Housing Electrification

Currently, over 70% of all California households depend on fossil fuels for their space and water heating. The table below, from the California Energy Commis- sion’s Building Decarbonization Assessment in 2021, summarizes four different electrification scenarios. Only the ‘Aggressive Electrification’ plan’s trajectory comes close to achieving the 2045 neutrality goals. The path to fully achieving the climate goal requires powering the complete housing stock with 100% renewable energy sources by 2045. In order to achieve this, all new and existing housing units will need to be converted to be powered by all-electric, renewable sources. For example, gas-powered space and water heating appliances will be converted to energy efficient all-electric heat pumps including other energy efficiency upgrades.

Straight Line Carbon Trajectories

Trajectories toward 2045 shows the relative closeness in 2030 of all the scenarios, but the long term shows large difference in trajectories.

Source: California Energy Commission

Visualizing the California Landscape

California cannot meet its climate goals without decarbonizing its affordable housing stock.

The below chart illustrates the breakdown of all emissions sources by sector in California. Multifamily properties are considered commercial, while single- family properties are considered residential. The multifamily sector comprises a substantial portion of the overall emissions released from commercial buildings: according to CBRE, nearly 40% of California commercial real estate investment goes to multifamily properties.

2020 Total CA Emissions

369.2 MMT CO2e

Source: California Energy Commission

California’s Existing Affordable Housing Stock

To determine the cost of decarbonizing the affordable housing sector, the team first assessed the existing affordable housing stock. The below chart shows the breakdown of California’s residential housing stock by single and multifamily housing. Of the 13.7 million total housing units in California, around 9 million units are single-family and around 4 million units are multifamily. According to the California Housing Partnership, approximately 1.6 million units are classified as affordable housing, defined as both regulated and unregulated units where rents are such that residents making average household incomes do not spend over 30% of their income on rent. Approximately 500,000 of these units are regulated by government agencies to ensure specific rent levels for the long-term. The remaining 1.1 million affordable units are unregulated, otherwise known as Naturally Occurring Affordable Housing (NOAH).

California’s Existing Affordable Housing Stock

Source: California Housing Partnership

Forecasting California’s Affordable Housing Stock

Given the target of statewide carbon neutrality by 2045, the team additionally forecast the number of new affordable housing units likely to be built between now and then.

California’s affordable housing crisis is driven by a severe undersupply of affordable units: California Housing Partnership reports a gap of around 1.3 million affordable housing units that would also need to be all-electric within the framework of the energy efficiency goals. Despite this gap, California averages around 20,000 newly created affordable housing units per year. Data from the California Housing Partnership shows a positive upward trend in the past 3 years; however, the state is still only funding around 16% of what it needs to meet its housing needs. For the purposes of creating a realistic analysis, the team added the 1.6 million existing units that need to be decarbonized with 20,000 per year of newly created affordable housing units for 22 years, ultimately deriving a total of 2,078,000 affordable housing units by 2045.

The Cost of Electrification

In their California Building Decarbonization Assessment, the California Energy Commission estimates that the cost of decarbonizing a residential unit in the State of California ranges from $10,000 to $40,000, with costs decreasing if units already have some electric appliances, electric heat, and/or electric water heat. At an average of $25,000 per unit, the cost of decarbonizing all 2 million affordable housing units is approximately $53 billion.

The Funding Gap Calculation

Currently, the climate plan carves out $1.1 billion affordable housing electrification over the next 5 years, or $220 million annually. Although this funding level illustrates a strong commitment by the state, the funding levels are insufficient to meet the goal.

As illustrated in the below chart, the actual cost of upgrading affordable housing in California requires $2.4 billion per year for a total of $53 billion.

To calculate the annual investment cost for upgrades to affordable housing, we can divide the total gap of $48 billion by the 22 years that we have to reach the climate goal, which results in a required annual additional cost of $2.2 billion a year to reach the climate goal for affordable housing.

The above chart outlines the current funding per year set aside by the State of California compared to our own estimates. The current funding level is extrapolated out until 2045 in current dollar values and assuming that California will at least maintain current funding levels over time.

Calculating Rent Increases

Regulated affordable housing, which has strict rent caps, currently faces limited resources to generate additional funds for decarbonization. The bulk of the state’s affordable housing stock, however, is largely unregulated, and owners of those properties have an option to increase rents to fund the upfront cost of decarbonization measures.

The team developed the example below to help better understand the potential negative consequences on unregulated affordable housing rents when strict decarbonization mandates are coupled with a lack of increased funding. In this example, we assumed three-person households earning 65% of area median income (AMI) in LA County; an affordable two-bedroom rent for such a household would be $1,844 per month. We assumed that units were unrestricted affordable Class B units built in the mid-1990s and would cost a minimum of $25,000 per unit to decarbonize. A 100 unit affordable housing property would thus need to raise an additional $2.5 million in upfront capital to fund decarbonization. If the owner has no other source of low-cost funds (ie. grants or “soft loans”), then they will be forced to fund the decarbonization upgrades using conventional debt, which translates to an increase to in-place rents, thereby threatening affordability.

At today’s interest rates, we are confident that if this $2.5 mil funding gap for decarbonization is not filled with state and federal support, housing owners will be forced to raise rents by approximately of $155 per month, or 8%, in order to raise the upfront capital required to fully fund the decarbonization of their properties. This 8% rent increase is typical of what we will see, and it will be borne by those with the lowest means in our communities.