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Is cheap energy the enemy of efficiency?


Adding extra insulation can reduce energy costs by 30 percent a year, though it will be more cost-effective when energy prices are high.

Photo courtesy of Cold Climate Housing Research Center

In 2008, the price of oil hit $140 a barrel, double what it had been just a year before. The impact was felt throughout the country, and especially in Alaska, where we rely on oil in so many ways. The state budgeted $300 million to help Alaskans make their homes more energy efficient. Across the state, many residents started retrofitting their homes and burning more wood to save money.

Today we have a different problem. A barrel of oil is going for about $50. It’s been two years since prices crashed, and it’s starting to feel like $2-a-gallon heating oil is the new norm.

In this environment, how does one make decisions about cars, heating appliances, and houses, decisions that will affect pocketbooks long into the future? In other words, does energy efficiency make sense in a time of cheap energy?


Life-Cycle Costs

First of all, this is Alaska. Due to climate, remoteness, and a host of other factors, Alaskans spend more than twice as much on energy as the average American. For example, Minneapolis, one of the coldest cities in the Lower 48, has a heating demand similar to Ketchikan, one of the warmest cities in Alaska. On top of that, more than half the homes in Alaska were built during the pipeline boom of the 1970s and 1980s; today they are aging, inefficient, and under-ventilated.

Second, we have no idea what the future will hold. A house should last sixty years or more. Such a long-term investment demands a long-term view of all the costs associated with it.

We call this the life-cycle cost of a house. It includes not just the cost of buying or building a home, but also what one spends heating and maintaining it over the life of the structure.

But how do we know what energy costs will be in the future? We don’t have a crystal ball, but we can look at projections from the experts.


Table CP2 from US Energy Information Administration | Annual Energy Outlook 2016 | eia.gov/aeo


Increase Wall System R-Values

How can one plan for such an unknown? Let’s look at a couple scenarios.

For the sake of comparison, we’ll take a standard 2,000-square-foot house in Fairbanks with 2x6 stud walls insulated with fiberglass batts. This wall system has an R-value of 19 and is very common in Alaska. It also has a conventional oil boiler and an electric hot water heater.

If heating oil is $2 a gallon, annual heating costs will be approximately $2,500. At $4 a gallon, the costs jump to $5,000.

Now take the same house and retrofit it with an additional four inches of EPS foam on the outside of the walls. This wall system has an R-value of 35, nearly twice as much as the first wall.

At $2-a-gallon heating oil, it will cost about $1,800 to heat the home each year. At $4 a gallon, it’s closer to $3,500.

Either way, adding exterior foam insulation reduces energy costs by about 30 percent each year, though it makes a bigger difference when oil prices are high (saving twice as much each year).

Keep in mind these numbers are Fairbanks-specific and would vary based on region, fuel type, ventilation, user behavior, and other factors. In the Anchorage area, for example, energy costs are significantly lower and more stable, so one wouldn’t see the dramatic swings among the different scenarios.

Back to the example house—is it worth it to add the foam? Based on current prices, it would cost an estimated $15,000 to retrofit it by adding extra insulation to the walls (again, labor and material costs are specific to Fairbanks). How long will it take to recoup that in energy savings?

It depends on the price of energy. If estimates are correct and heating oil returns to $4 a gallon, the payback period is about eleven years, not a bad return on investment for those planning to live in the house long term. But at $2 a gallon, it stretches to twenty-five years, too long for many homeowners. Either way, energy efficiency requires a long view and a careful calculation of costs and expected returns.


Small Measures, Big Differences

Fortunately, there are other things homeowners can do to make their homes more efficient regardless of the price of oil. We recommend starting with small measures that can make a big difference without a huge investment.

First, air sealing is almost always the best “bang for your buck.” People pay a lot to heat the indoor air: keep it from rushing outside through doors, windows, and cracks in the floor and ceiling. Air sealing includes caulking windows, weather stripping doors, and spray foaming any penetrations in the building envelope—for example, where pipes and wires enter the house. Additionally, patch holes in ducts through unheated spaces (and make sure those ducts are well insulated). Keep in mind that tightening a house will most likely boost the moisture levels inside; so installing mechanical ventilation may be necessary if it’s not already present.

Second, rather than insulating the entire house, focus on the attic or crawlspace. Because hot air rises, most heat is lost through the top of the house, so that’s a good place to start. For a cold roof with an attic, it’s relatively simple to add more insulation to the attic floor. Another option is to add foam to the crawlspace walls, either on the inside (cheaper, but placement is important to avoid moisture problems) or the outside (more expensive, but simpler from a building science perspective).


It’s easier in many ways to build an efficient house than to retrofit an existing house. For example, building an extra efficient house in Fairbanks will pay back in six years, based on traditional mortgage terms and today’s energy prices.

Photo courtesy of Cold Climate Housing Research Center


Consider New Construction

New construction is a different story. When buying everything for the first time, certain efficiency measures may be cost-effective that wouldn’t be for existing homes.

For example, it’s less expensive to add extra insulation during construction than during a retrofit, since the walls don’t need to be taken apart. And the end product will likely be better because one can pay attention to details, like air sealing, that make the system perform better as a whole.

Let’s say someone is building a house from scratch. An average sized house in Fairbanks built to a higher energy standard will cost an additional $13,000 compared to a conventional house built to the Alaska Housing Finance Corporation’s minimum energy standard. At today’s heating oil prices, that’s a savings of nearly $1,000 each year. While that may not seem cost-effective when paying out of pocket, the numbers change if one is borrowing money. Based on traditional mortgage terms (interest rates, tax deductions, etc.), the energy improvements will pay back in six years. Over thirty years, a homeowner will save almost twice what was invested in the extra insulation.

In Anchorage, it would cost roughly $8,700 more to build an extra-efficient house compared to one built to Alaska Housing Finance Corporation’s minimum energy standard. At today’s natural gas prices, it would not be economical. But remember, the state has poured more than $1 billion into subsidizing oil and gas production in Cook Inlet. Using unsubsidized energy prices (estimated by the Revenue Department to be 22 cents higher than current prices per hundred cubic feet), the extra efficiency measures would save $700 a year, which would save money in the long term.

So again, lots of factors to consider.

There are other options if investing in the walls isn’t feasible or desirable. For example, good windows are a great investment in a place like Fairbanks. Even at current oil prices, buying triple-pane instead of double-pane windows pays back in less than seven years. Over the life of the window, homeowners will make more than twice their money back in energy savings.

In a place like Anchorage, however, it would take twenty-one years for the triple-pane windows to pay off at current natural gas prices, which is roughly equal to the life of a window. There are other reasons to buy good windows—like comfort and performance—but the decision should not be driven by economics alone.

While housing decisions should be based on economics and the best information at hand, remember—not everything can be measured by payback period alone. Efficiency equals stability. There is a great sense of security in knowing that, no matter what happens to prices in the future, only a small amount of fuel is needed to stay warm through the Alaska winter in an energy efficient home.



This article first appeared in the December 2016 print edition of Alaska Business Monthly.

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