Beyond Green Hype


Getting realistic about energy efficiency.

Fortnightly Magazine - April 2010

Energy efficiency has emerged as a prominent component of our nation’s energy agenda. This, however, is nothing new. Efficiency always has been perceived as a panacea, particularly during times of rising electricity prices, electricity supply shortages, or transmission constraints. It remains the ultimate low-cost solution that benefits all stakeholders from the federal government to the individual and everyone in between. At the individual level, energy efficiency helps consumers lower their energy bills. It allows utilities to both manage capacity additions during supply shortages and maintain grid stability during transmission constraints. Finally, governments at all levels—federal, state, and local—rely on this low-cost solution to improve supply security and to garner support during times of electricity price escalation. Today, faced with an additional and unique challenge of reducing greenhouse-gas (GHG) emissions on a global level, energy efficiency once more is emerging as an apparent silver bullet solution.

Studies over the past several years have analyzed various measures to reduce GHG emissions—from transportation to power generation to industrial production—and each cite energy efficiency as the cure-all solution. Many have claimed it not only to be the low-cost, or no-cost, solution, but the no-lose investment that will provide the nation with substantial net savings in the process. According to one report issued earlier this year, efficiency can provide $1.2 trillion in energy savings from only $520 billion in upfront investment by 2020, reducing demand by 23 percent. With these numbers, who wouldn’t want to retrofit an entire house (or business) today?

Unfortunately, experience shows that energy efficiency is far from a simple solution, and that many top-down abatement projections are wildly unrealistic. Energy efficiency can, and will, play a critical role in addressing our nation’s energy problems, but the tone must be both pragmatic about the savings opportunities that can be achieved and clear about the paths that will enable the realization of these savings in a cost-effective manner. Therefore, a practical approach is necessary that goes beyond what’s theoretically or technically possible, to what is realistic and can be planned for, given the suite of barriers that exist today. Many of the studies that have been conducted to date fall short on these two aspects, and consequently present overly optimistic and misleading scenarios.

Barriers to Savings

Barriers to energy efficiency adoption can be broken down into two distinct categories: Marketplace barriers affecting efficiency measures within the commercial, industrial, and residential communities; and program and policy barriers affecting development of a coordinated and coherent set of programs and policies to address these constraints and accelerate adoption.

While the first has become increasingly well documented, the second has received considerably less attention. Without a coordinated effort across key stakeholders involved in program and policy development, however, efficiency’s impact will be muted significantly. Particularly illustrative is the recently documented failures of the stimulus bill’s residential energy efficiency program where a fraction of 1 percent of planned homes have been addressed due in part to numerous inhibiting regulations. For example, higher-potential older homes are possibly subject to preservation codes, while governement prevailing wage rules raise costs to less attractive levels.

Barriers to adoption in the commercial, industrial, and residential communities will limit our nation’s ability to achieve the technical potential for efficiency savings that have received substantial hype. Within the commercial and industrial market (C&I), proportionally high energy costs historically have led to more energy efficiency activity relative to the residential market. Several barriers to further adoption still exist.

The first barrier is awareness. While C&I customers are more sophisticated in their understanding of efficiency opportunities than are their residential counterparts, many still believe that serious savings requires serious investment, and consequently take little action (addressed by Lesson#1 below). Second is site diversity. Energy use, energy pricing, and efficiency opportunities differ based on the characteristics and geography of a building. Consequently, the most cost-effective efficiency measures change site by site (addressed by Lesson #3).

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Third, debt financing, often required to make energy efficiency improvements financially attractive, has become increasingly difficult to obtain in the current credit-constrained environment. The fourth issue involves alignment with business priorities. Given the number of priorities on companies’ agendas at any given time, efficiency upgrades often need to align with existing priorities and the net energy contribution to the cost of goods sold to gain traction.

Additionally, split incentives can impede efficiency efforts. Within the commercial real estate market, tenants often reap the benefits of investments the owner makes, creating a disincentive for owners to take action. Fourth, the economics of efficiency upgrades are highly dependent on energy prices, which can fluctuate considerably based on commodity prices, supply/demand balance, and state or federal policies. And fifth, behavioral change can be a low- or no-cost way to reduce energy consumption, but has historically been difficult to realize, and even harder to sustain (addressed by Lesson #2).

While historically not a focal point of efficiency efforts, the residential market will be critical to realizing the full potential of the nation’s energy savings. A few of the key barriers are similar to those affecting C&I customers. Awareness, for example, presents a major issue. While many consumers know that energy efficiency can provide energy and cost savings, few are aware of where these opportunities lie and how to take advantage of them. Also, competing priorities reduce the effect of efficiency programs. Even if the opportunities are understood, on a single household basis, the opportunity is relatively marginal and often takes a backseat to other priorities. And as with the C&I market, behavioral change is the logical no- or low-cost alternative, but it can be difficult to realize and sustain (addressed by Lesson #2).

Other issues are more peculiar to the residential market. For example, many consumers are unwilling to sacrifice individual preferences for more efficient products (e.g., incandescent or LED lighting). And while energy efficient upgrades can have an attractive payback, individual consumers tend to base decisions on a very short time horizon—especially during periods of financial strain.

Given these marketplace barriers, stimulating efficiency adoption will require programs and policies to address key constraints. Two key barriers to doing this effectively are customer diversity and coordination. Diversity is a barrier because customer needs, preferences, and behaviors vary significantly by segment. To drive real efficiency gains, one must understand these differences and develop programs that reflect them (addressed by Lesson #4). Coordination is a barrier because developing a coherent set of programs and policies requires coordination across a diverse set of stakeholders with different agendas, budgets, and operating models. Utilities are critical actors in any conservation program, and they typically have an inherent conflict in energy efficiency gains that reduces their revenue, and consequently shareholder value. Federal, state, and local governments must design policies and incentives to address marketplace constraints, while coordinating with utilities and implementation facilitators. And a handful of additional actors are critical in implementing programs and policies—most notably non-profit organizations, local community groups, contractors, and educators (e.g., energy efficiency vocational training).

Quite simply, the number of stakeholders that must be involved in developing a coherent set of programs and policies, combined with their often competing agendas, is a considerable barrier in itself (addressed by Lessons #6 and #7).

Efficiency Lessons

By working to identify energy reduction opportunities with leading businesses, utilities, and municipalities—ultimately, critical actors in driving any real efficiency impact—a series of lessons has surfaced that can be used to drive efficiency improvements in a cost-effective way. Lessons 1 through 3 deal with driving such improvements for businesses, Lessons 4 and 5 outline a path for utilities to achieve energy efficiency mandates in a cost-effective manner, and Lessons 6 and 7 deal with driving efficiency improvements at a municipal level.

Lesson#1: Focus on operating and behavior changes, not structural improvements. Structural improvements can provide considerable energy savings, but are much less cost-effective than other more simple operating and behavior changes. This has been documented in several studies; however, the belief persists that serious savings requires serious investment. This simply isn’t the case (see Figure 1).

Lesson #2: Behavioral change is difficult to realize, and even harder to sustain; automation and competition are keys to success. Automating energy-intensive appliances and devices (e.g., lighting, HVAC) can provide much more sustainable change by removing the human element. For commercial and industrial facilities, an attractive payback period often can be achieved due to high energy costs. For residential customers, recent pilot results suggest that competition might be the key to realizing behavioral change at a minimal cost (see Figure 2). By using monthly reports showing consumers their energy usage relative to peer groups, sent by mail separate from the electricity bill, energy savings of 1.5 to 3 percent have been realized and sustained for well over a year.

Lesson #3: There’s no one-size-fits-all solution to energy efficiency. What makes sense for one site won’t always make sense for another. However, custom tailoring energy efficiency solutions for every site isn’t scalable and often results in analysis paralysis and little action. Therefore, a compromise approach should be taken whereby sites are segmented into clusters and efficiency solutions are developed for each grouping (see Figure 3). This approach can be defined by four steps: 1) Segment sites into clusters based on easy-to-identify building characteristics—building square footage, age, and geography; 2) Within each cluster, identify energy expenses per square foot to break the segment into performance quartiles; 3) Identify drivers of cost-differential between top and bottom quartile sites to surface actions that can be taken to improve performance; and 4) Implement actions across cluster, with particular attention to bottom-quartile sites.

Lesson #4: Investor-owned utilities (IOUs) must understand their customers. They aren’t all the same. Reaching unsaturated segments is critical to achieving deeper and more sustainable energy efficiency savings. However, doing so requires a thorough understanding of customer needs, preferences, behaviors, and barriers within segments to ensure that products are designed and marketed to achieve maximum adoption. Without customer insight, program performance will vary significantly by segment and deep and sustainable savings will be difficult to attain.

Lesson #5: Be smart about rebates. Utilities historically have relied on rebates as one of the primary incentives to encourage adoption of efficiency technologies, and rebates are becoming even more prevalent. However, increasing rebates aggressively can have negative impacts. First, it leads to unnecessary lost margins in early years, which might not be compensated by regulatory incentives, or it might be subject to recovery lag. Second, it results in early market saturation, making it difficult to achieve future goals. To ensure utilities achieve their goals consistently over a sustained period, it’s essential to set rebates at the optimal level by aligning rebates to customer’s buying characteristics. For example, rather than adopting a one-size-fits-all approach, the rebate level for sustaining families could be higher than for accumulated wealth to overcome cost barriers. But again, regulatory reluctance to, in effect, price discriminate could prohibit rebate customization.

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Lesson #6: Municipal governments and other policy makers must build coalitions of their most important stakeholders, and work together to develop the market. Key stakeholders necessary to drive efficiency savings in cities, such as utilities, NGOs, foundations, and community groups, will have different objectives that are unlikely to be aligned. Some might even have hidden agendas. The key to moving forward is to avoid fighting the conflicting agendas, and instead to understand unique objectives and build an efficiency coalition based on the commonality that runs across them.

For example, an IOU’s core objective is to maximize shareholder value while meeting regulatory obligations (e.g., energy savings targets). A private market representative’s goal is likely to minimize regulation and accelerate job creation. And NGOs might want to support low-income housing or improve the lives of disadvantaged citizens. While each agenda is different, common threads can be tied across them. Once this common purpose is defined and agreed upon, stakeholders must be organized into a coalition operating toward concrete, specific tasks that tie into each stakeholder’s objectives. Cities can be critical to this process, building the coalition and continually communicating to each stakeholder in terms of their individual goals.

Lesson #7: Force explicit program decisions through program portfolio analysis that includes all stakeholder groups. Energy savings aren’t always the only objective of every energy efficiency program. Many will have other purposes, such as job creation or decreasing energy costs for low-income communities. Full benefits comparisons force these trade-offs. For example, program spending should be assessed on factors ranging from effectiveness in eliminating or deferring new supply spending, to reducing emissions (e.g., dollars per MTCO2e reduced), to extending the life of existing plant, etc.

Smart Efficiency

Energy efficiency will play a critical role in addressing today’s energy challenges. It has become abundantly clear that the way we produce, and use, energy in the 20th century will have to change in the 21st. However, we need to be reasonable about our expectations. It’s important to look beyond much-hyped theoretical potential, and to focus the discussion on the specific paths that will enable businesses, utilities, and municipalities to realize energy efficiency savings in a cost-effective manner.