The undeniable power of Solar Leasing and PPAs is now the driving force in all major PV markets.  These energy service contracts (by another name) allow homeowners to go solar without upfront investment and without long-term performance or equipment risk.  Clearly it is working.  

The Investor Confidence Project believes we can capture this same momentum in the energy efficiency market.  Clearly EE is more complicated, however there is no technical reason that we can't produce a very similar consumer value proposition in both the residential and commercial sectors.  

It was not long ago that solar was in the same boat.  Less than 10 years ago just about the only finance mechanism in residential was the home equity loan or a bank account with $25K in it... and a healthy personal tax appetite.  A little data, and some right thinking policy and energy efficiency can begin to offer a similar proposition and join our friend in the solar industry, selling customer what they want as service.

With solar costs ever declining, there appears to be a disturbing trend for third party leasing and PPA firms to overstate the cost of solar systems.  They are doing this for the simple reason the the 25D Solar Investment Tax Credit (ITC) is cost based.  Which means that these companies essentially get a tax credit for 30% of the cost of a system.  This creates an incentive to report high prices... maybe higher prices than are actually reality in the market.

This issue is essentially common knowledge in the industry.  There are reports of smaller firms marking up cost of system to levels that have not been seen in the retail market for 10 years.  However, this issue does not seem to be exclusive to a few small rogue companies.  It appears to be likely the practice is also being conducted by some of the largest firms in the market.

A report released by LBNL with input from SEIA and other industry groups on the cost of solar, references how they had to strip out overpriced third party owned data so as not to skew results:

"Third party owned systems were screened out of the data sample in cases where reported installed prices were deemed likely to represent appraised values; the median installed price reported for these systems was significantly higher than for host customer owned systems (e.g., $8.0/W vs. $6.2/W, among ≤10 kW systems completed in 2011). In contrast, installed prices reported for other third party owned systems that were retained in the sample were similar to those reported for host customer owned systems."

This issue was also highlighted as a risk in the recent SolarCity S-1 Filing prior to their IPO, where they stated:

"The Office of the Inspector General of the U.S. Department of Treasury has issued subpoenas to a number of significant participants in the rooftop solar energy installation industry, including us. The subpoena we received requires us to deliver certain documents in our possession relating to our participation in the U.S. Treasury grant program. These documents will be delivered to the Office of the Inspector General of the U.S. Department of Treasury, which is investigating the administration and implementation of the U.S. Treasury grant program.In July 2012, we and other companies with significant market share, and other companies related to the solar industry, received subpoenas from the U.S. Department of Treasury’s Office of the Inspector General to deliver certain documents in our respective possession. In particular, our subpoena requested, among other things, documents dated, created, revised or referred to since January 1, 2007 that relate to our applications for U.S. Treasury grants or communications"

The question remains as to what extent the solar leasing and PPA industries, which represent as much as 80% of the California solar market, have legal exposure to this issue.  It also begs the question as to how much this price inflation has helped achieve the economics that have led to this current boom.

In general this is more validation that cost based incentives are inferior to performance incentives.  This is particularly evident when you compare cost of PV in Germany, where there is a Feed In Tariff  vs. costs in the US where incentives are driven as a percentage of the cost of the system, not on its output.

You may have seen the report put out by Deutsche Bank and Living Cities on multi family retrofitting highlighted an issue that is endemic to our industry.  We get it wrong, by a lot, and often.  

In this case, this study showed that "While fuel savings projections ranged from 25% to 50% across about two-thirds of the buildings, most projects actually saved 10% to 40%."

The study goes on to suggest that as a way to deal with this over prediction bias, which it acknowledges is due to a variety of issues, not just modeling, projected savings should be downgraded not to exceed a linear relationship between actual savings and pre retrofit fuel use intensity.  While this capping certainly reduces overprediction, it also has a number of other unintended consequences.

This essentially creates a penalty for deeper retrofits  or those that spend the extra time and investment to actually achieve deeper savings.  It essentially says you cannot get credit for investing in deep savings or quality work.  This model has the consequence of creating an incentive to stay shallow, and keep it cheap.

Rather than just enforce and arbitrary cap, we think instead, using the standards such as those prescribed in the EDF Investor Confidence Project, we can create the dataset necessary to differentiate on the many influences of project performance, and avoid this serious unintended result.

The report states that "A variety of factors influence the ultimate accuracy of savings projections, including how much of the associated scope of work was implemented, equipment specifications, the quality of construction and ongoing facility management, and the quality of the energy audit. Nonetheless, there is no systematic means of quantifying the relative influence of each of these key factors individually across the DB/LC dataset."

Our focus should be on solving this issue and building the kind of dataset necessary to drive deeper and higher quality results.  The eventual outcome of this kind of thinking is a system the encourages exactly the type of cream skimming that has prevented us from getting to the deep cost effective resource of energy savings.

Read the entire report at:  https://www.db.com/usa/img/DBLC_Recognizing_the_Benefits_of_Energy_Efficiency_01_12.pdf

I was lucky enough to go the ACEEE Summer Study this year, and among the many interesting conversations and very engaging sessions I attended was a presentation on the DOE Home Energy Score.

In this session there was one slide in particular that peaked my interested and got me thinking about use cases.  Just how good is good enough?

The following slide in particular raised some questions for me.  If the these various tools have the degree of variance that the stud presents (HES wrong by greater than 25%, 39% of the time, Rem/Rate wrong by greater than 50%, 25% of the time), what is the use case for these labels?  

While many tools seem to be doing well on predicting how pools of homes function, individual homes are a different story with wide variance.  If you are one of the homeowner that receives a label that says your house is 50% worse than it is (which will include potentially millions of American homeowners if we roll any of these systems out), you probably don't really care that the label is right on average.

My question is simple.  How should we use any score that has the potential, on a given house, to be wrong by such a large degree?  

At a hearing last week at the CEC there was a comment and commendation related to calling Energy Audits, Energy Assessments.  This branding decision was made by the EUC marketing consultants early on, and has been core to the EUC branding effort (at least $30M spent to date).

So the question is... What are homeowners thinking about?  Assessments or Audits?

Here is a live embed from google that shows what people in California are searching for:

This has been an ongoing debate.  I tend to agree that the term audit has some potentially negative connotations.  However, I also think that rebranding a term that is widely understood and in the public mind is very costly.  In CA we just spent the most money we may ever have to rebrand Energy Audits as Energy Assessments... and based on google statistics, we don't seem to have moved the vernacular needle.

Is it time to go back to "energy audit" as the term of art for what we do, and instead of rebranding the name as an Assessment - which does not apear to be catching on.  Perhaps we should own the Energy Audit and make sure when people hear the term they stop thinking of the IRS and instead think of being in a cozy, healthy, and efficient home.

CEC holds first AB758 Hearings in Sacramento on Oct 8th and 9th.  This is big stuff, AB758 gives the CEC the authority to regulate energy in existing buildings.  The outcomes of this process will shape California's energy future.

Find out more:  http://www.energy.ca.gov/ab758/notices/2012-10-08-and-09_Staff_Workshop.pdf

AB758 Basics:
In 2009, AB 758 was enacted, authorizing the first program in the country to address the energy efficiency of existing buildings at the statewide level. The California Energy Commission, a long-time world leader in energy efficiency standards, is now poised to address the substantial opportunity to conserve energy present in California’s existing building stock.

The Energy Commission is conducting a two-day workshop to solicit input and gain insight from stakeholders on where the greatest market barriers and opportunities exist. You are invited to contribute to the foundation of these new comprehensive programs for existing buildings. The workshop will address the questions in the agenda. Please be prepared to discuss your comments on these questions.

Background documents may be found on the Energy Commission’s website:
http://www.energy.ca.gov/ab758/documents/index.html

The Energy Commission invites you to subscribe to the Existing Buildings (AB 758 Comprehensive Energy Efficiency Program for Existing Buildings) List Serve to get the most up to date information about this program:
www.energy.ca.gov/efficiency/listservers.html

Is securitization of solar inevitable?  Maybe... but the key to avoiding the issues is real and rigorous Quality Assurance and underwriting procedures.  It is a slippery slope, and with the explosive growth in the industry it is essential that standards be put in place before serious problems emerge.

There are already rumors of seriously under performing commercial and utility scale projects.  Similarly standards in residential solar are all over the map.  

Securitization is the path to unleashing private markets, but must be undertaken with care or the repercussions can be enormous.

http://www.greentechmedia.com/articles/read/talking-solar-securitization-with-centrosolar/?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+greentechmedia-all-content+%28Greentech+Media%3A+All+Content%29 

With many initiatives in full swing to put ratings on homes and buildings across the country, there may be a lesson to be learned from recent cases where consumers have prevailed in suing car companies for promising an MPG that is not based on real-world driving.

Before you read any farther, I want to make clear that these models are not the problem, it is actually how they are being applied.  Applying any predictive model to an individual building is the problem.  It is up to us to use these tools as a way to manage this risk in pools, and avoid driving that risk down to homeowners.  Great examples of this can be seen in the success of solar PPA and Leasing models.  

Most labels, including the National RESNET HERS and California HERSII labeling system and the DOE Home Energy Score, are in fact asset scores that, similar to an MPG, score a house based on a set of average users.  These scores have potentially wide variance for any particular building, and have a tendency in many climate zones to over-predict savings.

A recently released study called Modeled vs. Actual Savings for Energy Upgrade California Retrofits, analyzes predicted savings based on the CEC’s required energy modeling software, against actual results from customer bills.  The study shows that California HERSII is over-predicting by and average of 50%, with a huge amount of variance between winner and losers.  Resulting in more than 78% of homeowners not achieving the savings being predicted.

A recent LBNL report on the Home Energy Score called "Accuracy of the Home Energy Saver Energy Calculation Methodology" was announced with an email headline declaring that HES is now within 1% accuracy on average, which is a great result.  Of course on closer examination it is clear that there is wide variance for any individual project - perhaps even wider than other tools in the study.  Which of course goes back to the original issue that homeowners are truly not interested in the average, especially if they get the bad end of the stick.  

This issue is not exclusive to the United States.  The Green Deal in the UK has also suffered from estimated savings that are outpacing reality.  In an April 11, 2012 article in The Telegraph, called “Green measures for homes 'save less on fuel bills than forecast”

"An official pilot study of 67 homes in Sutton, South London, found all of those who took the 25-year payback package rather than ten years - a third of the owners - faced repayments higher than the savings.

Another study of 139 council houses in Sunderland found savings on energy bills were just 12 per cent rather than the expected 19 per cent.

Luciana Berger, Labour's climate change spokesman, said the proposals were "complex, confusing and leave customers exposed to mis-selling".

"Before anyone takes out the Green Deal they have a right to know how much it will cost them and how much they will save. Relying on guesswork just isn't good enough. If people are promised savings which never arrive, they will think the Green Deal is a con."

Both the CA and UK rating systems are based on a faulty notion that relative scores are more important than accuracy.  In striving to achieve a relative indicator of performance, and removing behavior (how people actually use their homes) we are left with a system that is really more about policy and theory then what matters to real people - which generally boils down to, how much does it cost, and what will I save.

The idea that we are going to put MPG stickers on every home in CA, or the US, at great expense (It will cost $5B to label home in CA alone) is a mistake.  At least with a real MPG on a car it is based on actually testing the vehicle, and you are not having to test every single vehicle on the road, vs. labeling buildings where we are attempting to derive energy use from physics calculations and every house needs an expensive custom test.  

Here is an article on the topic of MPG from the Huffington Post, Hyundai Fuel Economy Lawsuit Filed Alleging Misleading Ads, that I think should have us all worried:

"For carmakers, the new trendy thing is to have a vehicle in the lineup that gets 40 mpg. One huge problem is that fuel efficiency figures are not based on real-world driving. And automakers opt to advertise with the fuel economy figures that are most impressive -- for highway driving -- rather than lower city or average mileage calculations, which would make their cars look less efficient.

But the Hyundai lawsuit is the second one in recent months to challenge automakers over lofty fuel economy claims. In February, California attorney Heather Peters sued Honda in small claims court over the fuel economy claims for her 2006 Honda Civic hybrid. She said she never got anything close to the 50 mpg she was promised. A judge awarded her $9,867 in the case, which Honda is appealing."

In the end our goal is to save energy and drive consumer adoption.  There is a distinct risk that all of our efforts may backfire when consumers come to understand how imperfect our ratings are, and when the financial community tries to underwrite investments based on energy savings that don’t really exist.

It is time that we start focusing on real data and actual savings, rather than more complicated regulatory schemes.  All this is not to say that energy efficiency does not work, instead it should tell us that we need to move from energy efficiency expressed through code and complicated ratings or scores, and instead focus on turning savings into a resource that can be valued and traded.

We are in a unique moment in time where we can move past regulatory frameworks, to engage markets that can finance our long-term goals, which are simply too expensive to achieve driven primarily with public dollars.  

This article is not to say that modeling is worthless or wrong.  In point of fact, it is far better at predicting savings than just simple one size fits all deemed savings, and can be very good predictors of a large pool of buildings.  However, we need to rapidly move from a model where we have policy anointed solutions based on long regulatory process and instead start measuring and valuing savings predictions based on actual results.  Once we have a system that can measure real savings versus predictions, markets can step in, invest, and manage savings risk so that building owners and households don't have to.

If you look at the Solar industry as a guide, where in CA residential Energy Service Contracts (Leases and PPAs) are currently 75% of the market, building owners on completely insulated from risk through performance guarantees, private capital is flowing, and quality has become a function of industry.  

A system built on real proven savings at the meter will drive innovation and investment, which is the path towards a real and sustainable solution that can achieve the promise of energy efficiency in the build environment.

Enough talk and theory... get the actuarial data and the market will follow!