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What is Increased House Efficiency Worth?

By Bruce Barbour - May 2021, Updated September 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 22c per kWh. That will vary for different retailers and different regions. 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 $95 per year in heating and cooling costs for grid electricity purchase.

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 $950 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 $3300 invested in a roof top PV system would probably buy a 3 kW system (not including the Victorian Rebate). In Melbourne that would generate at least 4000 kWh of electricity per annum. This a bit under 10 times the amount of electric energy saved by the one Star energy efficiency increase in the example provided on this page. The system in Melbourne would currently generate $314 per year for the owner (at a 6.2c/kWh feed in rate and a conservative 10% usage in the house), a rate of return a bit under 10% - more if considering the Vic Rebate. This compares to the possible, say, 3.3% return from the energy efficiency upgrades - it really depends on the cost of the upgrade to achieve the one Star efficiency increase.

However there are a couple of additional aspects to take into account: 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.

Also energy efficiency upgrades should last the life of the house whereas PV has a life of 25 plus years and may require inverter replacement and perhaps other maintenance at some time in the 25 year period. And a 3.3% return tax free is not a bad return.

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 at least not 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.) Considering that factor alone would indicate a investment of $2842 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 $3000 would probably be available at an interest rate much 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 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.

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. (See Table earlier on this page - row 10.)

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 the 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.
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%).

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 an amount whereby they make back that money in 10 to 30 years depending on how they look at it, as discussed earlier. If they also take into account that they may get a price premium for the house they might be prepared to spend extra on top of that. Either way I would suggest that any additional spending remain on the conservative side.

If the new house owner just wants to either have a very energy efficient house or perhaps a more thermally comfortable house, and cost and financial return is not the main concern, then perhaps they would be willing to spend more than what the financial analysis might suggest.

Should The Mandatory Minimum Be Increased from 6 to 7 Stars?

The answer to this depends on whether the energy efficiency increase can be done cheaply enough. It may be counter productive to increase the cost of the house by say tens of thousands of dollars if this amount of money would not be returned to the owner in say 30 years.

However that said there are quite a few improvements to the energy efficiency of the house that can be made for little or no money. Some changes even save money. Some of the ones that I can think of are:
  • Increasing roof insulation from R4 to R6.
  • Decreasing the size of south, west and east windows – this would actually save money.
  • Increasing wall insulation to R2.5 minimum – or if more is needed perhaps increasing the external wall stud size to 130mm (from 90) to allow, say, R3.5 wall insulation ( though this may add more expense - except if this innovation becomes commonplace).
  • Shading on north windows for summer sun.
If an increase in house efficiency was mandated even the more expensive improvements such as thermally broken window frames would come down in price with more people installing them.

One of the other changes that could potentially be done without an increase in building cost would be implementing at least some aspects of passive solar design. The issue with this is that at present very few of the smaller (i.e. cheaper) new blocks are suitable for full passive solar design. To regulate that new blocks should be suitable for passive solar design would require changes in how blocks are subdivided which may make the blocks more expensive.

So if the "low hanging fruit" changes to building design, some of which are included in the dot point list above, are available why aren't they currently implemented. One of the answers to that is that their implementation is not necessary for developers/builders to reach the current 6 Star energy rating. The volume developer/builder want to do one house design, one rating, and say that it is suitable for whatever orientation the block allows. Changing window sizes or having different designs for different orientations requires a little more work from the developer that they don't want to contend with. However if the Star rating was increased to 7 Stars then they may have to implement these changes to maintain a reasonably priced house.
*The Cost of Upgrading from 6 Stars to 7 Stars
After writing this section I discovered that Renew had looked at this question and had issued a report in August 2021. I had missed seeing this report which is unfortunate, especially as I am a long time member of Renew. The report is called "Households Better Off: Lowering energy bills with the 2022 National Construction Code".

In that report they say that the Australian Building Codes Board (ABCB) had estimated the cost of upgrading a house from 6 to 7 Star in Melbourne at $9.69 per sqm or $1938 for a 200 sqm house. This is well within my calculation for economic viability. If these figures prove to be correct in practice then the upgrade from 6 to 7 Star minimum for housing should be mandated

So my answer to the question posed in this section - "Should The Mandatory Minimum Be Increased from 6 to 7 Stars?" - is a provisional yes*. The provision is provided the cost of doing so is not too large, and I believe that it won't be too large provided more care is taken in the design of the house. (See Box* at side. Renew and the Australian Building Codes Board (ABCB) indicate that the cost of achieving a one Star is affordable.) Making it mandatory would force the developers to adopt the required changes.

Even if the cost of the house increases by a few thousand dollars this should be able to be easily accommodated in the budget of the new home owner by either having more savings in the heating and cooling running cost of the house - therefore being able to afford to borrow more - and/or making savings by decreasing the size of the house by a few square metres. (A lot of new housing is over large anyway.)

Comments on the House Energy Rating System

The house energy rating system (NATHers) 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 or even 7 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.

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. Or 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.

When buying a new home knowing what the building fabric Star rating is is useful for the potential homeowner. However this only tells half the story of the energy efficiency of the house. There should also be another rating for fixed appliances used in the home. 

All fixed appliances – air conditioning, hot water and cooking – should have a consistent rating. For example – ovens are not currently Star rated at all, heat pump hot water systems are not Star rated – but do have a small technology certificate (STC) allocation which can be used as a comparator. There should be a minimum rating standard on all these appliances. In addition to this I would also like to see an overall fixed appliance rating for new houses as well, which would be a combination of the Star ratings of the main fixed appliances calculated in accordance to a formula to be determined. Rooftop PV could perhaps be included in this in some fashion – but only because it makes some of the appliances more energy efficient – heat pump hot water run primarily off PV is an excellent arrangement – so long as the heat pump HW has a timer and a sufficiently large tank to allow middle of the day heating. PV will also assist home heating/cooling during the day – provided electric heat pump heating is used. Perhaps a minimum rating for the house’s fixed appliance rating would not be mandated – but instead has to be disclosed to new home buyers. It would provide greater transparency to the energy efficiency of the house’s fixed appliances by providing the potential new home owner with the one figure – the aggregate fixed appliance Star rating – that they can compare houses on – rather than looking at rating of the three or four fixed appliances (some that are not currently rated) – which they will probably not do. And sure this rating can change overtime if appliances are swapped out – but in a new house hopefully this is not for years. And when the house comes up for sale again the appliance rating calculation would have to be done again based on the fixed appliances installed at that time.

The two Star ratings would be reported separately but could 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.)

I would not however suggest that the developers/builders be able to say decrease the building fabric Star rating because they have a good fixed appliance rating.

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 should reflect the potential lower energy use of smaller homes. A smaller house will use less energy than a similarly rated larger house at present, all else being equal. The energy saving benefits of having a smaller house should be reflected in the (modified) Star rating. Also more benefit should be given for implementing zoning in the house - or indeed the ability to zone the house for heating and cooling should be mandated, especially in relation to having doors on the stairwells.

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

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 primarily to the quarterly connection charges. Having recently changed electricity retailers -  to Powershop supplying 100% "carbon neutral" (which is probably different to accredited "Green Power") at a cheaper price than my previous retailer provided "brown" power - I anticipate that I should be in credit over the whole year going into the future. No power costs whatsoever! And probably no non-offset carbon emissions from electricity use.

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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