Stanford expert: Energy efficiency wins big in California election, but debate looms over dividing $2.5 billion

By Mark Golden

California's Proposition 39 did not get much attention in the months leading up to Tuesday's election, but voters handily approved the measure to increase taxes on some corporations, with $2.5 billion of the money going for projects to conserve electricity and natural gas consumed by schools and other government buildings.

The appeal to Californians was understandable. Basically, the additional taxes will be paid by companies that sell their products in the state but have relatively few employees and little property here. In turn, $500 million annually for five years will pay for public building retrofit projects, each of which must save taxpayers more on energy costs in the long term than the retrofits cost.

The money can be used for renewable energy installations like solar panels too, but the cost-effectiveness requirement currently favors energy efficiency projects like insulation or modernizing heating, air-conditioning, water or lighting systems, according to James Sweeney, professor of management science and engineering, and director of the Precourt Energy Efficiency Center at Stanford University.

"Many efficiency improvements can pay for themselves in several years," said Sweeney.

According to a McKinsey & Co. report in 2009, state and local government buildings in the United States could reduce energy costs by $49 billion for $26 billion in efficiency investments, while also slashing their greenhouse gas emissions by a third. For decades California has been more aggressive than most states in promoting energy efficiency. State regulations result in utilities spending about $1 billion annually on financial incentives primarily for homeowners and businesses rather than large government buildings. Such programs are funded primarily by utility customers, not tax receipts.

Under Proposition 39, $500 million to $550 million a year will be spent in three areas: outright grants to cover the costs of projects, low-interest loans for such projects and workforce training to increase the skilled workers available to install the new technologies.

The state legislature is to write by June the rules that will determine how the money will be divided among these three groups.

That will require debate, said Sweeney. Cities and school districts in these tough budget times would much prefer grants to loans. Even 1 percent interest loans create more debt on already strained government balance sheets.

Federal stimulus funds that California allocated to energy conservation grants for small cities and counties were taken up quickly, while a related low-interest loan program is still taking applications.

"For public buildings, capital constraints have prevented cost-effective investments to conserve electricity and natural gas. Grants under Prop. 39 will clearly overcome these capital constraints," said Sweeney.

On the other hand, most policymakers in Sacramento have a strong preference for low-interest loans, which upon repayment can fund additional projects. A significant loan program could leverage the Prop. 39 program far beyond five years and $2.5 billion by conserving more energy and creating more jobs than one-time grants. Such a program might also be extended to private companies rather than just governments.

Under state mandates, half of the proceeds from the higher taxes must go to certain types of spending, primarily public education. After five years, the annual $500 million for energy efficiency will become available for general purposes.

Mark Golden works in communications at the Precourt Energy Efficiency Center at Stanford University.

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