent or 2 percent. And so the question is, can there be some subsidy so it’s not a commercial rate, but it’s a lower rate. You want the city to break even, you might want a percent or two so they can grow the loan fund. But it has to be sustaining, so we’re looking at all these mechanisms to get sustaining programs, because of fiscal responsibility. We can’t be using a Recovery Act year after year after year.

Woolf: So let me ask you about the PACE programs, because I share your vision that this is a way to try to make a sustainable post-stimulus. I know in my state of Maryland, and I think across the country, the banks are very concerned about property-assessed clean energy loans subrogating other mortgagees, and they’ve been resisting that kind of approach. Have you heard that? I think that’s one area that we’re hoping that the Department of Energy can kind of give a push so we can get these programs going while we’ve got the stimulus.

Chu: Well, I’ve heard that is a problem, and it is an issue that I think hasn’t been completely worked out. But again, it’s something where you really have to try to get beyond this “who gets first lien on the property.” I would personally like to say, it’s a small fraction of the worth of the house, if you have co-investment. It’s a fraction of 1 percent, quite frankly. Then it’s not really that big a deal.

Woolf: I think states would love to partner with you on that. Because that is a way to leverage and get the kind of private capitalization that we’re going to need post-stimulus.

Chu: And also for ESCOs [Energy Service Companies], another similar thing, if the ESCOs get the capital, they have to go raise the capital, if that capital, instead of being at a certain percentage rate. Just imagine being two percentage points lower, a lot more things can be done. You can go a lot deeper into the energy efficiency retrofits. So that’s something again we’re looking at. And it is highly leveraged. If instead of taking the money and just saying “here is the entire sum,” then do one or two retrofits, if you think you can do twenty this other way, then that’s much more exciting to me.

Woolf: I think state energy officials would agree. I know one issue that you’ve been working on, and we appreciate, is working with the Department of Labor on the Davis-Bacon issue that you mentioned earlier. And getting the weatherization wage-class for weatherizing low-income homes, an issue that I understand you’re continuing to work on, is extending that classification to the non-weatherization residential retrofits. I don’t know if you have an update on where we are with that issue. I know that’s one of the concerns that I’m hearing in my state about spending the stimulus dollars. We just don’t know what wage class to use outside of weatherization.

Chu: Right. Well, again, a very complicated issue. You do want to pay fair wages, but you also want to get the work done. And so in some of our programs, I think it really depends on the precise wording, what you mean by wages, prevailing wages, and things like that. And, in some of the programs, we’re trying to do retrofit ramp-ups, where we have trusted suppliers of weatherization. Let’s pretend you get a Lowes, a Home Depot, a True Value, which is syndicated, and these brands stand behind, we will come, we will energy audit, we will do the work. And the question is, how do we get these players in here in a way that they pay fair wages? But if we go through the same thing with weatherization . . . I don’t want to see another nine months of debating what the wages should be in every county.

Woolf: Right.

Chu: So, it’s one of these very sensitive issues. But in the end, we have 130 million homes in the United States. And I think—in fact, as you said—every ten or twenty years they should have an upgrade in efficiency, as the technology gets better, as we learn more about how to save money.

Woolf: And that’s why the vision that President Obama and you have articulated is so wonderful, aggressive, bold, but a challenge. Particularly when we think about how we make it sustainable after the stimulus dollars. I know one of the things that states have been thinking about are pilot programs both on the finance side and on the technology side. We used to have a program with the Department of Energy because there already is, I think, over $4 billion of nonfederal money from the states that are invested into energy efficiency and renewable energy. I don’t know if there has been any thought at the Department of Energy about dusting off some of those pilot programs and partnering with the states to leverage the private—the nonfederal dollars—toward energy efficiency.

Chu: In the FY10 budget, we had about $270 million for the weatherization programs, in total, low-income weatherization, and the state energy programs. It’s combined, that’s a top-line number. For 2011 we requested Congress to appropriate $385 million—a substantial 40% increase. With those extra funds, we want to partner with the states and their energy programs. Again, it’s a leveraging—it’s very important because states and local governments control a lot of things, like zoning issues, the standards for home efficiency and home insulation, and buildings. And so, this is where, I believe, the biggest gains are—if you renovated a commercial building, encouraged them to take the necessary steps that will over the life cycle of that renovation save them money. There is a McKinsey report that was published about a year ago, that looked at all the low-hanging fruit for decreasing carbon emissions, and about half of it was going to save money, but there were hurdles: inertia hurdles, lack of information hurdles, and especially, lack of capital or the initial cost of capital. But on the regulatory side, which the states control, in home insulation for example, they said an added thousand dollars in labor and materials in a home will pay for itself in one or two years.

Woolf: That’s amazing.

Chu: It is amazing. So then you have to ask, why are we not asking for better regulations when the benefits are just instantaneous. It’s not a matter of ”I can’t afford the home.” You can afford it, and you’ll get a return on that thousand-dollar investment every, let’s say, two years! For the time you own this home. That is truly an amazing thing. And it’s a regulatory thing: builders build to regulations. There are still some states in the country that have no insulation standards.

Woolf: I’ve always viewed building codes as the least energy efficient building that you’re legally allowed to build. That it’s kind of a minimum standard of what folks should be doing, and I’m amazed when I talk to my neighbors about energy efficiency and how much money they could save, they nod politely and say it’s great, but they don’t implement. When I then share with them that their neighbor is paying 20% less for the same house, that’s what seems to get them off their seat, to actually do an energy makeover of their own home.

Chu: I think that’s what it’s all about—saving money. If you talk about saving the planet, they kind of gloss over. Forget about it. Save money! We’re here to save you money on a monthly basis.

Woolf: One of your priorities, I know, has been multifamily buildings, apartment buildings, the poorest of our families who are most heavily hit with high energy prices. I wonder if you could talk a little bit about what the agency’s doing. I think there have been discussions with Secretary Donovan and HUD, who are trying to help accelerate retrofits of apartment buildings.

Chu: Sure. We signed memoranda, we have a lot of weatherization money, and there’s no reason why that can’t be used on multifamily homes. HUD will go in, and instead of having to satisfy the HUD and the DOE, we say either one will work and it’s good for the other agency.

Woolf: Great.

Chu: So, I think there is, at the top, a real spirit that this is the right thing to do. It goes deeper than that; we are trying to work on how we can help HUD. They have energy efficient mortgages, which haven’t been used very heavily. So, we will try to help with our tools in evaluating how much money you could possibly save, a reasonable projection. We are looking at whether we can get, during their turnover property, an energy audit with the structural things, a competent energy order, make it as seamless as possible so you can actually get these energy efficient mortgages tacked on to your regular mortgage. Where it’s an automatic thing in the housing form.

Woolf: Right. And you’d save money in the very first month, because the increased mortgage payment is less than –

Chu: Exactly.

Woolf: So one of the issues we’ve been talking about is that Montgomery County in Maryland has started disclosing energy consumption at the time of sale. So you can go onto the computer and find a three-bedroom, two-bath that uses less than, say, 2,000 kilowatts a month, and kind of incentivize energy efficiency in the market. We look forward to working with the Department of Energy on that.

Chu: Again, that’s something I’m very excited about. We’re trying to see whether we can actually do that. When we were looking for a home when we moved here, that’s something I’ve always asked—What are the energy bills?—for every home that we’ve bought. What I would really like to see is an official statement of last year’s energy bills from the utility company. And what I’d really love to see is: in this zip code, with this many square feet, this is the range. Kind of like a refrigerator label.

Now, of course, it depends on how people are using the energy. Some people, for example, in the summer can tolerate 75 degrees, others want 70 degrees; in the wintertime some people can tolerate 68 degrees.

Woolf: And the stay-at-home moms are different than the folks gone during the day.

Chu: Exactly. So what we’d like to develop is both the actual use on the record, which is highly variable, but also a way of evaluating—How many windows do they have? How big are they? Are they sealed? Look at the duct work; How well is the home insulated?—so that it would be the equivalent of the EPA mileage estimate on a car.

Woolf: That’s right.

Chu: So you have both the DOE energy efficiency estimate—how much will it take to run your home—and you have the actual use, but you understand that’s highly variable. The current homeowner is highly motivated to make energy efficiency improvements on their home, to increase the resale value. So its transaction costs are minimal, but it gets people in line with saving energy.

Woolf: I think states would love to partner with you on that effort. It’s a great way to kind of leverage the market to achieve our shared goals. Final question, if I may. We’ve talked a lot what we’re doing with stimulus. How do you envision the state-federal partnership—both the stimulus and beyond stimulus—to achieve our shared goals?

Chu: Going back to an earlier statement I made, where the states and local governments are actually responsible for many, many things—from regulations and standards to insulation—they’re more on the ground in terms of how you actually reach out to businesses, to consumers, to residential homeowners. So I think furthering this partnership is very important for that reason. The states and local governments are actually the ones that are much more directly interfaced with people who use energy.

Woolf: Thank you very much. I appreciate your time.

Chu: Thank you.

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