As energy efficiency moves from a deemed rebate approach into a performance-based marketplace where efficiency is measured as a demand-side capacity resource, the value of efficiency is going to increase, as will the incentive for bad actors with the intention of gaming the system. Making sure there are systems in place to regulate and police this market to ensure it is fair and transparent is essential. The good news is that there are many tools available to us today to manage this risk and make sure only real results are rewarded.

There have always been opportunities and incentives to game markets, and the emerging market for metered energy efficiency will be no different. In reality, a market with properly aligned incentives will drastically reduce the industry-wide bias toward over prediction and make the whole system more accurate, transparent, and enforceable. As in other markets, it will the regulator's role to put in place and enforce rules that ensure a fair and transparent marketplace.

In modeled performance programs, where rebates are paid in advance based on the results of engineering models or deemed predictions, there exist substantial incentive to inflating savings predictions. Even without counting the bias of the auditor or market tipping the scales (and there is little evidence that in the current market there is a concerted effort to do so), the engineering tools regulators require have a massive bias towards overestimation. In California, the Title24 HERSII based energy model required until earlier this year, overpredicted energy savings by nearly 300 percent (CA solution: www.CalTRACK.org) while New York and other states overestimation ran closer to 150 percent.

In pay-in-advance model of energy efficiency, we don’t measure results in a usable way and instead attempted to ensure good outcomes by micromanaging every step of the retrofit progress with an avalanche of regulation. A CPUC ruling in August summed it up, stating that “Program Administrator expenditures on costs other than customer rebates appear excessive, as they have come to represent approximately half of portfolio expenditures.” In other words, we are spending $1 on administrative costs to try and make sure the other $1 is spent wisely -- and then failing.

Some who argue for continuing the current programmatic approach to efficiency and point to the potential for gaming in a metered market as a reason to stick with rebates and program implementers. One anecdote that is repeated over and over again in energy efficiency circles as an example of potential gaming, tells the story of a contractor who targeted families with graduating seniors, knowing that when they went off to college, bills would go down, creating “savings.”

While this type of gaming is certainly possible, it would actually be much easier to regulate and police in a pay-for-performance model than in our current system.

Just as insider trading is illegal in financial markets, the gaming of energy efficiency savings by explicitly targeting populations based on customer attributes that will lead to decreases in use without intervention or investment, should also be considered gaming and fraud. Just like insider trading and other market regulations are illegal and prosecuting, fraud in measuring energy savings should be made illegal, aggressively prosecuted, and be grounds for debarment from participating in the market.

Fortunately, it turns out that just as with insider trading or even credit card fraud, it is harder than one thinks to game the energy efficiency markets without leaving fingerprints in the data. By looking at data in the aggregate, regulators can spot anomalies, investigate, and catch and prosecute illegal activity.

Like all markets, it is possible for bad actors to game in energy efficiency, and this is true both in today’s programs and in future metered performance markets. However, this potential should be used as an excuse to stick with the status quo. Regulating these new efficiency markets will require focus by regulators, however, we have the data and tools to ensure a fair and open market. We can learn for experiences in the past, such as standard offer programs from the 90s, as well as what has worked in other markets to ensure trust.

In this new world of measured efficiency, regulators can focus on protecting customers and regulating the marketplace to ensure savings are real and trustworthy. We should not let the perfect be the enemy of the good in energy efficiency and focus on learning from the past and developing data driven solutions so that efficiency can take its place as carbon free low-cost source of demand-side capacity.

Last week, the California legislature passed SB-350 Clean Energy and Pollution Reduction Act of 2015, a bill that set the state on a path to at achieving Governor Brown's ambitious clean energy goals by 2030. The Governor’s “50/50/50” plan aims to increase electricity from renewable sources by 50 percent, reduce petroleum consumption by 50 percent, and increase building efficiency 50 percent by 2030. While most media reports focused on the audacity of trying to increase the renewable portfolio standard and energy efficiency goals, and some observers expressed justified concern about items left on the cutting room floor, there was little discussion of some of the bill’s most important provisions, specifically those that address the details about how energy efficiency will be measured and delivered going forward.

Not only does the bill essentially double California's energy efficiency goals, it does so in by making a  number of very important changes in how we approach energy efficiency in the state.  These changes, if implemented, represent the beginnings of a major paradigm shift.

First, SB-350 specifically changes the way that energy efficiency is counted.  Rather than rely on a series of ex-post studies, including a stack of regulation that includes considerations for energy code and attempts to account for “free ridership” and other subjective impacts, SB-350 is clear that “energy efficiency savings and demand reduction reported for the purposes of achieving the targets established pursuant to paragraph (1) shall be measured taking into consideration the overall reduction in normalized metered electricity and natural gas consumption where these measurement techniques are feasible and cost effective.”

Additionally, this new law defines “energy efficiency savings” as “reducing the quantity of baseline energy services demanded” and includes both the adoption of efficiency measures and practices (such as behavior).  The law also directs that the CPUC “achieve greater energy efficiency in existing residential and nonresidential structures that fall significantly below the current standards in Title 24 of the California Code of Regulations.” In essence, this means that what’s important is results at the meter, not how one gets there, and that those results are the difference between the buildings’ baseline use before interventions and consumption levels during the performance period.

While this may seem like commons sense to many people, in reality, it is a huge shift from current practices, one that promises to standardize how efficiency is measured based on meter data, and evaluate it based on straight reductions in demand. More importantly, it has the potential to finally put in place a standardized and replicable system for measuring efficiency as capacity in a way that markets can treat as a reliable demand-side energy commodity. These new directives are also closely aligned with the process underway to implement the residential CalTRACK system based on the Open EE Meter.

Building on this data-driven approach, SB-350 goes on to “Authorize pay for performance programs that link incentives directly to measured energy savings. As part of pay for performance programs authorized by the commission, customers should be reasonably compensated for developing and implementing an energy efficiency plan, with a portion of their incentive reserved pending post project measurement results.” Later SB-350 goes on to specifically state that “Incentive payments shall be based on measured results.”

This approach, is similar to a pay-for-metered performance pilot that was proposed to the CPUC by NRDC and TURN, and supported as well by PG&E, which said in their CPUC filing that "PG&E supports a residential pay-for-performance pilot that we understand NRDC will propose in its workshop comments. This pilot design has the potential to facilitate comprehensive upgrades while simultaneously minimizing implementation costs through leveraging private capital."

Though it received less attention, another bill that passed last week was AB-802, which also specifically moves the State towards meter-based energy efficiency, in addition to its primary goal of implementing benchmarking across the State. This law directs the California Public Utilities Commission (CPUC) “determine  how  to  incorporate meter-based performance into determinations of goals, portfolio cost-effectiveness, and authorized budgets, the commission, in a separate or existing proceeding, shall, by September 1, 2016, authorize electrical corporations or gas corporations to provide financial incentives, rebates,  technical  assistance,  and  support  to their customers to increase the energy efficiency of existing buildings based on all estimated energy savings and energy usage reductions, taking  into consideration  the  overall reduction in normalized metered energy consumption as a measure of energy savings.”

In addition AB-802 addresses the festering issue of Code Baseline in California, which has meant that the CPUC can only pay utility incentives for above CEC Title24 Energy Code, which represent an existential problem as code is increased to net zero energy, directing that “programs shall include energy usage reductions resulting from the adoption of a measure or installation of equipment required for modifications to existing buildings to bring them into conformity.”

Taken as a whole, these changes represent a fundamental shift in California’s approach to energy efficiency.  As these changes come into effect, we will be moving from a programmatic regulated approach to efficiency to markets that treat energy efficiency as a capacity resource and rely on private capital and innovation to create the business models necessary to achieve the scale required to hit Governor Brown’s goals.

While largely overlooked, these rather weedy changes to how energy efficiency is measured, and the directive to the CEC and CPUC to begin piloting pay-for-performance approaches to measured savings represent a true paradigm shift. Supported by an unusually diverse group of stakeholders, including environmental advocates, local governments, industry, utilities, and ratepayer advocates, these landmark bills represents a major advance and new opportunity for energy efficiency in California.