Total Resource Cost - A Self Imposed Barrier to Energy Efficiency

Cost effectiveness testing is such a complicated and often boring topic that it gets overlooked as one of the key barriers to achieving our energy efficiency goals.

The fact is, the days of the Recovery Act dropping piles of money on energy efficiency is over (thankfully). For the foreseeable future, the funding stream for energy efficiency will primarily be coming from ratepayer funds (utilities and PUCs), where spending on energy efficiency programs funded by electric and natural gas utility customers will double by 2025 to about $9.5 billion per year, according to projections published by Lawrence Berkeley National Lab. This move towards ratepayer funding will further cement requirements for program cost effectiveness.

While this seems like a simple and reasonable requirement - that investments of ratepayer funds in energy efficiency pay for themselves - the reality is that there is wide disagreement in what it means to be cost effective, and the approach most taken by utilities is simply not appropriate for energy efficiency, and in particular energy efficiency for homes.

The most common approach to how we view cost effectiveness is the Total Resource Cost (TRC) test.  This test measures the total cost of an energy efficiency (incentives, homeowner contribution, program overhead, etc.) resource against essentially the cost of a natural gas power plant. The idea being that we should not invest of energy efficiency if it is cheaper to generate power.

---

If you want to learn all about these tests, read the California Standard Practice Manual. Though many would claim that we are actually applying all of these test incorrectly. The original intent was to apply ALL the tests and then Public Utility Commissions can make measured choices based on these tests and their goals. However, this testing regime has been transformed into something binary - Pass / Fail. We have lost the ability to think and make reasoned decisions.

TRC sounds logical, until you consider more fully the many benefits of energy efficiency, such as comfort, health, and durability, and most importantly, that in most cases ratepayers are paying for only a small fraction of the total project cost. While the great energy efficiency theory proclaims that there is a huge amount of low hanging super cost effective energy efficiency, just waiting to be picked up, reality is something very different. Due to a range of transaction and opportunity cost issues, retrofits simply for energy efficiency efficiency sake, rarely have the return we have been lead to expect. However we have the great advantage that, while the energy efficiency return is not the no brainer value proposition put forward by so many white papers, study after study have shown that consumers who are investing in their home’s are doing so for a range of reasons. While energy efficiency is often on the list, by no means is at the top of the list of reasons why an upgrade is being made. 

Homeowners are investing in modern equipment (1 in 12 HVAC units go out every year), or to solve a range of other problems, where the primary benefit is often comfort, or better indoor air quality. The fact that a consumer may save a few dollars a month, or get a rebate is great and can drive deeper energy efficiency projects, but the rebate and the resulting energy savings are not the primary reason funds are being spent.

So, on one side of the equation we are looking ONLY at the value of energy savings from a project that is producing many valuable outcomes for the party making the buying decisions (that’s the homeowner), and we are comparing that against the TOTAL cost of the project.

Unlike a power plant, where the ONLY benefit is the energy it produces, in a residential retrofit, the primary benefits are not even being counted.  Of course this math does not come out looking good for energy efficiency. But that is not the fault of energy efficiency not being cost effective, we are simply applying the wrong metrics to understand the value.

There is one school of thought that to fix this imbalance equation, we should put a value of the non-energy benefits (NEBs) associated with energy efficiency, and deal them into the equation.  While this makes sense at one level, it is a giant mess at another. 

Comfort, health, and durability are all very complicated to apply a simple payback number to in a way that is all believable or testable in the real world.  So while attempting to count the value of NEBs will further the growth and full employment of the M&V industry, in the long run we will be left in a similar place where there is a lack of confidence in energy efficiency, and we are simply too far from the truth of the matter for it to pass muster in the world where energy efficiency is treated as an actual resource, not just a matter of public policy.  This is a short-term solution at best - and maybe not even that.

Non-energy benefits are already being accounted for in every single energy efficiency transaction. Building owners, who are putting up the vast majority of the investment, are weighing that investment against these benefits, and frankly speaking, trying to account for these benefits is just not the business of utility commissions or utilities.  

Instead we should focus on a simpler more transparent approach to cost effectiveness that is more aligned with how markets view energy efficiency as a resource and the public good, and leave non-energy benefits up to the people who are making the investment, not as a function of policy.

---

A Simple Solution

There is another approach to measuring cost effectiveness that is both considerably simpler and aligned with how markets will someday value energy efficiency, which is referred to as either the Utility or Program Cost test. This test looks not at the total cost, but instead focuses on the public or ratepayer investment vs. the energy efficiency savings that emerge. 

Rather than attempting to quantify non-energy benefits, it says that it is not the concern of the utility or program what a building owner is spending on benefits that really are private, and instead treats energy efficiency like a commodity or resource.  If we were buying oranges, we would not be interested in the types of tractors used, or if a farm was profitable or not, we are simply buying a product at a price.  

It is time that we take the M&V magic out of energy efficiency, and keep it simple (stupid). The public is investing in energy efficiency so we can build fewer power plants, and lets keep it to that. We need to stop trying to decide for consumers what is in their best interest, and stop telling the market and industry that we should only be paying attention to a single benefit.

Fundamentally, for energy efficiency to scale, we need business models that are profitable and can scale; products that a range of consumers want to actually invest in; and we must survive off of public funds tied to the value of the energy efficiency we actually produce.

Currently programs and utilities are doing a terrible job at the one aspect of this venn diagram that they should actually be responsible for, which is measuring and holding actors accountable to the savings produced.  The last thing we should do is set a bunch of bureaucrats and high paid consultants on a new complex and very expensive, but ultimately impossible mission to put a value on warm feet, happy marriages, less sniffles, homeowner’s egos, keeping up with jones’s and any number of potential other reasons for investing in energy efficiency.

The simplest answer is usually the right one. We need to start measuring the results of our work in a way that is transparent and that creates real accountability, and we need to simply measure the necessary public investment to harvest the resource. It is time to start compareing apples to apples - Public or ratepayer dollars against savings at the meter.

I'll leave you with one parting thought - click the quote below to learn the truth:

---