Energy Matters

When Home Performance programs talk pricing, they often hurt the market

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Some efficiency programs do an excellent job undermining the market and the very contractors they’d like to enlist to make efficiency improvements. And when they start talking about pricing, most of the time that’s exactly what they do. (For a discussion of other things that many programs could do better, see this program design recap.)

Here are a couple of good illustrations from the National Residential Efficiency Measures Database (and I’m copying and pasting them right from their website on December 1, 2013, so that you know I’m not just making this stuff up!!):

NREL cost example-furnace

Really??? An average installed cost of a 60,000 Btu, 98% AFUE furnace is $2,540? ($1,100 + 50kBtu * $24/kBtu) . And the range is $1,640-$3,240?? I’m wondering if NREL will provide a quality installation of the measure at the cost. If that’s the case, we can all start subbing work out to them.  A fair installed price–and NREL makes no distinction between cost and price–for the furnace could easily be 2-3 times that. And no, NREL isn’t  just talking about equipment cost. They mention some of the things that can influence the cost, including:

  • Prevailing local wages
  • Drive time
  • Local code requirements
  • Access
  • Condition of existing flue
  • Need to bring in combustion air
  • Condition of existing electrical system
  • Need for additional wiring/switching
  • Condition of existing gas line
  • Presence of hazardous materials
  • Stand alone vs treating both heating/cooling
  • Need for controls and/or zoning
  • Condition of existing duct system
  • Type of equipment

Well, yeah. Those and many more factors.

I’m not really cherry-picking a bad example. Look at any of their other furnace numbers. Or the boilers. Or the air-conditioners. Or the HRVs:

NREL replace AC cost example

So, according the NREL’s database, replacing a SEER 8 Central A/C, with a SEER 14 model costs on average, $2,636. Wow. Well, the good news is that 98% AFUE furnaces appear to be cheaper. The bad news is this number is also doesn’t work.  Consider this an open invitation to NREL to defend these numbers. I’ll provide space here if they want.

No, not everyone reviews this database. But the database does feed things like the Home Energy Saver–the foundation of the Home Energy Score–that many consumers use, and that some home inspectors are starting to cite in referencing home improvement savings and costs. Yes, if one reads closely, NREL states, “The application of the average measure costs displayed below to any particular home is discouraged.” And yet they give a range that is just as bad, and perhaps even worse than the average. More on that in a moment.

This is just one example. Many programs make claims about what “reasonable” costs (costs to the consumer, i.e., prices) that are just as divorced from reality as NREL’s numbers.

How does this hurt the market?

Well, the big screamingly obvious reason is that it undermines the credibility of contractors who want to do quality work based on real costs and a fair profit (is 10% net profit fair? most contractors don’t even make that much.) The trusted authority says that 98% AFUE furnace costs on average $2,300. And the contractor–and honest, quality-focused contractor quotes $4,600 to install that furnace. The consumer thinks the contractor is trying to rip them off, despite the reality that the contractor may have presented a very real and very fair price. Now, a big discussion about how to price is beyond the scope of this post, but holler if you want to have that discussion.

The less obvious reason has to do with the anchoring effect. Since at least as far back as 1974 when Tversky and  Kahneman published “Judgment under Uncertainty: Heuristics and Biases” we’ve know about the anchoring effect. The anchoring effect boils down to our bias to use an initial piece of information to make following decisions. Sounds reasonable. But wait. What happens is we make decisions based on the perceived comparative value, rather than on the pure value for investment (time, money, etc.), we factor in comparative value.1

In home improvement, it boils down to the reality that the NREL or program price becomes the benchmark–even the unconscious benchmark–for future framing of value. The too-low, way-too-low, price determines what seems reasonable in the mind of the consumer.

The NREL prices are wrong. Sometimes installed prices are less than material costs alone, without labor costs, marketing costs, sales costs, other overhead costs, let along even a small measure of profit. Tversky and Kahneman and many others down the line have shown that this is hurting the market. They should pull the plug on this immediately.

And the same applies to other programs who dabble in pricing, but don’t have a full understanding of what sustainable pricing in the market really looks like. Don’t do it.2

(Note, this article includes a correction from an earlier version based in a clarification from NREL. Originally I cited a furnace cost of $1,100. As NREL pointed out,  I misinterpreted the data in the NREMDB.  Specifically, I overlooked the guidance at the top of the page…” Where multiple costs are indicated they must be combined to obtain total measure cost (e.g., fixed ($) and normalized ($/sf) costs).” The costs need to be calculated; there’s a fixed component AND variable component.  In the case of the furnace example I used, the average cost is $1,100 + $24/kBtuh.  So, NREL’s estimate of the average cost of a 50 kBtuh furnace would be $2,300.)

1Dan Ariely is another of the many behavioral economists who’ve discussed this. Check out his informative and fun TED talk–a very watchable 17 minutes, including examples of anchoring. And suggestions about who to bring with you when you go bar hopping.

2Those programs who say, “but our incentives are tied to costs, so we need to make sure they’re fair” are trying to fix the wrong “problem”. The problem isn’t with the pricing, it’s with the incentives. See more on incentives and unintended consequences–and unintended costs–in this article.

Those interested in consumer protection would do better to enforce existing codes, regulations, and laws. If in CA, 85% of HVAC installations don’t comply with Title 24, no wonder those who pull permits and focus on quality installations have to charge more. There, the price anchor is based on crappy work! I’m using CA as an example only. The same applies elsewhere.

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

Discussion

  1. Ben Jacobs  December 12, 2013

    Hi Mike,
    I share your concerns also about the lack of reliable information from government websites. I work with a federally funded program that has goal of providing free home energy audits to HUD eligible families to encourage homeowners in a low income community of southeastern NC, to make improvements to increas home energy efficiency.
    A major problem that the project struggled with is the Lack of Benchmarks on programs similar to ours in the rural southeast. There are very few model programs that have been done in rural areas of the southeast. There are few programs that provide information on energy use of homes in the rural southeast that we can use for comparison. We have had very little comparative information to build upon on energy usage in detached single family homes in rural areas of North and South Carolina. We have gathered information over the past two years to help build knowledge understanding, and practice in this area.
    A recent study on the “Help My House Pilot Program” in rural areas of South Carolina has provided a lot of very useful information that is very helpful to us to establish comparable benchmarks of home energy use in a rural area very similar to ours in home designs and home energy use, in best practices for recruiting clients in a rural area, and for projections of energy to be saved by specific measures. This program also provides detailed information on cost of specific home energy upgrades.
    In the “Help My House Pilot Program” customers invested an average of $7,700 in energy improvements and saved an average of $1,160 per year. The investments in the improvements paid for themselves in an average of 6.6 years. Research shows that advances in Building Science has improved analysis of problems, designs for improvements, and vastly improved renovation of homes.
    Efforts to encourage improvements normally focus on dollars saved on home energy bills. A savings of $500 to $1,000 per year is very desirable and achievable. However, research shows that improvement in Occupant Health is a major benefit of Retrofits to Homes in poor condition that are occupied by people of low and moderate income (especially those with major health problems or breathing problems).
    I think there should be much more research and discussion on the benefits of improving health of occupants that come about as a result of improvements in home energy efficiency. Benefits of Home Energy Improvements can be over $2,000 for person with chronic breathing problems such as Asthma. They can be over $200 for average occupants, that results in fewer colds and breathing related illnesses. A Home Energy Audit helps guide homeowners to Healthy Homes Solutions. A healthy home is: dry, clean, safe, properly ventilated, pest-free, contaminant-free, and well maintained. Because all the elements of a home interact, home energy upgrades often improve indoor air quality and upgrades can be designed to produce a healthier home.
    I encourage you to do a Google search and read the summary and the details on the outcomes of the “Help My House” program. In this case the home retrofits were affordable and sensible, and were not deep energy retrofits that way to expesnive for most low and lower income middle class families.

    (reply)
  2. adin  December 12, 2013

    Mike,
    Great points. I’d love to see a database of utility program pricing for thermal measures – especially the ones that have fixed program pricing, like in MA. Each utility has it’s own price list based on what is deemed ‘cost-effective’.

    Margins for contractors are so low, that there wan up-roar when the program started requiring the permits for insulation to be submitted with invoices – there was no profit left after one extra trip to get a client’s signature and then driving to inspector’s office to submit the permit application !

    Fixed price lists are backward for any program that is approaching ‘house as a system’ – how you employ true system thinking when the solutions are wrapped up in a linear utility mindset ? Fortunately In MA incentives for all mechanical equipment are ‘open market’ .

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  3. Oliver Curtis  December 6, 2013

    Mike,

    I share your concern that the information in the National Residential Efficiency Measures Database could easily anchor consumer perceptions of retrofit improvement prices. This is clearly not the intent of the database, however, it is one likely outcome of centralizing cost data. It is irresistible because the data is free, complete and appears to be precise. In other words, it has an irresistible allure.

    I’ll bite on your pricing lure because no cost discussion is complete without equal time on pricing. I would argue for more contractors to adopt a value pricing model. This means decoupling cost from price through a focus on the desired outcomes of the client. The onus is then on the contractor to articulate and deliver the stated value or outcome based on a mutually agreed upon price. This is the difference between selling a furnace replacement and delivering comfort to all areas of the home. The first proposition is priced like a commodity (race to the bottom) while the second can be priced based on the value delivered.

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    • Mike Rogers  December 7, 2013

      Thanks for the input, Oliver. Nice addition on the cost v. price question. Too much contractors try to compete on price rather than differentiate on value. The result is both lower quality and precarious financial health of the contractors.

      (reply)
  4. Dave Roberts  December 5, 2013

    Thanks for the feedback Mike. We appreciate your insights and perspective now as well as throughout the process of developing the NREMDB. As we’ve recently discussed, we are happy to continue to work with you to address your concerns.

    (reply)
    • Mike Rogers  December 5, 2013

      Hi Dave,

      Thanks. I’ve always found that you take people’s concerns seriously.

      I don’t think there’s much you can do to work with me to make this better–it’s much bigger than that. To be even close, it absolutely has to be market by market, with sufficient data in each market. San Francisco is very different from Fresno and Des Moines and Pensacola. The database very also has to be updated very regularly–and by regularly I mean quarterly as are the best cost-estimator services out there. These services are expensive and it would be very expensive for NREL to try to keep up. I suspect it’s unlikely that NREL will ever have sufficient funding to do this right.

      Even the above perfectly executed isn’t great from a consumer communication perspective. The exact average will be wrong almost every time when applied in an individual case, and sometimes wildly wrong. You’ve already recognized this with the caveats. And thus we’d be left with the behavioral economic implications touched on in the article above.

      The concept works as a remodeling cost estimator, for example, because remodelers often use it for a subset of the overall project (being more familiar with their own routine costs), and over time they can adjust accordingly, and they learn way to build the uncertainty of these costs into their pricing structure. Note, that I said cost estimator, not a price estimator. They are not the same thing.

      I’m not convinced folks at DOE or in any efficiency program should be in the pricing business. DOE doesn’t suggest pricing for light bulbs. Or refrigerators. Or new homes. Why the obsession with pricing for retrofits which are much more individualized in nature, and much harder to generalize about? Focus on the benefits. Focus on quality. Give people something other than price on which to differentiate!

      Thanks,
      Mike

      (reply)
  5. Coby Rudolph  December 2, 2013

    And then on top of this, there are the programs that use fixed pricing and cap pricing for each measure at some amount that’s been determined by a combination of cost effectiveness tests and some kind of market survey. Great!!

    One other thing that these pricing guides don’t account for is differentiation in customer service, and different kinds of pricing packages that may include followup services.

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  6. Mike Rogers  December 2, 2013

    On the evening of Monday, December 2nd, the National Residential Efficiency Measures Database appears to be down. I deny any responsibility. :-) Several of you have contacted me. The link I provided was correct–Google still show the same link. It’s just not working.

    Some further background is available. See for example this DOE fact sheet, http://1.usa.gov/1ciotaa.

    A couple of excerpts:

    “The National Residential Efficiency Measures Database contains performance characteristics and cost estimates for nearly 3,000 energy retrofit measures. To date, it is used in four prominent DOE software packages to help optimize energy-efficiency recommendations.” (emphasis added)

    and

    “The database has been well received by the retrofit industry and is already being
    employed by the following DOE energy analysis software tools:
    • Home Energy Scoring Tool. Developed by Lawrence Berkeley National Laboratory (LBNL), this tool is used in DOE’s Home Energy Score pilot program.
    • Home Energy Saver. Developed by LBNL, this tool recommends cost-effective energy-efficiency improvements to homeowners.
    • Home Energy Saver Pro. Developed by LBNL, this professional-grade tool for contractors recommends cost-effective energy efficiency improvements.”

    No word yet if the connection between the database and these tools is currently down or still active.

    It’s kind of scary to think that cost-effectiveness recommendations are made using this cost data. In at least a couple of public sessions we’ve learned the home inspectors are doing just that, projecting savings as much as 50% for $9,000, based on inputs to the Home Energy Saver Pro. And any consumers using the Home Energy Saver and getting recommendations based on the costs may be subject to a surprise that decreases confidence to buy.

    (reply)
  7. David Holtzclaw  December 2, 2013

    Mike,

    The the National Residential Efficiency Measures Database is down both from your link above and from goggling the database. They are probably too embarrassed :-)

    (reply)
  8. John Nicholas  December 2, 2013

    Mike, Major Point with Pricing. This type of stuff does anyone working the field a bad name. The HVAC contracting world has many different models and most of them do not complete simple Quality Install Checklist Items. The buyer is not well served by short cuts and by this report from NREL.

    I’ve seen replacement systems installed within 30 miles of me for 6K within a week. The same system installed 100 miles east will price out at 15K and a 6 week wait to install.

    On the ERV, a dealer can obtain a Fan Tech model and install it in this price range. That should be considered a below average price. Most dealers will not try to install equipment from other than their major brand.

    (reply)
  9. Dmitri Martin  December 1, 2013

    Thanks for sticking your neck out and ruffling a few feathers!

    (reply)

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