According to the American Council for an Energy-Efficient Economy, Massachusetts is once again the nation’s most energy-efficient state, largely based on the perceived success of its ratepayer energy efficiency programs.
But what is the right metric for success? While spending the most per capita on energy efficiency programs may accomplish near-term goals, real success should be measured by the approaches that can scale to enable the massive investment needed to achieve the true potential of energy efficiency.
The question remains whether the Massachusetts’ approach -- a prime example of a top-down, program-based strategy for delivering energy efficiency -- can scale, given the extremely high levels of public and ratepayer investment required for it to work. Even moderately successful scenarios will require an investment in energy efficiency that reaches into the trillions of dollars, a number that vastly exceeds even the most optimistic assessment of available public and utility ratepayer funds.
Under the Mass Saves program, utilities hire an implementation contractor to audit and sell projects and set pricing with contractors. The program was changed in recent years to allow homeowners to at least select which contractor they want to work with and to allow contractors to acquire their own customers. Nevertheless, the program remains extremely restrictive; market actors still must essentially compete with the program or be relegated to filling orders.
While this approach has indeed been able to drive significant numbers of audits and projects in Massachusetts, it appears to be accomplishing the opposite of its intentions. According to both a Lawrence Berkeley National Lab report and an American Council for an Energy-Efficient Economy report from this year, Massachusetts is spending more public money for each kilowatt-hour saved than any state in the country.
In other words, Massachusetts may spend the most per capita on energy efficiency, but it is, in fact, the least efficient state in the country at delivering savings.
While Massachusetts is clearly ahead of most states in terms of the adoption curve, getting even basic data on penetration rates or depth of retrofit savings is surprisingly difficult.
It is, however, unlikely that Massachusetts has moved much beyond early adopters. Even if the program were squarely in the mass market, energy savings should be getting cheaper, not more expensive as volume increases.
So why are costs so high?
The simple answer: when money pours into a program that lacks competition or transparency, costs increase -- a common problem for monopolies in general. By comparison, in competitive, transparent markets, prices drop as the market grows and competition increases, rewarding those who deliver results more efficiently and encouraging innovation.
The recent success and rapid growth of solar energy provides an instructive example of such innovation. It's a real-time example of the power of market forces to reward business models that work for customers and industry while being held accountable to results. As the California Solar Initiative rebate program trended from a subsidy of nearly 50 percent to zero, a strong industry, driven by billions in private capital, has emerged in its wake. Costs have plummeted as financial and technology innovations have delivered solutions to meet customer demand, resulting in a huge influx of private investment and innovation in technology, finance and business models.
By contrast, the energy efficiency industry has been conducting a grand experiment for the past 40 years to prove the theory that top-down programs can “transform markets.” At this point, we have proven rather conclusively that the program-centric approach to energy efficiency does not appear to benefit from economies of scale found in competitive markets. Furthermore, it is highly vulnerable to cyclical political changes, especially in states that are less environmentally sensitive than Massachusetts. In just the past six months, public utility commissions in Ohio, Arizona and Florida have begun the process of shutting down their state’s energy efficiency programs, citing cost as the primary motivator.
Simply put, it is not reasonable to expect homeowners to voluntarily dip into their wallets and directly fund the massive infrastructure investment in distributed energy efficiency. Instead, we must engage private capital to invest in this emerging new market that will value energy efficiency as a reliable resource, and we must pay for these investments in the same way we finance power plants -- through project finance that monetizes cash flows from savings, rather than the balance sheets of the building owner.
Energy efficiency is a resource that delivers clear public benefits (in addition to enormous private benefits such as improved comfort and lower bills). It creates local jobs, reduces the need for new power plants, and moves us closer to meeting our emissions goals. Getting paid for that value is not charity; instead, monetizing these unrealized benefits simply aligns interests and pays for this distributed negawatt power plant by rewarding the homeowners and companies making the actual investments energy efficiency -- just as if they were building new generation capacity.
By creating a more transparent marketplace for energy efficiency, we can increase private funding, increase flexibility in delivery, and truly add efficiency to the pool of resources that will make up Grid 2.0.
The coming paradigm shift will not the eliminate the need for public and ratepayer funding and regulations to ensure a fair and transparent market, but it will require a different, simplified regulatory role -- a role that looks essentially like the public sector involvement in every established market.
A new vision for the future
Rather than programs and regulators attempting to divine the right business model, they can focus on safeguarding consumers, ensuring that the resource of energy efficiency is fairly measured and valued, and compelling a conflicted utility sector to continue making investments in demand-side resources. That will leave the private sector to invest in and innovate around how energy efficiency is delivered.
The good news is that private capital is already flooding into renewable energy, and it is poised to do the same for energy efficiency. In just the past year, we have seen a number of significant energy efficiency deals inked, including Citi’s provision of $100M of debt to Kilowatt Financial, the launch of Renewable Funding’s Warehouse for Energy Efficiency Lending and the creation of Renovate America’s residential PACE securitization.
While nobody has yet cracked the code on the utility structure of the future, or on exactly how energy efficiency will contribute, there are some huge innovations in the works. In particular, the New York's Reforming the Energy Vision proceeding is fundamentally rethinking the utilities’ role and how to engage both energy efficiency and renewable energy as resources.
In one example of this new emerging model, cited in a recent Utility Dive article, Con Ed was faced with 2 percent to 4 percent load growth in Brooklyn and Queens (come on, hipsters, turn off your lights!). Rather than building a $1 billion substation, the Public Service Commission asked Con Ed to rethink its approach; in response, the utility went out to the market for 52 megawatts of demand-side solutions.
In the article, Audrey Zibelman, chair of the New York Department of Public Service, explained what was different with this project: instead of Con Ed designing the solution upfront and issuing a restrictive RFP to achieve it, the utility “just went out and said, 'We need 52 MW of demand reductions over the next several years. Market, come at us.' [...] As a result, we're getting incredibly innovative solutions. Because rather than a bunch of regulators and utility engineers sitting there saying, 'We know best,' we're asking the market. We're saying, 'We have a problem. Can you solve it?'"
In a recent Greentech Media interview, Richard Kauffman, New York Governor Cuomo’s “energy czar,” put it succinctly: "We want utilities to have the economic incentive to run their systems more efficiently. We give them price signals. We will free up the data to encourage competitive markets." In reference to the shift from central generation to distributed resources, he said, “We need to get to that system not by creating more programs, but by animating markets."
New York may be the most aggressive in spearheading a move away from program-delivered energy efficiency toward markets; however, we see similar trends in other states including California, where in response to the closure of the San Onofre Nuclear Plant, Southern California Edison put out a request allowing all resources, including gas-fired generation, energy storage, demand response, renewables, and energy efficiency, to bid and compete in the same solicitation.
While some had hoped for a even more decisive outcome in favor of clean energy options, 27 percent of the 1,892-megawatt procurement went to non-fossil-fuel-based solutions, with 7 percent flowing specifically to energy efficiency. While there is clearly room for growth, one could conclude that this is a strong early showing, considering these “upstart” industries are competing with the deeply entrenched status quo of the energy sector.
The transition of energy efficiency from programs to markets is both a major paradigm shift and simply the addition of competition, transparency and accountability to the current system. Business models that customers demand, are profitable to deploy, and can survive based on the value of the savings they deliver to market will be allowed to succeed. The great innovation is simply to make energy efficiency like every other established commodity market.
As Grid 2.0 unfolds in real time, there is an opportunity to embrace the evolution of energy efficiency by valuing energy savings as a resource on a performance basis in an open market. We can start by getting clear about what constitutes success.