While there have been many studies that document the value of solar systems at time of sale, there has been little analysis to date on the impact of 3rd party owned solar system (leases or PPA) on home valuation or marketability. Given the enormous growth in 3rd party financed solar market, which currently represents more than 75% of the market in California, and is increasing market share in just about every viable solar market, this question is of great importance.
In May of 2013 a report entitled The Impact of Photovoltaic Systems on Market Value and Marketability, was released by the Colorado Energy Office. The study, which is far from conclusive, looked at case studies of 30 single‐family homes in the north and northwest Denver metro area and the impact of solar on the roof at time of sale.
In terms of the direct impact on values, they found that solar systems that are owned did in fact have a positive impact on home value, adding between $1,400 to $2,600 per kW on the roof.
However, the qualitative part of this study turned up some interesting and somewhat concerning trends when one looks at the differences between 3rd party owned solar (Leases and PPAs) versus owned systems.
First off, there has long been an economic argument that given the falling cost of solar, and the zero upfront nature of third party leasing, truthfully a "solar ready" house should be more valuable than one that already has a 3rd party owned system on it, as there is no upfront costs to putting a system on, and the price keeps dropping.
However consumers are not always rational economic actors, so the fact that people values solar was not a complete surprise.
When one reads the qualitative results of this report, and looks at the effect of Leased vs. Owned solar systems on the value of houses and transactional friction, there appears to be a rather clear trend that 3rd party owned systems are not having the same positive impact on home values, and in some cases are adding significant friction.
Of the 39 systems studied, 72% were owned systems, and overall, 59% of the time solar was rated as adding market value or marketability to the transaction. However, of the 22 homes where solar systems were rated as a positive, only two (2) of the homes were leased, while of the 14 neutral impacts six (6) were Leased, and in the three (3) cases of negative impacts on the transaction 100% were Leased systems.
I would caveat all of these conclusions and concerns as extremely preliminary. This is a small dataset and these are qualitative results. But when you read the comments in the table on the right there is a clear difference in the feedback when you compare those systems that are owned with those that were leased.
There is a lot more to this study, and to the value of solar in general, this blog is merely highlighting one interest trend, that given the growth in 3rd party ownership of solar, is something worthy of further discussion and research.
The entire study is worth looking at, and the table on the right can be found on page 46.
What Realtors have to say about the impact Solar leases versus owned systems on market value and marketability:
Four years ago Property Assessed Clean Energy (PACE) was set to roll-out to communities across the country and was a key element of our State and Federal strategy to stand up a energy efficiency industry and consumer value proposition. However, In July 2010, FHFA released a Statement on Certain Energy Retrofit Loan Programs, which essentially killed residential PACE by advising Fannie Mae and Freddie Mac to avoid buying mortgages with PACE assessments, leading many PACE administrators to suspend their residential programs.
In the meantime, a number of pirate PACE programs stayed in business and proved that PACE can drive significant demand and volume. In particular, the HERO program in Southern California has done over $100M in residential PACE loans, and just today released a preliminary rating for the first PACE Securitization.
Based on now proven success, and a continued belief by many that PACE is not the threat FHFA made it out to be, and that it is a critical component to meeting our energy and climate goals, many have continued to fight for residential PACE. In California that fight is about to bear fruit.
The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), with the backing of the California Governor Brown, is about to roll-out a first of its kind PACE Loss Reserve Program. CAEATFA recently published a final version of its PACE Loss Reserve Program which should be officially approved based on their website, by the second week of March - only a few weeks away.
It would appear that we may have a second chance to make Residential PACE happen in California, and if we can make it work here, perhaps the rest of the country as well. A big thank you to all the people who continued fighting for PACE and to CAEATFA and Governor Brown for keeping PACE and residential energy efficiency a priority.
The last remaining question is really FHFA and how they will react to California's new plan. With their primary concern dealt with through the State reserve fund covering any potential losses, I hope this question will be put to rest so we can get on with the business of creating American jobs and saving the planet!
I recently came accross this video from a UC Berkeley panel from back in 2011 entitled Sustainable Residential Energy Use, Design, Feasibility, Performance. Given the current state of residential energy efficiency in California and across the country, the points being made are perhaps even more relevant today, as many of the problems outlined can now be proven based on actual programmatic results. Residential energy efficiency is at a crossroads where we will either transition towards real markets, or become a footnote. However, since 30% of California electrical energy is used by existing homes, we can't afford to keep failing. It is time to change the model away from our programmatic roots and towards market based solutions that trade in energy efficiency as a resource.
Watch the full program.
Energy Efficiency Mortgages (EEM) enable homeowners to add energy efficiency to their mortgage at time of sale, taking advantage of long-term and very low rate financing. To qualify a purchaser must undertake an HERS rating to assess the work scope and calculate payback.
It seems like a no-brainer. Target homeowners during a transaction and during a period in which they traditionally spend substantially more on home improvements. One NAHB Study showed that a buyer of an existing single-family detached home tends to spend about $4,000 more than a similar non-moving home owner, including $3,600 during the first year.
While focusing on a home purchase a trigger for an energy efficiency upgrade seems extremely logical, it has not been working in the market. This “trigger point” continues to be the focus of government programs, whitepapers, and both State and National legislation, yet EEMs have not achieved more than a toe hold in the market, and the numbers continue to fall.
Total US Energy Efficiency Mortgage (EEM) Loans Per Year
So the question is, why is something that makes so much sense on paper failing to such a degree in the marketplace?
1) People buy solutions to problems
Unlike kitchen, bathroom remodels, and new flooring, energy efficiency and comfort are not visible to a homeowner that has not yet paid a bill or spent a cold winter (or hot summer) in their new home. As the trigger to get people to invest in energy efficiency and comfort solutions for their home tends to be based on solving a pain point, it is hard to motivate a new buyer to take action on issues where they have yet to experience the problems.
2) Buying a house is stressful enough
The process of buying a house is full of stressful decisions, complexity, and risk - and for most people constitute their biggest single investment. Adding another moving part to this process, one that will require more inspections and general make transactions take longer is just not a priority for most home buyers.
3) There's no money in EEMs
Nationally, Energy Efficiency Mortgages add and average of only $7,500 for energy efficiency upgrades onto the base mortgage (based on data from HUD). When you consider that time is money, and that the brokers and realtors who are shepherding the transaction through the process get paid when it is completed, there is no wonder we don’t see realtors jumping up and down excited to promote EEMs.
On the typical EEM, realtors make no money, as their commission is based on the sale price, not the added value of the EEM. Realtors make no more money on an EEM than a traditional mortgage yet they incur risk, extra time, and expense.
As usual the answer is simple - follow the money!
Over the last four years, California Energy Commission has rolled out its HERSII rating system, which was designed as a way to provide a score to homeowners and prospective buyers that compares the energy performance of a house to similar homes (without occupant behavior). The HERSII system is based on the same engine that drives California Title 24 Energy Code and was identified as a key part of the State’s approach to driving energy efficiency in existing buildings.
The goal of the HERSII system is to label all California homes in order to equate energy performance with building value at time of sale, and as a way for a homeowner to get third-party recommendations as to the most cost effective options to save energy.
It was brought to my attention, that while the AB758 Action Plan did not discuss HERSII issue, there was an on the record discussion on HERSII at the AB758 Fresno Workshop where Commissioner McAllister and also Bill Pennington of the CEC, at which time both expressed a willingness to at least revisit or maybe even "reinvent" the HERSII program. I would like to commend them for being willing to go on the record, but I will also implore them that we need real resolution and clarity on this issue and that waiting for the next AB758 Report to emerge and then another proceeding is prolonging uncertainty that is affecting the market.
Download: AB758 Workshop Transcript with HERSII comments highlighted
Like puppies and apple pie... or is it?
HERSII sounds great and asset ratings and third-party raters make for really nice policy white papers, but when put into practice on existing buildings, the results speak for themselves ― and don't necessarily agree with the theory. The HERSII ratings system is extremely costly, has low consumer demand, and does not result in significant conversion to energy efficiency projects.
In an attempt to develop a one-size-fits-all solution to provide an asset rating for use at time of sale and in the appraisal process and provide an actionable workscope and savings projection all in one system, we have instead created a solution that does not work well for either use.
So the big question is, will the HERSII strategy work?
The good news is that we now have results back from our initial tests of the system. However, the unfortunate reality is that the test phase has demonstrated serious shortcomings in the current theory, which should at a minimum call the HERSII system into question and hopefully lead to thoughtful evaluation of the shortcomings that emerge to avoid costly missteps for the marketplace and government programs.
Based on results from HERSII tests over the last four years, the HERSII rating system does not appear to be catching on with homeowners, nor does it seems to be driving market transformation in terms of conversion to energy savings or discernible asset value improvements (though the latter is harder to know with the current dataset). Admittedly, some of our data is a little sparse, but that is a function of how hard it is to get real numbers out of these pilots.
What can we learn from the Sonoma County HERSII Pilot?
Sonoma County ran the largest HERSII pilot in the state, paying a subsidy of $700 per HERSII rating, which resulted in 100 percent free audits and ratings to customers, and unsustainably high margins for raters.
In Sonoma, we see a clear jump in the number of HERSII ratings while this lucrative incentive was on the table. However, shortly after the massive subsidy went away, the number of ratings drop immediately back to virtually the same number of ratings as were occurring before the incentive program. It would appear that even after this very expensive attempt to seed the market, there is little to no actual consumer demand in the market for ratings and one is left to wonder what happened to all the HERSII raters who got trained in Sonoma for this brief pilot, now that there is no more work.
Clearly, California does not have the funds to pay $700 or more per rating out of public funds on every home in California, so the fact that Sonoma’s 100 percent rebate pilot seemingly did nothing to jumpstart actual consumer demand is very concerning, and means an attempt to roll this system out would force California homeowners to shell out for an expensive service they are not valuing.
The fact that the Sonoma pilot program did not result in any discernable market transformation, either in terms of sustainable businesses conducting ratings or demand for ratings by homeowners, should be of serious concern.
Do homeowners value HERSII ratings?
When we look at the adoption curve of HERSII ratings during the recovery act period, we find that ratings are highly correlated to rating incentive programs and appear to have little organic consumer demand.
In fact, as is apparent in the chart on the right, it appears that these incentive programs had little lasting impact on demand in the marketplace.
When you couple this with the emerging facts related to the propensity of the HERSII system to overpredict potential savings by as much as a factor of 3x (see: Ex Ante Tool Review Findings Disposition for Energy Upgrade California Custom (‘Advanced’) Measure Savings, 1 Mar 2013), one realizes that not only is this system not working in terms of driving customers to take action, but it is failing to do so while massively inflating the level of savings and ROI being sold to the customer.
The propensity of the HERSII system to project significantly higher savings than what is delivered means that if HERSII in its present form was applied as a mandate, there would be many millions of California homeowners who would see only a small fraction of the savings they were told to expect.
This fundamental issue is based on the CEC’s attempt to create a system that is based on code, and then apply it to operational predictions of savings. These two uses are nearly opposite in terms of how a model is constructed, and speaks to the need for systems designed for the specific purpose being asked - one size fits all is not cutting it (learn more about this issue here).
The CEC may have the legal authority to regulate ratings in California, and AB758 may give the Commission the legal basis to attempt to implement this approach, however it is highly unlikely that they have the political capital to make it stick once we start subjecting real people to these outcomes.
Asset ratings may in fact have a place, but they are really not compatible with delivering actionable workscopes in the real world, and the one size fits all approach has resulted in a system that really fits nobody very well. HERSII is an expensive and complex system to deliver ratings that have significant accuracy issues, don't work for industry, and consumers don't seem to value.
Is HERSII worth the cost?
Each HERSII rating costs at least $500 and often more, based on the fact that conducting a rating consumes half a day in the field and then more hours back in the office inputting data into the California Energy Commission (CEC) mandated software tool. There is little room for substantial economies of scale.
When you consider that we have upward of ten million homes in California, the cost of having a HERSII rating done for all California homes will require California homeowners to invest $5 billion dollars in ratings - and that is just for ratings, not actual energy efficiency.
Do HERSII Ratings turn into energy efficiency projects?
California home performance contractors have a very hard time converting HERSII third-party audits into viable leads that result in customers who are ready to make energy efficiency upgrades.
HERSII Ratings conducted in Sonoma were cross-referenced with Energy Upgrade California™ (EUC) projects and it was found that conversion from rating to energy efficiency retrofit was under 10 percent (this analysis was conducted prior to 100 percent completion of the program, and until it is redone more accurately should be considered a clear directional indicator). This is especially surprising given that in the Sonoma program, unlike elsewhere in the state, home performance contractors were allowed to provide the rebate to customers for their diagnostic test-in as long as the project included a HERSII rating upon completion. Given that contractor close rates are typically 30 percent or greater, their participation in the Sonoma pilot would have been expected to inflate the actual conversion rates when compared to HERSII on the open market by third-party raters.
At a 10 percent conversion rate, a $700 rating incentive translates into $7,000 of public funds in rating incentive per closed retrofit in addition to Utility incentives, and other Energy Upgrade California program spending. Clearly this was not a cost effective way to drive demand for retrofitting.
This trend is borne out in PG&E figures for its entire territory, which shows that of the 582 homeowners who obtained HERSII ratings, only 59 projects have been completed energy upgrades through Energy Upgrade California, which pencils out to a similar 10% conversion rate. This of course compared to conversion rates of audits to retrofits that are typical of integrated home performance contractors of over 30%.
Why is it so hard to get homeowners to act on their ratings?
The HERSII process is convoluted, complex, and expensive. From a homeowner perspective, it goes something link this:
First, a third-party rater does a HERSII rating for a homeowner who shells out something like $500 for the audit and report. If that customer is interested in doing work, they bring the rating report to a home performance contractor to get the upgrades implemented. However, here is where it starts to gets tricky and the real world collides with theory.
Contractors are ultimately responsible for a project’s outcome, including its energy performance, and cost. When presented with a third-party HERSII rating, a contractor must determine if the report recommendations match the conditions he/she finds in the home. This means the contractor always must go back to the customer and do what amounts to another audit of the building to confirm recomendations, code compliance, and pricing, but — because the customer has already paid for a rating audit — the contractor has to conduct this work for free.
On a very large percentage of these third-party HERSII ratings, the contractor will end up not agreeing with either the estimated price coded into the rating (which drives the Return on Investment and ranking in the software), or they will disagree with the solution being recommended once someone with construction experience visits the site and creates an actionable workscope.
This puts the homeowner in a bind. On one hand, they have the third-party rater sporting a CEC logo on their report telling them one thing, and a contractor telling them another thing, and far too often the homeowner becomes uncertain as to how to proceed and who to trust, so no work gets done. The third-party model ends up with very low conversion rates, and is generally not a profitable source of customers for home performance contractors.
How do we move forward from here?
It is time that we focus our energies in California on moving to a market that relies on actual performance, not complex regulatory structures translated into software and a numerical scales. The web of regulation we have created has many unintended consequences, and with the advent of smart meters and big data, we have the opportunity to move beyond regulatory proxies and instead harness private markets and sources of capital. We should embrace this change as a great success of the California system, not a failure. It is time for State policy to advance and lead the nation towards a smarter more efficient model to deliver the deep energy efficiency required if we are going to hit our climate, energy, and economic goals.
In light of the results from HERSII to date, the California Energy Commission strongly considers adopting simpler approaches to providing homeowners with ratings, that are substantially lower in cost to homeowners and do not pretend to be of investment grade accuracy. One such solution is the national DOE Home Energy Score. A very simple model can be input through an API from a variety of software tools, and is simple enough to be part of a home inspection, resulting in a 1 to 10 score for the homeowner.
These simpler systems work as a way for homeowners to gauge a home's performance but will not be confused with real energy audits capable of delivering solutions to homeowner that contractors can actually build and that will deliver reliable results. We should separate upfront simple asset ratings from the more complex needs of a diverse contractor marketplace who can deliver the level of quality auditing necessary to develop an actionable workscope and a real price. Instead of applying an expensive and inaccurate comprehensive HERSII rating on every house in the State, we instead would only do an investment grade audit when there is pathway to getting a project built.
We need to do more than tweak the knobs on the current model. We need to be open to new ideas and substantial change in our approach. Solutions are out there, but we need to be willing to admit that many current ideas are not working, and minor changes will not be sufficient to reverse the trend. It is time for California to step back into the lead and help the country move towards a sustainable market for energy efficiency.
This process should start today by admitting that the HERSII system needs to be reevaluated based on evidence and feedback from the market. It does not matter how much we have invested, we need to look at empirical results and change course. We cannot afford to keep marching forward with the same basic theories, while hoping for different results.
On December 26th 2013, the New York Public Service Commission issued a ruling Approving Energy Efficiency Performance Standard (EEPS) Program Changes, that address substantial problems with the required approach to cost effectiveness testing for NY energy efficiency programs, and attempts to bring order to the web of complex regulatory and utility programs in the State.
While cost testing can sounds boring, given that the bulk of energy efficiency funding are going to come from ratepayers for the foreseeable future, this issue is fundamental. To learn more about why cost testing is so important to energy efficiency, check out the GreenTech Media article from last year written by Efficiency.org's Matt Golden, "What It Takes to make Efficiency Programs Work." The National Home Performance Council has also been doing significant work on this issues and you can learn about their cost testing solution in the report Recommendations for Reforming Energy Efﬁciency Cost-Effectiveness Screening in the United States.
New York has been requiring Total Resource Cost test for every individual measure being installed as part of an eligible project. This means that the total cost (consumer and public sector) for every single energy conservation measure implemented must be cheaper than the next least cost option to qualify for rate payer funds.
This application of TRC at the measure level has been a disaster for contractors, program goals, and ultimately homeowners who often could not qualify for incentives on projects that objectively make sense to the customer, drive deep savings, comfort and many other benefits, with the vast majority of the investment is in the form of private dollars - yet they don't qualify for New Yorks program based on the antiquated and misapplied PSC mandated use of TRC.
It would appear that in this ruling the PSC has wisely attempted to change the rules to require TRC only at a portfolio level, allowing individual measures to pass based on a combination of much more straight forward tests including Program Administrator Cost Test (PACT) and Participant Cost Test (PCT). These tests looks primarily at public incentives versus savings and not full project costs that are likely driving a range of non energy benefits not counted in the TRC equation.
It remains to be seen how this approach will work in the real world, the the PSC applying a different bar at a measure level and at the portfolio, but it does seem to be a step at least in the right direction, and the NY PSC may have cleared some real hurdles that have cut into energy savings and hurting New York business.
Here are the key elements proposed by the NY PSC staff to fix Cost Effectiveness Testing in their ruling:
In terms of the complexities of NYSERDA and Utility programs (and the regulators that direct them) overlapping or completing while confusing the market, the PSC has laid out a series of goals and a basic structure to move forward towards more collaboration and organizational swimlanes. How these ideas actually play out will be interesting to watch as the ruling is not heavy on details.
Just about everyone I know operating in New York would agree that more coordination and cooperation between the Utilities, NYSERDA, and the Public Service Commission would be a good thing, and simplification and alignment of the various programs out there into a coherent approach to the market would be a great start.
However it would be wise to analyze in this equation the balance of not just the role of Utilities vs. NYSERDA, but also to take into account the fundamental roles of the public vs. private sector.
We have a common situation in NY where the program proposes "market transformation" but the core of the market for energy efficiency is missing. A market at its core is centered on a transaction and a price. However, the result we are trying to encourage - energy efficiency, is not being tracked or rewarded in either a timely or transparent fashion.
Rather than put in place the foundation for a market based on paying for the product that is being brought to market - savings that can be calculated based on utility bills - we have instead attempted to regulate our way to a market by essentially determining the business model for energy efficiency through regulatory and stakeholder processes. Getting this complex equation right, in advance, without feedback or selection is nearly impossible (like writing a business plan, and then operating per the plan without checking the balance sheet).
Rather the just move the deck chairs around one more time, we should look closely at the overall approach to market transformation in energy efficiency. The definition of a Market is the process by which the prices of goods and services are established. If we want to establish the market for energy efficiency, we need to start by measuring it and setting a price for savings.
The contractors I know in the NYSERDA program would prefer to see NYSERDA focus on aligning incentives with actual energy savings and move away from the current extensive regulation of the contractor business model that has defined the current program. Rather then pour money into program overhead such as layers of approvals, requirements, and software, instead if we applies only a small fraction of those dollars to make delivering real energy savings lucrative, we could unleash the power of the market to innovate and select for those approaches that deliver results. We need to send a signal back to the market, and allow those business models that work to win, and those that do not deliver results to change or exit the market.
Rather than Utilities and NYSERDA focusing on redesigning the program and executing on traditional private sector activities like consumer marketing and lead generation, the utility sector should focus on procuring energy efficiency exactly like they already do for other energy commodities. If performance risk flows to industry, and ratepayers and regulators are buying delivered savings, regulators can be freed from attempting to manage the entire process in a vain hope to regulate good outcomes and instead focus on rewarding results.
Reward energy savings performance at the meter and the market will select for business models that customers demand and that are profitable for industry based on the value of the real savings delivered.
The good news is that given the amount of money being spent on programs in this sector, we could make delivering real savings a great business model while at the same time reducing costs by decreasing program overhead.
I hope that New York can seize this opportunity to put in place the foundation for a real market where Energy Efficiency can be valued and traded as a true demand side resource, letting markets emerge and allowing programs to play the contained regulatory role that they do in others successful markets.
Based on this ruling, I think there is room for NYSERDA and the Utilities to make the fundamental changes necessary, but it will take leadership and courage to turn this ship. However, overcoming big challenges with big ideas is the only real chance we have of success.
Efficiency.org would like to thank Commissioner Mark Ferron for his serives and dedication. The job of CPUC Commissioner can be thankless and daunting. Commissioner Ferron once described his job to me as an exercise in spinning plates - never enough time to focus on one issue long enough before he had to run off to another topic. Little did I know that one of those plates was much more than a policy debate.
Commissioner Ferron, our thoughts are with you as you take on Prostate cancer with all of your focus and energy.
Commissioner Ferron left us with parting words that lay out both the opportunity and the challenges we have ahead of us. While we wish you were to remain to help us cross the finish line, perhaps the critical concepts you laid out will continue - but only if we take these challenges on. It is a worthwhile read and lays out many of the key structural issues we need to address, as well as the amazing opportunity in front of us to transition our system towards clean sources of energy.
Read the full statement Final Commissioner Report by Mark Ferron, January 16, 2014.
The following unedited expert lays out the Commissioner's six key points. Emphasis in the original text.
1. First, there is no better place to be than California when it comes to energy and climate policy. We all know that there is no real Federal energy or climate policy, thanks in large part to the obstructionists in the Republican Tea Party and their allies in the fossil fuel industry. But in California, we have a clear commitment to green-house gas reductions and are taking bold and exciting steps in advancing renewables, energy storage and Electric Vehicles (Parenthetically, I do believe that California has lost pace with the best in terms of Energy Efficiency and Demand Response.) We are at an inflection point where the convergence of new technologies, changing economics and, I hope, an added urgency to address our deteriorating climate, will combine to create exciting new business and policy opportunities.
2. We are fortunate to have utilities in California that are orders of magnitude more enlightened than their brethren in the coal-loving states, although I suspect that they would still dearly like to strangle rooftop solar if they could. Modern utilities are subject to a rapidly evolving business environment, and I wonder whether some top managers at our utilities have the ability or the will to understand and control the far-flung and complex organizations they oversee. And I am very worried about our utilities’ commitment to their side of the regulatory compact. We at the Commission need to watch our utilities’ management and their legal and compliance advisors very, very carefully: it is clear to me that the legalistic, confrontational approach to regulation is alive and well. Their strategy is often: “we will give the Commission only what they explicitly order us to give them”. This is cat and mouse, not partnership, so we have to be one smart and aggressive cat.
3. We also have a Legislature that by many measures is very inexperienced, and yet considers itself expert in energy policy matters. Many of the more influential members and veteran staffers seem to display an open, almost knee-jerk hostility toward the CPUC. It’s as if some Legislators (or their staff) think that their reputations will be enhanced by slapping down this Commission’s policy initiatives, rather than working on writing and passing legislation that we can quickly and effectively implement. (Exhibit A is the killing of our Energy Efficiency Financing pilots by the Legislative Analyst’s Office for “budgetary oversight” reasons). The CPUC needs to do a better job of convincing the Legislature that we are not their rivals nor their enemies - but rather their partners - in the design and implementation of policies that are vital to the economy and the people of this state.
4. Fortunately, or maybe unfortunately, with the passage of AB327, the thorny issue of Net Energy Metering and rate design has been given over to the CPUC. But recognize that this is a poisoned chalice: the Commission will come under intense pressure to use this authority to protect the interest of the utilities over those of consumers and potential self-generators, all in the name of addressing exaggerated concerns about grid stability, cost and fairness. You – my fellow Commissioners - all must be bold and forthright in defending and strengthening our state’s commitment to clean and distributed energy generation.
5. The Commission itself has many challenges: it has reacted too slowly to the changing landscape and, although we have tried to learn from past failures, we still have a very long way to go. I believe that our desire to create a stronger safety culture is real but, sadly, we have not had the right calibre of management to implement this effectively. And we are hopelessly out-gunned in terms of the resources necessary for our mission – in particular, our audit and finance functions have been woefully inadequate and we face a demographic time bomb, with our younger talent leaving for private industry and our most experienced staff on the verge of retirement. I hope that the zero based budgeting exercise ordered by the Legislature will create transparency into just how chronically underfunded the CPUC is, but I fear that this exercise will be used against us to tighten the screws even further.
6. Finally, we also have a serious governance problem at the heart of the Commission: we Commissioners rightly are held responsible for what happens in this building and yet we do not have any effective means to provide guidance and oversight to the CPUC’s permanent management and staff. My colleagues and I have discussed arranging ourselves similarly to the way that a Board of Directors is organized in Corporate America: we could create subcommittees dedicated to overseeing important internal issues like Audit, Budget, Personnel, External Relations, and Safety. These two-Commissioner subcommittees would meet regularly with senior directors and staff to provide strategic direction and would report on progress and seek policy direction from all five Commissioners on a regular basis. This arrangement could help give the Commissioners more effective senior-level oversight without violating Bagley-Keene and I believe would create a stronger and more effective agency. I do hope that my fellow Commissioners will act on my suggestion after I am gone.
Read the full statement Final Commissioner Report by Mark Ferron, January 16, 2014.
Energy Efficiency may be the fifth fuel, but different than carbon, nuclear, wind, and solar, energy efficiency cannot be measured or metered - by definition, energy efficiency is the absence of the use of energy, which can only be calculated by comparing what might have been with what is. It is the delta between these values that comprises energy efficiency, which makes it a calculated value.
This complexity leaves energy efficiency open to interpretation. One can always debate what might have been if energy efficiency actions had not been taken. There are many complicated and interactive factors that can play into the resulting energy efficiency including, weather, building usage, building changes, changes to resource costs, and occupant behavior.
One can compare past bills against future results, but the savings are often obscured by significant noise that is common in building energy bills, and coming up with a bankable number that everyone can agree often not straightforward or clear.
Fortunately, there are many examples of markets investing in calculated metrics. In fact, globally $1.2 Quadrillion Derivatives Market Dwarfs World GDP. While energy efficiency is complicated, it is possible for markets to agree on a standard set of “weights and measures” and is a foundational step that is underway - one project in particular to watch is the EDF Investor Confidence Project, a methodology that could be be equally applied to residential and commercial energy efficiency (full disclosure, I run this project for EDF).
Energy Efficiency is expressed in every transaction as a prediction or estimate of savings to come. This estimate is part of a calculation made by investors (Including: building owners, financing firms, utilities, energy services companies, insurance providers) and the validity and transparency is critical to create investor confidence and ensure real results are being delivered.
Given the complexity, I wanted to go over some of key terms necessary to have a real conversation about energy efficiency. There are in fact, a number of ways to express energy efficiency, and there is not a single right answer.
Realization Rate is a comparison between predicted and actual energy usage, generally corrected for weather, and sometimes societal norms with a control group. A 100% realization rate means that on average savings were delivered as expected. A 60% realization rate would mean that on average from every 100 predicted kWh of savings, only 60 kWh were delivered.
Average is highlighted above, as there can be considerable differences between energy efficiency portfolio’s that have the exact same realization rate. We will discuss Variance more in the next section, but it is possible for two portfolios with the same realization rate to have substantially different numbers of winners and losers.
It is also important to recognize that realization rate always comes with a confidence interval. Sufficient pre and post data is required to calculate savings vs. the baseline. A single or small number of projects may not be indicative of overall results, and it is necessary to get enough heating and cooling degree days to make sure we can calculate realization rate for different end uses and fuel types.
Variance is the expression of not our average performance, but instead the number of outliers. This is often expressed as standard deviation.
Variance rates are critical in combination with Realization Rate to understand the actual performance of a portfolio. It is possible to get a 100% realization rate while having a lot of winners and losers. If 25% of projects were over by say 50%, and another 25% under by 50%, it is still possible to have a 100% realization rate.
In the context of program design and markets, both realization rate and variance are important, though potentially for different stakeholders. Utilities and public programs, for example, may be most interested in average performance as that is what drives fewer power plants, however they also have interest in protecting ratepayers, so variance becomes important. Individual consumers may care about realization rate in a general sense, however when it comes to what they should expect on their personal investment, variance level may be just as important as realization rate in their decision making.
As anyone who has worked with real live clients knows, even if one is perfectly correct on average, if there is a lot of variance (winners and losers) your phone will still ring on the weekends. If a client saved $25 a month, when they expected $50, they are no happier to learn their neighbor savings $75.
What Kind of Savings Are We Talking About?
It turns out that in addition to how we measure savings, there are number of ways we talk about the savings themselves:
Gross Savings is how utilities and regulators think about savings. This is the volume of savings in terms of units of energy saved. While this sounds simple, to consumers who generally barely understand the difference between a therm of gas or a kWh of electricity, gross savings may be confusing.
Many programs (including federal legislation) look at savings in terms percentage reduction for a specific building. This approach can be applied using site, source, or cost (more to come on that).
While this approach sounds really simple, it can have some interesting unintended consequences, such as rewarding smaller projects on home’s with lower bills at the same level as project on larger consumers that may in fact cost a lot more, and save a lot more gross energy. This can result in a selection bias that favors projects that save less energy.
Site Savings looks as savings in terms of reduced BTU and kWh at a specific building. While on the surface it is very simple, in reality because different fuel types may have different costs, percent reduction in site energy may not have a lot to do with percentage reductions in bills. This measure can also encourage fuel switching when it may not always be in the societal or even the customers best interest to do so.
Source Savings looks at energy savings based on reductions in generation, not end use consumptions. In many cases and locations, there may be as many as three kWh generated for every one kWh that is ultimately consumed in a building (the other 66% being lost to grid inefficiencies). While source makes a lot of sense to utilities and policy makers, it is often very confusing to consumers, and hard to apply in a way that is accurate due to varying fuel mixes around the country and even in different places in a single region or time of day.
Money saved is what customer care about most and understand best. It also tends to split the difference between site and source (as cost is also a reflection of energy production). This approach is not used widely, but is built into new federal legislation.
Making Energy Efficiency a Resource:
This energy efficiency stuff is a lot harder than it would seem on the surface. While I fully support the basic notion of more transparency, registries, and public accounting, energy savings do not just pop out of the numbers. We need to define our terms and agree on the key metrics we are applying, and recognize with every choice, there are a host of often unintended consequences we must address.
Once we have agreed on a common metric and standard approach to calculating and expressing energy efficiency, and the accuracy of predictions, then we can start using this data to drive behavior (consumers, contractors, and regulators) and most importantly create alignment that encourages private markets to emerge.
There is a raging and healthy (most of the time) debate about the future of home performance and energy efficiency more generally.
However, I have found that some of the key terms in energy efficiency and home performance are misused or have many different definitions, resulting in confusion and impeding our ability to move forward.
Here are some key terms and how I have come to understand them. Please feel free to debate and discuss - that is the point of this blog!
While “home performance” has come to mean a specific method to conducting whole house energy efficiency retrofits on existing building - generally including BPI / RESNET, energy audits and modeling, combustion safety, etc.
However, I believe home performance is not about specific tactics, but is instead an umbrella term that refers to a systems based approach, based on building science, that measures success in terms of results not by individual measures. Home performance is not how you do it, but instead is defined by outcomes including energy, health, and comfort.
We often confuse performance testing of a building and the overall performance of a project. Performance testing can provide more accurate and site specific inputs into a prediction of results or as a design tool, however real performance of the overall system can only be calculated at the meter (or in comfort or air quality), not in a blower door test or whole house assessment.
While the current understanding of “prescriptive programs" tends to focus on programs that specify improvements and values, generally using population averages (deemed savings, product rebates, etc) vs. whole house site based analysis. However, I believe the real definition should be more broadly defined. Prescriptive approaches to energy efficiency, and prediction of savings, include all methods and models that are not calibrated to results at the meter.
Employing a whole house methodology, or a simulation model to estimate overall savings, does not make a performance project. In fact, simulation models and “home performance” as we know it, is entirely prescriptive until such time as there is accountability and transparency to the results.
“Performance Based” approaches to energy efficiency are based on past performance, calculated by measured performance data (meter data). However, incentives are driven by upfront predictions and performance risk (savings) is still be shouldered by ratepayers and homeowners and paid in advance of actual results.
Past performance may be used to calibrate incentive levels and provide feedback to contractors / vendors / and ultimately consumers to drive improvement in the system, however fundamentally we are still betting with other peoples money, which triggers regulation and oversight - contractors and industry are not sharing the actual performance risk.
“Performance Contracting” is a system where there is accountability directly to actual savings calculated based on the meter. Rather than ratepayer fronting incentives, and consumers taking performance risk on their investment in EE paying off, private parties will front incentive values to customers and put their money where their mouth is - taking full performance risk.
Utilities will procure energy efficiency through demand side capacity contracts, and buy real and documented savings from aggregators or contractors directly. This will massively reduce program costs, as managing the risk becomes a private sector activity, and will result in dramatically increased value of the negawatt.
By paying for delivered savings, the program and utilities roles change from defining business models and micro managing programs to attempt to regulate good results, into simple consumer protections, and ensuring that savings being procured are real and calculated correctly. Delivery models, software, measures, training, and quality assurance, all traditional program roles, will become functions of the private sector instead.
Moving Toward Performance:
Many of the internal Home Performance industry debates center on us all using the same terms, but in different ways. In particular, there is a loud contingent focused on getting quickly to “performance.” However, they tend to want avoid regulations in the process, when in fact what they are proposing is in fact a “performance based” model, where there is scorekeeping on predictions, but risk still flows to ratepayer and homeowners.
Personally, I believe in moving to Performance Contracting and an Energy Efficiency as a Resource model for home performance (lowercase home performance - performance not a specific approach) and that there is a strategy and series of steps that will allow us to move from our current prescriptive approaches to home performance, to a reasonable middle ground where incentives are calibrated to past performance and results are reported transparently on an ongoing basis. I believe that the dataset that emerges from this Performance Based approach will be critical in defining the actual energy efficiency yields for whatever models work for industry and customers, and will provide the critical actuarial data that will facilitate a move to Performance Contracting business models. We must convert Energy Efficiency from uncertainty to manageable risk before private markets can engage.
However, tracking performance is considerably more complicated than people tend to giving it credit for, and it will take some time to make this transition. Energy Efficiency is not something you can meter or measure and is easy to confuse with a range of external changes like weather, building use, and even resource price changes. Energy Efficiency is in fact a calculation and derivative value that requires relatively significant amounts of data to be statistically valid, and is not nearly as easily to “see” through the noise as many would make it out to be.
Given all of this, I think there is actually a lot more alignment than one might believe reading some of the industry blogs and forums. I would like to challenge everyone to move from high level theory by translating ideas into actionable steps and processes. Nothing happens overnight, and we have to make sure we have a solid foundation in place to support the transition from prescriptive programs to performance based markets.
There has been an ongoing debate about the use cases and technical differences between energy models designed to produce a rating or asset label, designed generally for use in code or as a way for consumers to compare the energy use of two buildings, and operational models, used to predict energy usage and savings on an individual building, either for to inform an investment decision, or to qualify a project for participation in an incentive program.
Recently, during an interesting conversation on the complexities of estimating r-value for assemblies in the BPI RESNET Linkedin group, a point was made by David Butler that I found exceedingly interesting and important.
How one builds a conservative energy model for an asset rating is exactly the opposite of how one would do it in an operational setting.
When building a model for a ratings or an asset score, the definition of a conservative assumption is a low value. If you pick a lower r-value there will be a lower and therefore more conservative score.
In an operational model, where the purpose is typically to estimate the delta between the base case (where the house started) and an improved scenario (post retrofit), the definition of a conservative assumption is a high value. If you estimate a higher r-value, then there will be a more conservative estimate of savings. Conversely, if you use a low value (like you would in a conservative asset score) you will actually come up with a much more aggressive prediction of savings.
Software for asset ratings are designed with low values which tends to drive lower scores for those homes that can use the most improvements, and raters are typically trained to default to low values if they are uncertain. This makes reasonable sense in the context of a label or for code enforcement, where the goal is to encourage folks to take action and lower scores are more likely to encourage folks to improve.
However in an operational system where the goal is to give accurate predictions of savings to consumers, as well as project savings that will drive ratepayer incentives, this tendency in an asset model, leads to an underestimation of building performance, that in turn results in often drastic overestimations of energy use, and therefore potential savings.
This issue confirms the notion that asset and operational scoring tools should not be one and the same. It also explains some of the realization rate problems we see when attempting to use rating software to predict retrofit savings.