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The Trouble with Freeriders

The debate about freeridership in energy efficiency isn’t wrong, but it is wrongheaded.

Fortnightly Magazine - March 2012

freeridership and spillover are measured separately and incorporated in NTG, while other jurisdictions estimate NTG without specifying freeridership and spillover individually. In the majority of cases where NTG is required, it’s applied only prospectively for planning and improving program design.

A review of practices in 31 jurisdictions with active energy efficiency programs illustrates this variation. All but six of these jurisdictions (82 percent) have energy efficiency resource standards (EERS) in place, setting minimum performance requirements. 28 Remarkably, documents and reports are lacking on NTG or how it’s treated in different jurisdictions. For many jurisdictions, this information must be gleaned from multiple sources, such as regulatory filings and evaluation reports. Indeed the authors’ research couldn’t determine with certainty the requirements for calculating and reporting NTG in several jurisdictions.

The available information shows that 13 of the jurisdictions (42 percent) have no NTG requirements. 18 jurisdictions (58 percent) include freeridership in determination of NTG, and in seven of these jurisdictions freeridership is applied at the energy efficiency measure level. In six jurisdictions (20 percent) only freeridership in accounted for. Participant spillover is measured in 12 jurisdictions (37 percent) and in 10 cases (32 percent) NTG calculations include all three effects (see Figure 1) .

The high proportion of cases where only freeridership is assessed suggests an asymmetrical treatment of spillover and freeridership effects. Should spillover be included, it’s likely that many of the NTG ratios will be near or greater than 1.0. Over two-thirds of all evaluation studies reviewed in a recent best-practice study had a net-to-gross value of approximately 1.0. 29

Finally, there are cases where NTG—or its components—don’t require measuring. Gross savings, adjusted for actual installation rates, are employed instead as the measure of program performance. That’s also the case with regional transmission organizations (RTO) such as the New England independent system operator (ISO-NE), where verified gross savings are used as the basis for verification of energy-efficiency bids into the forward energy market.

There’s also the question of what to do with the NTG ratio once it’s measured, and how to factor it into performance metrics, such as cost-effectiveness tests. Although the total resource cost test (TRC)—as formulated in the California Standard Practice for Cost-Benefit Analysis of Conservation and Load Management Programs (SPM)—has been almost universally adopted as the principal criterion for economic assessment of conservation programs, there was no clear or uniform method to how the NTG should be applied to the cost side of the TRC equation. Indeed it wasn’t until 2007, almost 25 years after the SPM’s initial publication in 1983, that the CPUC issued a memorandum to clarify the matter. 30 Even today there’s little consensus on how to account for NTG in the calculation of TRC.

Assessing Blame

It’s tempting to blame the critics of energy efficiency for the prolonged confusion over what to make of freeridership; and that wouldn’t be entirely wrong. But skepticism about ratepayer-funded conservation isn’t the full story. The fact is that the proponents of energy efficiency have failed to devise and make a convincing case for workable solutions to the problem.