Response to Bruce’s Question About EE Incentives

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In response to last week’s post on “Designing Effective Home Efficiency Programs“, Bruce Manclark asks regarding 3. The closer any incentives are to the energy-savings result you want, the less you need clunky and expensive rules to try to herd the market in the right direction: “Whats the best way to do this? Modeling? Deemed savings? Open EE meter?”

The best way to do this is to make the price of energy (or carbon) higher. Many economists agree this is most efficient.

Combine this with ratcheting up standards everywhere. David Goldstein makes a good argument that energy use actually isn’t very price elastic, so raising prices has little impact. His argument has too many confounding factors. However, he does make a very compelling case that things like better codes and standards has a big impact. I agree. (Read “Carbon Fees are Not the Best Solution to Climate Pollution”).

But I hear Bruce’s follow-up already. “That’s not practical. And I meant what is the best incentive that the utility regulators can impact.” (Sorry Bruce, if the word’s I just put in your mouth aren’t accurate!)

Ah, that’s a different question. We’re no longer talking about the best. But, what can we do?

For starters, I’ll point to a lot of things for which efficiency programs provide incentives that don’t lead directly or very effectively to energy savings. Many of these will seem very familiar.

What about pay-for-performance? I think that’s a great idea. Performance is really the only thing that rate-payers should ultimately pay for! There are some challenges with this, including changing use cases and gaming. Big data—and access to that data—can mitigate some of this. The other thing that will mitigate it? Lots of rules from the regulators that may it less efficient. Over time, the rules pile on to prevent fraud and abuse and this creates friction which limits the effectiveness of the approach. Wanna bet?

I don’t look at P4P as a panacea however, certainly not for contractors looking to deliver bigger projects (and more savings). First, as this data needs to be agreegated right now, and those doing the aggregators will generally do this only as it makes good financial sense for them to do it. That means they get a big cut off the top, and the incentives to the homeowner shrink. At least a couple potential aggregators in California are crunching the numbers and seeing pretty low incentives remaining…although that’s compared to the very high incentives they’ve seen in recent years under programs like Home Upgrade/Advanced Home Upgrade.

Another thing made possible by big data is that it will be able to capture the savings from many, many small transactions. As these are captured and credited, they take their share of the incentives. That seems totally fair to me. However, it’s primarily a shift from those who build power plants to energy-efficiency free-ridership. As the incentive gets spread thin, its impact won’t be so big for even big residential projects.

There is also a challenge with timing of payments. Anything up front? Is P4P really just Pay-for-the-first-12-month’s-Performance? (Which makes it easier to game.)

There are still things to work out, but since we don’t have the courage to do the best thing and raise energy prices, P4P will ultimately a good option.

Of course, that means contractors who want to sell big projects will have to learn how to sell big projects. Go figure. In fact, if you’re a contractor, I’ll suggest that in most cases figuring how to run your business is a better use of your time than figuring out how to design incentive programs.

Deemed savings? Clearly when one starts oversimplifying, a lot of error gets introduced. OTOH, the errors there don’t appear any bigger than the goofy modeling results we’ve see in many programs. BTW, I’ll point out the programs historically have specified the modeling tools, and in some cases even many of the inputs to the tools, and I refuse the through contractors en masse under the bus. (There are cases of contractors cheating—when you find them, apply the full force of the law to punish them.)

If you’re going to incentivize widgets, there are likely smarter ways than consumer level rebates. In places like Vermont, they’ve seen enormously better uptake—like two orders of magnitude!—be moving the incentives upstream to the distributor level.

What I’m most intrigued by is the potential to marry something like P4P with energy savings guarantees. Requiring contractors to actually promise a level of savings and back it up with cash in escrow, for example, with escrowed amount depending on the long terms delivery on the guarantees. With folks like Sealed already taking a stab at this from a market perspective, programs ought to be able to insist on it.

As I’ve said elsewhere, many mechanisms can play a role in moving a market or generating targets energy savings and Negawatts more cheaply than new generation. But program spending doesn’t equal energy savings. And if you reward X, don’t be surprised when you get X instead of Y. So you’d better know what you’re actually incentivizing.

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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+

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