Cost-effectiveness testing is such a complicated and often boring topic that it gets overlooked as one of the key barriers to achieving our energy efficiency goals.
The fact is, the days of the Recovery Act dropping piles of money on energy efficiency is over (thankfully). For the foreseeable future, the funding stream for energy efficiency will primarily be coming from ratepayer funds (utilities and PUCs), where spending on energy efficiency programs funded by electric and natural gas utility customers will double by 2025 to about $9.5 billion per year, according to projections published by Lawrence Berkeley National Lab. This move toward ratepayer funding will further cement requirements for program cost-effectiveness.
While this seems like a simple and reasonable requirement -- that investments of ratepayer funds in energy efficiency pay for themselves -- the reality is that there is wide disagreement in what it means to be cost-effective, and the approach most taken by utilities is simply not appropriate for energy efficiency, It's particularly unsuitable for energy efficiency in homes.
The most common approach to how we view cost-effectiveness is the Total Resource Cost (TRC) test. This test measures the total cost of an energy efficiency resource (incentives, homeowner contribution, program overhead, etc.) against what essentially amounts to the cost of a natural gas power plant. The idea is that we should not invest in energy efficiency if it is cheaper to generate power.
If you want to learn all about these tests, read the California Standard Practice Manual. Many would claim that we are actually applying all of these tests incorrectly. The original intent was to apply all the tests and then allow public utility commissions to make measured choices based on these tests and their goals. However, this testing regime has been transformed into something binary -- pass or fail. We have lost the ability to think and make reasoned decisions.
TRC sounds logical, until you consider more fully the many benefits of energy efficiency, such as comfort, health, durability and most importantly, that in most cases ratepayers are paying for only a small fraction of the total project cost.
While the great energy-efficiency theory proclaims that there is a huge amount of low-hanging, super-cost-effective energy efficiency just waiting to be picked up, the reality is very different. Due to a range of transaction and opportunity cost issues, retrofits for energy efficiency's sake rarely have the return we have been led to expect. However, we have the great advantage of knowing that while the energy efficiency return is not necessarily the no-brainer value proposition put forward by so many white papers, study after study has shown that consumers who are investing in their homes are doing so for a range of reasons.
While energy efficiency is often on the list, by no means is it at the top of the list of reasons why upgrades are made.
Homeowners are investing in modern equipment, or to solve a range of other problems where the primary benefit is often comfort, or better indoor air quality. The fact that a consumer may save a few dollars a month or get a rebate is great -- and it can drive deeper energy-efficiency projects. But the rebate and the resulting energy savings often are not the primary reason why funds are being spent.
So, on one side of the equation, we are looking only at the value of energy savings from a project that is producing many valuable outcomes for the party making the buying decisions (that’s the homeowner), and we are comparing that against the total cost of the project.
Unlike a power plant, where the only benefit is the energy it produces, the primary benefits are not even being counted in a residential retrofit. Of course, this math does not come out looking good for energy efficiency. But that is not the fault of energy efficiency not being cost-effective. Rather, we are simply applying the wrong metrics in an attempt to understand the value.
One school of thought says that to fix this imbalance equation, we should put a value on the non-energy benefits (NEBs) associated with energy efficiency and factor them into the equation. While this makes sense at one level, it is a giant mess at another.
Comfort, health, and durability are all very complicated issues, and it's hard to apply a simple payback number in a way that is believable or testable in the real world. So while attempting to count the value of NEBs will further growth and employment in the measurement and verification (M&V) industry, in the long term, we will be left in a similar place where there is a lack of confidence in energy efficiency. So this is a short-term solution at best -- and maybe not even that.
Non-energy benefits are already being accounted for in every single energy efficiency transaction. Building owners, who are putting up the vast majority of the investment, are weighing that investment against these benefits. And frankly, trying to account for these benefits is just not the business of utility commissions or utilities.
Instead, we should focus on a simpler, more transparent approach to cost-effectiveness that is more aligned with how markets view energy efficiency as a resource and the public good, and leave non-energy benefits up to the people who are making the investment, not as a function of policy.
A Simple Solution
There is another approach to measuring cost-effectiveness that is both considerably simpler and better aligned with how markets will someday value energy efficiency, which is referred to as either the utility or program cost test. This test looks not at the total cost, but instead focuses on the public or ratepayer investment vs. the energy efficiency savings that emerge.
Rather than attempting to quantify non-energy benefits, this approach holds that it is not the concern of the utility or program what a building owner is spending on benefits that are essentially private or personal in nature. Instead, it treats energy efficiency like a commodity or resource. If we were buying oranges, we would not be interested in the types of tractors used, or whether or not the farm was profitable -- we are simply buying a product at a particular price.
It is time that we take the M&V magic out of energy efficiency and keep it simple (stupid). The public is investing in energy efficiency so we can build fewer power plants, so let's keep it to that. We need to stop trying to decide for consumers what is in their best interest, and stop telling the market and industry that we should only be paying attention to a single benefit.
Fundamentally, for energy efficiency to scale, we need business models that are profitable and are able to scale -- products that a range of consumers want to actually invest in -- and we must survive off of public funds tied to the value of the energy efficiency we actually produce.
Currently, programs and utilities are doing a terrible job at the one part of the equation they should actually be responsible for, which is measuring and holding actors accountable for the level of actual savings produced. The last thing we should do is set a bunch of bureaucrats and high-paid consultants on a complex mission to put a value on warm feet, happy marriages, fewer sniffles, homeowners' egos, keeping up with the Joneses, and any number of other potential reasons for investing in energy efficiency.
The simplest answer is usually the right one. We need to start measuring the results of our work in a way that is transparent and that creates real accountability, and we need to simply measure the necessary public investment to harvest the resource. It is time to start comparing apples to apples -- public or ratepayer dollars against savings at the meter.
Matt Golden is an entrepreneur and policy advocate dedicated to helping energy efficiency achieve its potential as the cleanest and least-cost solution to the looming climate and energy crisis. Matt is currently a principal at Efficiency.org, where he consults with a range of clients on issues related to the juxtaposition of energy efficiency performance risk and its impact on financing and investment.