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Economic Currents

Keep up to date with the latest UHERO news.

Gauging Home Affordability: The Challenge

Posted December 2, 2015 | Categories: Hawaii's Economy, Blog

At a time of dwindling inventory and rising prices, housing affordability has once again become a hot topic in Hawaii. One way to quantify whether the typical single family home or condominium is “affordable” is to compare median sales prices to the value of a mortgage the median household income could support. However, mortgage payments do not capture all of the costs of homeownership. Below, we incorporate several additional costs and a number of different assumptions about mortgage characteristics to illustrate how they affect the affordability of a median priced homes and condos in Honolulu.

Beyond a down paymentand monthly mortgage payments, homeownership requires additional expenses. These include closing costs related to the purchase, which we estimate at 2% of the sale price, and periodic costs such as property taxes, insurance, and maintenance. Property taxes vary across counties, and residential property taxes as a percentage of the home’s assessed value range from 0.35% in Honolulu County to just over 1% in Hawaii County. Homeowner’s insurance is also quite variable, and a particular policy depends upon features of the home and surrounding area. We estimate insurance costs using the average of the 2015 premiums published by the State Department of Commerce and Consumer Affairs.

Condo association fees can range from less than $300 to well over $700 per month, and we take $500 per month as the approximate midpoint. All expenses associated with the structure, such as insurance and condo fees, are adjusted across time to reflect historical changes in construction costs. Finally, our estimates are contingent upon a buyer’s ability to come up with a down payment, which is a significant barrier to home ownership for many households. If a purchaser pays less than 20% as a down payment, lenders require insurance to cover non-payment of the mortgage. Based on data from the Federal Housing Administration, we use an annual mortgage insurance premium of 0.8% of the loan amount.

  

The first two figures plot single family home and condominium prices that are “affordable” for a family spending 30% of the median household income (estimated by the US Department of Housing and Urban Development) on homeownership under various scenarios. Not surprisingly, a simplified measure that focuses only on the downpayment and mortgage costs overstates the affordability of homes and condos in Honolulu. Using the assumptions listed above and UHERO’s forecasts for 2015 home prices and mortgage rates, the median household can only afford 75% of the median priced home. In contrast, condos remain within reach of the median household that can muster the 20% downpayment. For households making only a 5% downpayment, owning a median priced condo would require more than 30% of the median household income, with the exception of the period from 1997-2003 at the bottom of the last housing cycle. Finally, the last figure illustrates that families earning only 75% of the median household income can not afford a condominium if all the extra costs of ownership are factored in.

 

- Peter Fuleky


Research Driven Energy Policy

Hawaii is in the midst of transforming its electricity system into one with a lot more renewable energy. It’s an exciting time, but also a challenging one that is forcing the State to make tough decisions amid many uncertainties. There appears to be confusion about who bears responsibility for making these decisions. Take, for example, public discussion surrounding the potential merger of HECO and NextEra, which has focused at times on whether NextEra can be trusted to keep their commitments to meeting Hawaii’s clean energy goals. At face value, that discussion seems odd given the utility is regulated and obtains approval from the state Public Utilities Commission (PUC) for important policy changes. Meeting clean energy goals is a statutory mandate or regulatory requirement, not HECO’s or NextEra’s “choice”.*

It is possible that these concerns arise from the fact that the State’s goals have escape clauses. The Renewable Portfolio Standard (RPS), for example, includes a long list of reasons why the utility can be allowed to fall short of prescribed targets, including the cost of achieving the goals. Clearly, there are many ways the State might achieve its renewable energy goals, and the path we choose will have many consequences—for the cost of electricity, how the burden of those costs are allocated, how much energy we use, and the environmental impacts. Regardless of how the PUC decides the merger case, it is their job to ensure that the State’s goals are met in a cost effective manner.

Regardless of who owns the electric utility, given the pace and scale of changes to our electric system, there has to be a better way to fully utilize our local academic resources as we take on this formidable energy transformation. We need a mechanism for the utility, the PUC and other entities to engage in collaborative processes that results in an effective strategy befitting of the state’s multifaceted goals. These should include rigorous and transparent analysis of a wide range of policy alternatives from neutral parties.

We believe UHERO, as an objective data and research driven entity, can play a role in achieving the State’s clean energy goals and the need to lower and stabilize the cost of electricity. Several UHERO faculty and fellows have recently joined forces to form the Energy Policy and Planning Group. You may have seen some of the many blog posts or working papers we have released over the past year. A few things stand out from this line of research. First, is the merely obvious, reducing the cost of electricity in Hawaii can have significant impacts on our economy. Makena Coffman’s research showed that a 25% reduction in the price of electricity could raise Hawaii GDP by close to 1.5%. Moreover, focusing on making the business of contracting and pricing more efficient to get the incentives right is likely to create economic development opportunities through innovation in the production, delivery and use of energy.

Demand shifting is another active area of work that was discussed in some detail in "Efficient Design of Net Metering Agreements in Hawaii and Beyond" by Makena Coffman, Michael Roberts, Mathias Fripp, and Nori Tarui. This paper lays out several policy goals that are achievable in the near term, and some longer term goals. For example, Coffman et. al recommend an optional tariff, available for all customer classes, with hourly prices that reflect the continuous variation in supply and demand of electricity. In that way, customers will have incentives to reduce their use during times of high marginal cost (high loads with low renewable power production) and increase their demand during times of low marginal cost (low loads and/or high renewable power production). Customers who are able to shift demand will reduce their own costs and the system’s costs. And, variable pricing will open the door even wider to storage and related innovations. Such variable pricing will require smart meters, and HECO has already filed with the PUC to install smart meters.

There are thoughtful ways of incrementally modernizing the grid in a way that also facilitates customer choice. At first, smart meters need only be installed for households most willing to juggle variable pricing. Well-designed experimental pilots can be used to measure efficacy and guide future policies. To implement these policies it is imperative that the PUC possess the capacity to analyze the technical and economic merits of proposals or issues to be deliberated. UHERO faculty and fellows have been working on building such capabilities for several years. For example Matthias Fripp’s open source SWITCH model allows optimization of investment and electric system operation decisions to study alternative pathways to extremely high penetration renewables. And the UHERO electric sector model is tied to our General Equilibrium Model to translate energy systems decisions into economic outcomes.

We recommend using UHERO’s Energy Policy & Planning Group as a neutral, research-driven evaluator to model and analyze Hawaii’s energy policy. This role could be modeled after the role of the UH Hawaii Natural Energy Institute as a neutral evaluator of energy technology, or it could be less formal.

- Carl Bonham, Makena Coffman, and Michael Roberts

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*See also  "Who’s In Control Here" by Mina Morita.


Does PV Add Home Value?

Circuits with installed PV up to and greater than 250% of daytime minimum load. Source: HECO

Hawaii leads the nation with the highest per capita installation of solar photovoltaic (PV). High electricity rates—three times the national average, —a generous state tax credit, plummeting PV costs, and net energy metering (NEM) policy have all contributed to the proliferation of PV. Considering future cost savings, PV is an attractive investment, yielding an internal rate of return of 23% with the state tax credit, equivalent to a payback period of four years (Coffman et al., 2016). In a recent analysis I answer the question of how PV is capitalized into a home’s value.

Using econometric tools, I assess the impact of PV systems on home value for single-family resale homes on Oahu. Using home resale and PV building permit data from 2000-2013, I find that PV adds on average 5.4% to the value of a home. This translates to approximately $34,000 relative to the sales price of the median non-PV home of $630,000.  

This means that PV already installed on a home is worth about $4,000 more than the median value of a PV permit (approximately $30,000). While this may appear puzzling at first, issues of circuit saturation may well-explain this result. Calculating the stream of electricity savings* over 9 years (the average household tenure) and a typical 30-year mortgage respectively, reveals that a homebuyer is effectively paying $4,000 more for a PV home to receive between $14,000- 30,000 in electricity savings. This makes sense given many of the circuits in Hawaii have reached legal limits for PV installations and therefore new homebuyers have an expectation that future installations will be limited. Thus for many the choice isn’t purchasing a house without PV (and then installing it) but rather to gain access to PV (and future electricity savings).

An area of further inquiry in light of the recent PUC ruling is to extend the dataset to examine whether homes that are grandfathered under the NEM program are worth more.

- Sherilyn Wee



Coffman, M., Wee, S., Bonham, C., and Salim, G. (2016). “A Policy Analysis of Hawaii’s Solar Tax Credit Incentive.” Renewable Energy, 85, 1036-1043.

 

*The net present value calculation assumes a 5% discount rate, electricity price of 30 cents/kWh, a system cost of $4.50/watt (year 2013), 5.2 solar hours per day, 75% efficiency factor, and daily household consumption of 18 kWh.

Economic Analysis of the Water-Energy-Food Nexus: My Visiting Research Fellowship at the Research Institute for Humanity and Nature in Kyoto, Japan

Posted July 30, 2015 | Categories: Blog, Project Environment

Earlier this year I had the opportunity to work with an interdisciplinary team at the Research Institute of Humanity and Nature (RIHN) on a Visiting Research Fellowship examining “Human-Environmental Security in Asia-Pacific Ring of Fire: Water-Energy-Food Nexus." Our objective was to design research frameworks for conducting water-energy-food economic analyses for three study sites in Japan: Obama, Beppu, and Otsuchi.

Synergies and tradeoffs among water, energy use, and food production should be considered by stakeholders and decision-makers looking to maximize the benefit from each resource. Economics can help to identify these tradeoffs by quantifying the benefits and costs of water, energy, and food-related projects over long planning horizons, as well as by optimizing allocations of these resources over multiple uses. During my research fellowship we developed frameworks for economic analysis of the water-energy–food nexus using examples from three case studies in Japan: water allocation over multiple uses in Obama, renewable energy production in Beppu, and construction of a dike in Otsuchi. Each of these case studies involves choices that will affect inherent linkages between water, energy, and food in each system. Failing to recognize these tradeoffs can result in sub-optimal allocation of resources with respect to the economy, the ecology, society and culture.

 

Obama is a city on the Sea of Japan in Fukui Prefecture, where groundwater is an important resource for a variety of uses including domestic use, melting snow, and fishery production (via submarine groundwater discharge). Over-allocation of groundwater towards above ground uses has implications on the important fishery resource near shore. An economically efficient solution is characterized by groundwater utilization paths over time that maximize net benefits across uses, explicitly considering how using water for one purpose reduces the availability of water for other purposes. Aside from the direct tradeoff between groundwater and the fishery, a key variable in the model is the price of energy, which affects the costs of both groundwater pumping and alternative snow-melting techniques. The team developed a bioeconomic optimization model that can be used to solve for optimal allocation of groundwater to each of these three uses over time.


Beppu is a city in Oita Prefecture best known for its high concentration of natural hot springs (“onsen”). Onsen are an important economic and cultural resource, whose use has significant implications on the surrounding society and ecology. Interest in small-scale renewable energy production using hot water and steam from the onsen (“onsen hatsuden”) has increased in recent years, especially following the Tokohu earthquake/ tsunami/ nuclear meltdown disaster of 2011. There are two primary types of onsen hatsuden being developed in Beppu: binary systems which are more productive but generate larger social and ecological damages, and the smaller scale yukemuri hatsuden which have a much lower production capacity but are less harmful to the surrounding ecosystem and society. We designed an economic approach to comparing the benefits and costs of each system.
 

Otsuchi is a small town in Iwate Prefecture in northern Honshu, one of the most impacted following the Tohoku disaster of 2011. Estimates of total economic losses from Tohoku range from $50-$210 billion USD. The research team developed an economic approach to assessing the benefits and costs of a government-financed dike being constructed with the intention of preventing similar losses following a natural disaster in the future. Benefits include the reduced risk of future losses, while costs include not only dike construction, operation and maintenance costs, but also loss of the groundwater connection between land and sea and the accompanying loss of mudflat habitat and associated oyster, abalone, and seaweed fisheries.

While the frameworks for the economic analyses have been developed, the science to properly parameterize the models is still being conducted at our three study sites. We will continue to improve our models and complete the analyses as more data becomes available. The 5-year/5-country (also U.S, Canada, Indonesia, and the Philippines) project will conclude in 2018.

Kimberly Burnett


Net Metering Agreements in Hawaii

In Hawaii, like most U.S. states, households installing rooftop solar photovoltaic (PV) systems receive special pricing under net-metering agreements. These agreements allow households with rooftop solar to buy and sell electricity at the retail rate, effectively using the larger grid to store surplus generation from their panels during sunny times and use it when 
the sun isn’t shining. If a household generates more electricity than it consumes over the course of a
 month, it obtains a credit that rolls over for use in future months. Net generation supplied to the grid in excess of that consumed over the course of a full year is forfeited to the utility. Net metering agreements often include 
a monthly fee to support billing, transmission and operation of the grid.

A growing concern is that the utility has many costs besides the fuel used in electricity generation, and most of these “fixed costs” are lumped in with per- kilowatt hour (kWh) charges. As a result, under current net metering agreements, when a solar customer provides their own power, they don’t pay the fixed- cost component for each kWh they produce. Under 
a revenue-decoupling rule, those costs are shifted to households and businesses without rooftop solar. As less power is sold in Hawaii, fixed costs per kWh are rising fast. Most of the decrease in power sales is due to gains in efficiency, but some of it is due to installations of solar PV. Residential customers now pay roughly $0.17/kWh for fixed costs. After the drop in oil prices earlier this year, well over half the utility’s revenue from residential customers goes toward fixed costs.

 

The graph shows the average residential electricity price from 2000 to the present, and breaks out the generation component from the total (Adjusted ECAF). The difference between price and the Adjusted ECAF (Gap) accounts for all non-fuel or fixed costs.


A longer-term concern, particularly in Hawaii with its high electricity rates, is that an inefficient pricing system could encourage many households and businesses to install stand-alone systems, unplug from the grid, and further raise costs for everyone else.

In a new report UHERO's Energy Policy & Planning Group summarizes the benefits and challenges with distributed solar and sketch out a set of long-term solutions based on marginal-cost pricing as the primary platform. Marginal cost is the incremental 
cost of power production—the cost of generating one more kWh. This cost can vary a lot depending on total demand and the amount of renewable power, among other things, so ideal prices would vary over the course of each day, week, season and year. This is likely to become especially pronounced as the variable supply from renewable sources becomes more prominent.

- Makena Coffman and Michael Roberts

UHERO brief

 


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