Reducing our dependence on foreign oil: A plan

Alternative energy technologies do not make a compelling cost-benefit case right now. Tax incentives designed to improve the economics don't work. We should do something about this.

In my home, the average electric bill is $73 a month. For most Americans, that surely seems cheap. We have upgraded our windows, air conditioner, dishwasher, washer, and dryer. We use natural gas for cooking, heating, and water heating, and we use electricity for everything else (including our clothes dryer). We are reasonably careful with energy consumption, but not excessively so. We do not spend winters buried under blankets, and we live in a reasonably mild climate (although summer temps climb to 100+ degrees, so summer is when our costs peak).

A solar electric system sufficient to reduce our electric usage to "baseline" levels would cost about $12,000, plus installation. It would save us a little shy of $50 a month. $12,000 amortized over 20 years (the warranted lifespan of the system) at 5% - i.e., if we took out a 20-year mortgage to pay for it - would cost us $80 a month. California has rebate incentives that would probably cover the installation costs. The federal tax credits are not available to us because all tax credits are eliminated under the Alternative Minimum Tax (AMT). However, in 20 years, it is highly likely that our savings will be greater than $80 a month, because electric rates rise consistently over time. However, it is impossible to predict how much rates will rise. Installing solar today would require paying a 60% price premium over today's KNOWN costs to reap an assumed, but unknown, savings later.

I do believe that the nation needs a better energy policy. Every dollar spent on foreign oil is a dollar that is not flowing through our own economy. $1 worth of domestic grain represents money flowing to a local farmer, who then flows the money to the local taxing authority, local workers, domestic seed companies, etc. $1 worth of foreign oil represents a small portion of domestic refining and transporting, and a big chunk of the dollar flows to foreign oil producers. Worse yet, that dollar is likely to come back as foreign investment. Americans borrow, spending tomorrow's dollars today, and foreigners invest here, staking a claim on our future income using the dollars we spend today to fill our gas tanks.

I propose two fixes to the energy incentive program. One, allow energy efficiency credits to take precedence over the AMT, so that people paying AMT can still reduce their federal tax burden by investing in alternative energy. This makes a lot of sense. Americans who can afford alternative energy systems are usually also subject to AMT. So the tax credits target an incredibly narrow band of potential users.

Two, create an FHA loan program for energy efficiency improvements. This program has 4 key points.

1) The loan can be transferred to the new home owner with payment of a small processing cost. Home buyers stretch to afford the most house, and rarely reimburse the home seller for the cost of an alternative energy system. They are more interested in getting more square footage or a better location than lower energy bills, and they assume they can add an alternative energy system later, if they want one. If the buyer assumes a loan, however, they can save their mortgage dollars for the house, and pay the alternative energy loan from their utility budget. For homeowners who want alternative energy, but might be moving, this would be a substantial incentive to go ahead and install it now.

2) The loan payment can be re-amortized if the loan is paid down in advance of the scheduled payment. In my example, the loan payment would be $30/month higher than the electric bill. If a buyer was unwilling to pay that extra $30 a month, I could pay the loan down by $4,000, and recover the remaining $8,000 up-front cost that "cash-flows". The buyer would have the best of both worlds - the security of a fixed energy cost, without the higher costs in today's dollars. This allows a buyer who *really* doesn't want to invest in alternative energy to negotiate how much loan they assume from the seller, without the seller eating 100% of the up-front costs. The U.S. Energy system wins, because there is one more solar array providing day-time oil-free power to the grid, even if the buyer of the home would not have installed one. Chances are, I'd go buy another house, and install another solar system. More energy dollars stay in America, and the only cost to the taxpayer is the cost of guaranteeing the loan.

3) Require local energy utilities to pay the homeowner for unused energy credits, at the prevailing wholesale rate. If the loan is not paid, or if the home goes into foreclosure, the FHA can recoup some of the missed payments through payments from the electric utility, until a new homeowner assumes payments. Make the FHA "first-in-line" for the payments, in case the loan is not paid. This also provides an incentive for homeowners to scale the system up to provide a larger portion of their energy needs.

4) The alternative energy mortgage should be calculated outside the standard debt-to-income ratios used in mortgage approvals. It should be considered a utility cost rather than a mortgage debt (for the purpose of calculating the mortgage ratio).

Here's a frightening read about the economic security implications of our dependence on foreign oil:
http://www.energycommission.org/files/contentFiles/oil_shockwave_report_440cc39a643cd.pdf