Cost-Effectiveness of California Standards

As noted above, since 1974 California law has required that the regulatory standards for new residential construction be "cost-effective, when taken in their entirety and when amortized over the life of the structure when compared with historic practice." Current regulations vary for each of three building types in 16 different climate zones in the state. The climate zones themselves were established for the commission during the process of developing the standards.

The standards specify an aggregate energy budget and permit a trade-off between energy used in water heating and in space conditioning. As noted above, the standards prescribed alternative methods by which compliance may be demonstrated.

The CEC staff itself determined that its proposed standards met the legally mandated cost-effectiveness test. In making this determination, the CEC compared the life-cycle costs of conservation measures in residences built before 1975 to the life-cycle costs of conservation measures in new residences designed to meet the standards. The analysis was performed for each of the three building types in each of the 16 climate zones.

The CEC estimated the characteristics typical of pre-1975 construction in each zone for each of the three base case building types through the assistance of local building departments (by questionnaires, interviews, etc.). It then used DOE's computer simulation program (DOE2.0A) to estimate energy consumption in the base case buildings in each climate zone.

The commission identified a variety of conservation and solar measures and applied them in combination to each of the building types in each climate zone using the same computer program. Basic parameters for weather, ground temperature, internal loads, and thermostat settings were unchanged; only the physical and thermal properties of the buildings and energy utilization rates were varied according to conservation technologies. For water heating, the CEC used another computer simulation program (f-CHART) to estimate the energy that could be

supplied by "typical" solar water heating systems.^[13] Estimates of the quantities of energy saved by various conservation investments were converted to dollars using a 30-year series of unit energy prices projected by the CEC staff (California Energy Commission, 1979). These price projections assume an increase in real energy prices of about 250% over a 29-year period.

Life-cycle costs were estimated using another computer simulation SOLFIN2. This program compares the life-cycle costs of dwellings built in conformance with the standards with the costs of base case dwellings built according to historical practice. The costs of owning and operating a building are calculated using specific assumptions about the initial down payment; mortgage payments; the resale value (if any); natural gas costs; electricity costs; maintenance costs; insurance costs; the costs of replacing HVAC, water heating, and energy conservation systems; federal taxes; federal tax credits; and miscellaneous costs. The program calculates annual costs for each of the 30 years and determines the present value of the life-cycle costs using a 4% real rate of interest.

The inclusion of federal taxes and credits in the calculation and comparison of social costs is an elementary error and may indicate more serious problems in the logic of these computer programs. In any case, however, with expectations of large increases in fuel prices and low discount rates, stringent standards were justified.

Very little information is available that would permit an independent evaluation of this regulatory program. Public reports of the CEC claim that the standards save substantial quantities of energy and also that the net monetary savings are large. For example, a 1985 report claims that the energy savings in 1996 attributable to current residential building standards in California will amount to 3,854 MW of peak electrical demand, 436 million cubic feet/day of natural gas, and 10,697 kwh of electricity sales (California Energy Commission, 1985c, pp. 2-7). The report continues:

The standards adopted in 1975, 1978, and revised in 1983 have reduced the amount of energy new homes used by 50% compared to pre-1975 homes. With the new standards, a house designed today will consume only half the energy for space heating and cooling and water heating that would have been used in homes built to the 1978 standards,

A report issued five months earlier claimed that the standards save both energy and money (although the estimate of thermal efficiency differs by one half):

[13] Data on 33 different systems were collected from solar installers throughout the state. From these data the CEC staff identified a typical system. Even in the least sunny areas where the proposed standards menu contains solar water heating, 60% of the energy required for water heating in California residences can be provided by the "typical system."

The Commission's residential building standards result in new home construction that is 75% more energy efficient than homes built in the 1970s. Over a 30-year period a typical homeowner in Los Angeles will save $25,000 (California Energy Commission, 1985b, p. 1).

Apparently these claims are not based on empirical evidence but, rather, on the computer simulation described above.

A somewhat different perspective on California's regional residential energy standards is provided in a paper by Quigley (1984b). This analysis estimates a production function for housing with energy, real estate, and land as inputs, using data on FHA-financed new single-family construction in California in the 1970s. Under a variety of assumptions^[14] the results can be used to estimate the efficiency of building regulations.

The analysis suggests that the California standards are quite efficient if energy prices are expected to increase by about 10%/year but are quite costly indeed if energy prices are expected to appreciate less rapidly.