Low-energy homes: Evaluating the economic need to build better now

Gray, S. 1 , Richman, R.C. 2 , Pressnail, K.D. 3 and Dong, B. 4
1. M.A.Sc. Candidate, Dept. of Civil Engineering, University of Toronto
2. Ph.D. Candidate, Dept. of Civil Engineering, University of Toronto
•  Associate Professor of Civil Engineering, University of Toronto , Toronto , ON , Canada
•  M.A.Sc. Grauduate, RDH Ltd. Vancouver , BC , Canada

ABSTRACT :Residential heating and cooling accounts for approximately 10% of all energy used in Canada. Although significant improvements in residential energy use have been made in recent years, the technology already exists to build even more energy-efficient homes. In addition to comfort considerations and the environmental imperatives, there are persuasive economic reasons why better-built homes should be built now. This paper compares the construction and the energy costs of model homes: one home built to the prescribed minimum standard established by the Ontario Building Code and one home built to the R2000 standard. Given the relatively long life cycle of homes built today, and given the relatively high costs of retrofitting existing buildings, this paper shows that it is more economical to build better, more sustainable, homes now.

•  INTRODUCTION

The following recommendations were made by representatives from the government, building product manufacturers, engineers, architects, mortgage lenders, utilities, developers, contractors and the public.

"The public needs a clear, concise credible message regarding low energy new housing. [There is a need to] introduce a new home certification program whereby all new homes would be rated on their energy performance prior to being offered for sale. energy efficiency [should] be considered for mortgage qualification and reduced realty tax.. [There should be an] increased emphasis on low energy housing in academic institutions."

These thoughtful words were written more than twenty-two years ago in an Ontario Ministry of Energy Report (Enerplan, 1982). The motive back in 1982 was in response to the "energy crisis" of the mid 70's. Today, these same words ring true. Yet today, it is a combination of energy prices as well as the need to protect the environment that is causing the writers to reconsider these words again. Residential energy consumption accounts for approximately 10% of all energy use in Canada (Cuddihy et al , 2005). The technology already exists to build better. The opportunity exists yet sadly, energy-inefficient homes are still being built today. In 2004 alone, there were 233,431 housing starts across Canada (Statistics Canada, 2005). This translates into more than 200,000 missed opportunities to build more sustainable, more energy- efficient homes.

Using an illustrative example, this paper presents compelling economic reasons why the home building industry should be building better now. An economic analysis is carried out using data from a large tract home builder in the Greater Toronto Area. The costs of building a model home to the prescribed minimum requirements of the Ontario Building Code and the associated energy costs are compared to the costs and energy savings of building to the R2000 standard. This illustrative analysis reveals that buildings should be built better than the minimum prescribed by the Ontario Building Code. Further, this paper examines the efficacy of trying to retrofit buildings later in their service life. In terms of life cycle energy, it will be shown that it is far more efficient to build better in the first instance. Using life cycle energy as well as incremental costs, this paper will show that there are compelling economic reasons to build better, more sustainable homes now.

•  Why build better now?

The answer to the question of whether to build better now will differ depending on whom you ask. Environmentalists will justify the extra expense of building better now because of the significant reduction in life cycle energy use of the building. In addition to energy savings, better-built homes offer their occupants improved indoor air quality and thermal comfort. These benefits are often measured against the cost of obtaining them in order to determine if there is a satisfactory pay-off. The ethical question of whether this purely economic approach can justify environmental destruction and the squandering of non-renewable fuel resources is often ignored in the face of dollar savings.

Previous initiatives for the implementation of energy efficient homes, such as the R2000 standard, were developed during an era of skyrocketing energy prices. The reality of the global energy market provided financial motivation for energy conservation. A comprehensive study of 28 R2000 homes in the Prairies, completed in 1989, showed that the energy efficiency measures had a satisfactory payback period in all of the participating provinces with the exception of Alberta where the cost of energy was significantly cheaper (Mayhew, 1989). When the "energy crisis" was resolved and the price of energy dropped, it once again became affordable to waste energy and ignore environmental damage. Now the year is 2005 and most of Canada 's new houses fall well short of the 20 year-old R2000 standard; however the environmental and societal implications of unnecessary energy wastage are more pressing than ever. Current building technology can easily produce energy efficient buildings at a small incremental cost over a standard model.

Residential construction in the Greater Toronto Area (GTA) has been booming over the last few years. The majority of these houses have been constructed by large "tract" homebuilders in accordance with the current Ontario Building Code (OBC). Under such production conditions, emphasis is placed on achieving the lowest initial capital cost. However, an economic and energy consumption analysis will show that the lowest capital cost is not necessarily the cheapest option for the prospective homeowner.

In order to perform this analysis, detailed construction cost data and floor plans were obtained from a large tract homebuilder (who has requested anonymity) in the GTA for one of their popular models. The house has two full storeys with a room over the garage. The total floor area is 248m 2 (2675 ft 2 ), which includes two covered porches. Table 1 shows the pricing data including costs of "upgrading" from OBC minimum standards to the R2000 standard.

Table 1. Construction Cost Data for Energy Saving Upgrades.

The total cost for upgrading the home to the R2000 standard was $9,269, an increase of just under 6%. In terms of cost per square metre of floor area, the increase was $37.35/ m 2 ($3.47/ ft 2 ) over the base cost of $644.22/ m 2 ($59.85/ft 2 ).

The energy simulation program Hot2000 Version 9.21 (available from Natural Resources Canada) was used to model the houses built to code and to the R2000 standard. Current Ontario electricity and natural gas (Enbridge) prices were used to determine energy costs. The simulation was run with data for Toronto 's climate and the houses were oriented in their least favourable position with respect to solar gains (the wall with the most glazing was taken as north facing). Table 2 presents the results of the Hot2000 energy simulation.

Table 2. Energy Costs for OBC and R2000 Homes

Hot2000 predicted a total savings of $818 in annual energy costs or a reduction of 32% from the OBC home. All the savings come from the reduced space heating demand of the R2000 home with demands for domestic hot water and electrical appliances remaining unchanged between the houses.

The question of whether to build better now becomes "Is the initial $9269 investment worth the $818 in annual energy savings?" Lack of interest in R2000 homes in new housing starts would suggest that the answer is "no"; however, consumers often go for the least initial capital cost option without consideration for the reduction in operating expenses offered by seemingly more expensive choices. In the subsequent economic analysis several financial indicators are considered to properly assess the options. These are summarized below in Table 3.

Table 3. Economic Analysis of Energy Upgrades.

Table 3 presents 2 columns of cost figures. The first column is based on the incremental cost of upgrading an existing plan to the R2000 standard ($9269). The second column is based on a plan designed to the R2000 standard from the outset, a strategy that more economically incorporates the upgraded components. The incremental cost for the R2000 designed home was $5661, which is 40% less than simply upgrading the existing plan. The results show that purchasing an energy-efficient home is not only a viable economic option but also a sound investment. If the homeowner chooses to pay for the upgrades by increasing her mortgage payments, she can generate a positive annual cash flow of up to $423 (for the R2000 designed house) through the energy savings the investment returns. Another persuasive indicator was the internal rate of return (IRR), calculated conservatively for a period of 25 years with no consideration for fuel cost escalation. For the standard home upgraded to R2000, the investment yielded an IRR greater than that achieved by other low risk options, such as bonds. In the case of the R2000 designed home, the IRR was calculated to be over 14%, which is extremely attractive even when compared to higher risk alternatives. The reality of today's energy and housing market is that energy conservation can put dollars back into the homeowner's pocket. Looking into the future, from both an economic and environmental point of view, the case to build better houses now becomes more compelling.

To further illustrate the point, several conservative assumptions were made in the above analysis. The investment was assumed to have no salvage value, while the cost of the upgrades will be reflected in the sale price of the house and it is reasonable to expect that the energy conserving measures will increase in value in the future, as fuel prices increase. Also, the investment period was taken as 25 years but this neglects the fact that the upgrades will continue to return energy savings for the life of the house, which could easily be 100 years. Consideration of these factors and likely fuel cost escalation will only make the investment in energy saving features more attractive.

In the above analyses, the price of fuel was assumed to increase at a rate equal to inflation, and thus would remain unchanged in the future in proportion to other expenses. Current and historical trends suggest that this assumption is conservative and even the most optimistic forecasters concur that it is reasonable to expect fuel prices to escalate ahead of inflation rates in the years to come.

Most pertinent to the current discussion, is the cost of natural gas, the heating fuel of choice for Ontario 's homes. In a discussion paper prepared by the Canadian Gas Association (2003), demand has been cited as outpacing supply growth since 1990 and will continue to do so as far as was forecasted (2020). Increasingly natural gas supplies are being derived from more expensive, "non-conventional" sources, previously considered too marginal to exploit. The implication for household consumers: "customers will be forced to shoulder more of the adjustment of the burden [of higher production costs]."

Given the above information it is clear that a house built today will have to perform in a radically different energy market in the span of its 100-year life. It would be prudent of civil engineers and architects to design accordingly. The above economic analysis for the Annual Cash Flow method was repeated for
varying fuel escalation rates (taken above the inflation rate).

Figure 1. Fuel Savings vs. Time for Different Fuel Escalation Rates

Figure 1 shows the importance of building energy efficient buildings now because of the likely increase in operating costs that will be experienced in the future. Long after the homeowner has paid for fuel efficient measures such as increased thermal insulation in the walls and improved airtightness, the investment continues to return ever increasing energy savings in the face of rising fuel costs. So while global warming skeptics may argue that the economic case for saving energy is marginal today (despite the analysis presented above) only the most short-sighted designer can ignore future economic and environmental implications of unnecessary energy wastage.

•  Further improvements

The previous section illustrated that it makes economic sense to invest in energy saving measures such as the R2000 program given current construction and energy costs. In addition, if rising fuel costs are considered, the case to build better now is more compelling still. Heat loss for the Code-built and R2000 homes was modeled in Hot2000 and presented below in Figure 2. A closer look at this figure shows designers where to concentrate future energy conservation efforts.

Figure 2. Heat Loss by Building Component

The largest contributors to heat loss in the R2000 home are the windows and walls. Further energy savings can be obtained by improving the thermal efficiency of these components. In 1991 Natural Resources Canada launched the "Advanced Houses Program" as an improvement over the R2000 standard. Five advanced houses were monitored closely and achieved energy reductions of 30% over the R2000 standard using upgraded windows, increased wall insulation, and improved airtightness (Mayo 1996). The important point here is that all these features are current technologies and can be assembled with the same labour as a standard house. Further improvements can be achieved by incorporating "unconventional" technologies such as heat pumps, domestic hot water heat recovery, dynamic walls, photovoltaic cells, etc. many of which have a proven track record even in North America. The builder that provided our cost data also asserted that further energy conservation measures well beyond the R2000 standard would also be economically feasible in today's housing market.

•  Down the road - Retrofit or Rebuild?

Years after the decision to opt out of the energy upgrades discussed above is made, the decision of whether or not to 'upgrade your home' is brought upon an owner. Whether it's the original owner or a new one, the question of retrofitting the model building code home arises. Although feasible in some instances, many owners do not consider the option of demolition and complete rebuilding of a home. Since upgrading eventually becomes a necessity, the question becomes whether to retrofit or rebuild? Recent research has shown that the answer to this question is not clear. In terms of life cycle energy and other environmental metrics, it is prudent to rebuild a house rather than perform retrofitting. In terms of cost, it is obvious that retrofitting is the preferred option.

One of the writers, Dong (2002), investigated alternatives to either retrofit existing buildings or rebuild them on the basis of life cycle environmental and economic impacts over a forty-year life. Focusing on three vintages of single detached dwellings in Toronto , various retrofit options were compared to the option of replacing the building in its entirety. Table 4 presents a summary of the preferred option between rebuilding and retrofitting in terms of environmental and economic metrics from the 2002 study.

Table 4. Preferred Option Checklist (Dong, 2002).

In terms of environmental metrics, the option to rebuild far outweighs the option to retrofit. Although this is contrary to popular belief, the results were common across the three vintages of house construction (i.e. 1930's, 1960's and 1980's). As the structures became more modern, the total savings would decrease, however the trend was clear: that rebuilding was at least 100% better than the most energy efficient retrofit options. Figure 3 shows the percentage of life cycle energy saved for various retrofit options and the various construction vintages.

Figure 3. The Percentage of Life Cycle Energy Saved by Implementing Retrofit or Rebuild Options for Each of the Reference Houses (Dong, 2002)

Figure 3 clearly shows that rebuilding is favorable versus retrofitting in terms of life cycle energy. Rebuilding offers the least environmental damage in terms of energy, global warming potential and air pollution index. Table 4 shows that two environmental metrics (i.e. water pollution index and solid waste generation) support retrofitting; however, a closer look at both metrics yields valuable information supporting the rebuild option. Although the water pollution index highly favours the retrofit option, the majority of the water pollution index 'score' results from the manufacturing stage of the rebuild case (Dong, 2002). When comparing water pollution index in terms of building operation, the rebuild option is more favourable. Further, one may argue that the rebuild option is unfavorable based on solid waste generation. However, the 2002 study assumed a worst case scenario for the rebuild option (i.e. 0% material recovery). Studies have shown that it is common to reclaim upwards of 75% of material using a deconstruction approach during the demolition stage of the project (Dong, 2002). One may then ask the question why owners choose to retrofit at all?

Unfortunately, it all comes down to capital cost. Dong (2002) reported the capital cost for rebuilding as over fifty times that of the most comprehensive retrofit option. Although the average net present value of the rebuild option over the forty year study period was just under 3 times that of the most comprehensive retrofit option, owners would, understandably, be reluctant to absorb the capital costs associated with the rebuild option.

In a project sponsored by the City of Chicago (Knight, 2004), four century-old bungalows were renovated at an average cost of $1388/m 2 ($129/ft 2 ). Improved energy saving measures accounted for an additional $50.5/m 2 ($4.69/ft 2 ). The study found that the annual savings in energy costs exceeded the annual cost of financing the extra renovations. A comparison of the average cost for this project with the figure provided by the Toronto area home builder for new construction ($645/m 2 ) clearly shows that renovating to obtain energy savings is not economically justifiable. The cost of renovating the bungalows was more than building a new home. But the motivation for renovating these century homes was in part for historical preservation and in part to "enable moderate-income families to afford them for another century [through reduced operating costs]". This point emphasizes our need to build better homes now, because it is not cost effective to renovate a poorly built house in the future.

Although the ethically correct option is to rebuild, depending on which metrics are most important to an owner, the decision is not clear at all. Strong cases can be made for either retrofitting or rebuilding based on economic and environmental metrics respectively. In order to avoid this confusion down the road, owners should adopt all possible measures to build better at the onset of building construction. Based on the data presented in previous sections, a similar amount of capital can be spent at the time of initial construction in order to achieve an R2000, energy efficient dwelling. This is far more cost effective than carrying out the most efficient retrofit option ten or twenty years later.

•  Conclusion

Using cost data from a large tract home builder in the Greater Toronto Area, this paper has compared the costs and associated energy savings of meeting the minimum established by the Ontario Building Code, with the costs and associated energy savings of building to the R2000 standard. Regardless of whether one upgrades an existing OBC design or designs a home to meet the R2000 standard from the outset, the illustrative economic case is compelling: design to the R2000 standard and the internal rate of return for a GTA home can be expected to fall within the range between 7% and 14%. While these values will vary from model home to model home, and from region to region, they are indicative of the need to scrutinize existing building codes.

To date, the attitude seems to have been to let the consumer choose whether they want a home that exceeds the minimum prescribed by building codes. Despite the fact that R2000 homes are, more comfortable, less of a burden on the environment, and more economical when one considers life-cycle costs, most homes are not built to the R2000 standard. Most homes are built to the minimum standard prescribed by the building code. While consumers need to be better informed, it is time to scrutinize and then change the building codes.

While the R2000 standard is better than the present standard established by the Ontario Building Code, it is only a beginning. There is a need to raise the sights above the R2000 standard as well. Unless homes are designed so that they may be easily retrofitted for energy savings in the future, designers should be designing homes that meet the economic and service conditions of the future. In structural design, service loads during the design life are predicted, and then accommodated. Shouldn't designers follow a similar approach when it comes to matters of life-cycle energy costs? Shouldn't designers be designing for 2025 or even 2050? It has been shown that in terms of life cycle energy, it is better to tear down and build again new, rather than try to retrofit an existing, energy-inefficient home. Any time a building has to be torn down during it's service life, a designer has failed. Consumers and future generations deserve something better. It's time to build better, now.

•  References

1. John Cuddihy, Christopher Kennedy, and Philip Byer, Energy use in Canada : environmental impacts and opportunities in relationship to infrastructure systems, Canadian Journal of Civil Engineering , Volume 32, Number 1, February 2005.
2. Enerplan Consultants Ltd., Low Energy New Housing: Interim Report/Workshop Discussion Notes . Ontario Ministry of Energy, October, 1982.
3. Statistics Canada , Canadian Statistics - Housing Starts, by Provinces . 2003-2004.
4. (http://www.statcan.ca/english/Pgdb/manuf05.htm)
5. Mayhew, William J., 1989, Assessment of Cost Effectiveness of R-2000 Energy Measures in the Praries. Funded trough the Innovative Housing Grants Programs, Alberta Municipal Affairs.
6. The Canadian Gas Association, Understanding the North American Gas Market . October 2003.
7. Mayo, Tim and Sinha, Robin, 1996, Advanced Houses: the Canadian Experience . Home Energy Magazing Online September/October 1996.
8. Hot 2000 Energy Simulation Software is available from Natural Resources Canada (http://www.nrcan.ca)
9. Natural gas prices from Enbridge (http://www.cgc.enbridge.com)
10. Dong, B. 2002, To Retrofit or Rebuild? A Comparison of the Life Cycle Environmental and Economic Implications of Retrofit and Replacment Options for Single Detached Dwellings . M.A.Sc. Thesis, Department of Civil Engineering, University of Toronto , Toronto , Ontario .
11. Knight, Paul, 2004, The Chicago Green Bungalow Project . Home Energy Magazine July/August 2004.