Back in 2015, California lawmakers created the country’s first pay-for-performance energy efficiency mandates, requiring utilities to use actual data from their fleets of smart meters to measure the effectiveness of efficiency spending, rather than the administratively deemed measures and other traditional tools of the efficiency trade. 

It’s a relatively simple concept, aimed not only at using real data to make much better and more focused efficiency investments, but also merging traditional efficiency with the ability to shift demand, shape loads, and otherwise meet the time- and location-sensitive needs of California’s increasingly distributed-energy-rich, duck-curve-inflected power grid. 

It’s taken a lot of time for utilities, regulators and energy efficiency industry players to work out just how to make this mandate into a reality — and to create the avenues for third parties to compete to provide the most cost-effective solutions. But in the past year or so, California’s investor-owned utilities have started to roll out the first tests of this new pay-for-performance efficiency paradigm. 

Take Pacific Gas & Electric’s home energy optimization program, currently accepting applications from homeowners interested in paying about $150 to $200 for a smart thermostat, in return for about $2,000 in technology and services over the next two years. ICF, the global consulting firm that won the RFP for PG&E’s home optimization program, is seeking up to 4,000 participants to sign up for the program’s two-year contracts. 

Patty Cook, ICF senior vice president, noted there’s no reason why PG&E wouldn’t choose to expand the program further, since it’s designed to provide efficiency at no cost to the utility, by enlisting private capital to step in to fill the gap. “The [investor-owned utilities] want to use third-party capital for these projects,” she said. “They want to shift the risk to the aggregator.”

Finding a "smart" baseline

ICF’s “measure mix” for PG&E’s home energy optimization program includes a number of relatively low-tech measures, such as HVAC tune-ups, incandescent light bulb replacements, and aerators and thermostatic control valves for hot water efficiency. But it also includes a Wi-Fi Emerson smart thermostat equipped with weather optimization algorithms from Whisker Labs, an Embertec smart power strip for consumer electronics and other sources of household vampire loads, and a smartphone-accessible water heater monitoring and control system from startup Aquanta

The rollout, funded by up to $20 million in customer rebates from PG&E, is part of the second round of pay-for-performance, or “P4P,” pilots from PG&E that are allowing participants to make their own choices about what efficiency measures they undertake, rather than mandate a particular mix of technologies. But participants are also on the hook to earn back their upfront costs over the term of their contracts, as well as save enough energy at each customer site to make a profit. 

To prove these savings, ICF and other parties involved will compare customers’ energy spend against a baseline of how much energy they’ve used in the past, normalized for differences in weather and other factors. This baseline is built on smart meter data, however, rather than abstract estimates of past energy use — a key challenge for traditional energy efficiency baselining. 

While the open-source CalTRACK system that PG&E is using to generate these normalized baselines may be necessarily complex, it’s transparent to all participants. It's also open for use by utilities anywhere to create commonly acceptable valuations for a quantity that doesn't truly exist in the real world — how much energy a building would have used, if efficiency measures hadn’t taken place.  

The term of art for this is normalized metered energy consumption, or NMEC, she said. “In this case, NMEC is being linked with 100 percent pay for performance,” which is the preferred path forward for efficiency spending in the state under the 2015 law AB 805. That puts the onus on ICF and its technology partners to orchestrate the smart devices it’s installing in customers’ homes, both to optimize their day-to-day efficiency capacity, and to collect data to inform its longer-range efficiency goals, such as when to schedule HVAC tuneups. 

Reducing consumption during peak hours

At the same time, these devices are capable of responding automatically, or at the command of the homeowner or aggregator, to opportunities or imperatives that shift from hour to hour or season to season, Cook added. Primarily, ICF is focused on ensuring its customers are able to shift load and reduce consumption to dramatically cut their grid electricity use from 4 p.m. to 9 p.m., during the peak periods of the new time-of-use (TOU) rates being rolled out by the state’s investor-owned utilities. 

“We’re basically getting 3x savings for efficiency from 4 p.m. to 9 p.m.,” she said — a value that can now be quantified through interval meter data and baselining, and added to the obvious value of using less power during TOU price peaks. ICF and PG&E are interested in pursuing other uses for the load flexibility provided by this mix of technologies, Cook noted. 

ICF is also involved in another home energy optimization program with Southern California Gas, which is coordinating with electricity utility Southern California Edison to manage the potential natural-gas shortages during hours of peak electricity and heating demand caused by the closing of the Aliso Canyon gas storage facility. 

This program includes a smart thermostat and Aquanta’s gas water heater controller, both of which are being installed primarily to reduce overall gas consumption, usually by avoiding heating air and water when it’s not needed. But as Aquanta CEO Matt Carlson noted in an interview this week, they can also be used to shut off water heaters if the region is facing a potential natural-gas shortage, or set up to preheat water in advance of shutting down if that shortage can be predicted. 

Energy efficiency as a grid resource

ICF’s Cook noted that the traditional lines between energy efficiency and demand response are blurring in many other ways in California. For example, during the mild yet sunny days when solar generation isn’t being consumed by air conditioning load, California can experience dips in its supply-demand balance, or even be forced to curtail excess generation for lack of customers to consume it — the “belly” of the state’s ‘duck curve.’ For obvious reasons, utilities and grid operators would prefer that homes not minimize their energy consumption at those times, she said. 

At the same time, efficiency that can be reliably counted on to show up at certain hours, or at certain locations, day after day and year after year, can provide utilities with a far more reliable and useful grid resource than the efficiency of the past, she said. This could allow efficiency measures, which is still the cheapest form of distributed energy resource, to play a more central role in efforts to tap DERs as alternatives to grid investments, as California is planning to do through a variety of policy measures. 

“The thing that's really new about these programs is that they really treat energy efficiency as a grid resource, rather than just as a system resource that's administratively determined," she said. "The goal is, let’s make EE more of a firm resource — it shows up when and where it’s supposed to, and people can see it, and people can get paid based on realized savings.”