How Efficiency Can Be Treated As An Energy Resource
By: Andy Frank
April 11, 2018
Energy efficiency is weird. You can't see it or feel it, yet it has been, by far, the most dominant source of energy to heat, cool and power buildings in the last 40+ years. It's the energy not used; the reduction of wasted energy that once flew out the window — literally. Investments in energy efficiency are usually made for non-energy reasons, like building occupant comfort, yet, for those in the know, it is the cheapest form of energy. Think of it like a whimsical riddle (what is all around us and yet invisible?) that happens to be central to whether we can keep this planet safe.
Energy efficiency ("efficiency") encompasses a wide range of technologies — basically anything that uses energy can be made more efficient. This includes more efficient appliances (think TVs, washing machines), smart technologies (learning thermostats, voice-controlled lighting), as well as materials that keep you warm in the winter and cool in the summer (fun stuff like insulation and caulk).
When you add everything up, efficiency hits the trifecta of awesomeness:
- Reduces utility and customer costs
- Improves quality of life and productivity
- Cuts carbon emissions and other pollutants
I know what you are thinking — sounds like the tooth fairy. But the good news is that efficiency is entirely realistic as long as policymakers and regulators treat efficiency as a real resource.
Traditionally, efficiency has been treated by states like a public benefit subsidy rather than as a resource. Somewhat arbitrary — but impactful — efficiency goals were set by policymakers in the form of Energy Efficiency Portfolio Standards ("EEPS") and similar policies that drove the development of efficiency "programs" measured by way of benefit-cost analyses. In other words, policymakers told utilities to spend a set amount of money as long as certain goals were met in a cost-effective manner.
While this traditional approach has enabled many states to reap the benefits of efficiency, it has limited the potential of efficiency as an economic energy resource on par with utility procurement of natural gas, coal, and other traditional sources of energy production. In other words, we could be doing a lot more if we treated efficiency as a real energy resource rather than just a policy goal.
So what would a policy that treats efficiency as a resource look like? The key is redirecting a portion of the billions of dollars that are being spent on new poles, wires, and expensive energy toward insulation, air sealing, and smart appliances that improve quality of life by improving building occupant health and comfort, reducing energy and carbon usage, and are cheaper than current energy outlays. Oh, and this kind of energy policy would create a ton of good, local jobs as well.
Currently, efficiency spending is largely divorced from capital investments associated with energy system planning and load forecasting, and when it is included, it is often heavily discounted. This leaves utilities relying on traditional capital investments and energy procurement, whether they purchase fossil fueled power or green energy, to meet the needs of the electric grid.
So what are the barriers to treating efficiency as a resource? Typically, there are three primary challenges:
- Efficiency is not "metered" like other energy resources
- Efficiency is seen as the "low-hanging fruit" that will happen anyway
- Efficiency cannot readily be tied to specific utility cost reductions
Efficiency Not Metered
The first challenge can be overcome by advanced analytics that more granularly isolate the impacts of efficiency upgrades by taking into account all of the data available. Con Edison, in its Brooklyn Queens Demand Management ("BQDM"), for example, leveraged predictive analytics and other advanced data strategies to treat and invest in efficiency as a Non-Wires Alternative ("NWA"), going past traditional "measurement and verification". Efficiency, in fact, is expected to make up ~60% of the total NWA resources procured through 2026.
New approaches to energy savings calculations via metered data (sometimes called "M&V 2.0") and organizations like the Investor Confidence Project are enabling utility-grade savings that can be compared apples-to-apples with traditional utility spending. My company, Sealed is doing its part with predictive analytics that demonstrate sufficient accuracy to receive a residential energy savings insurance policy, showing that the private market can absorb performance risk with investment-grade energy savings predictions.
Efficiency Will Happen Anyway
The second challenge is more existential. Some argue that efficiency is low-hanging fruit and, therefore, does not need any additional utility investment. In other words, since efficiency is already going to happen — why invest it in like a resource?
While some efficiency activity is low-hanging fruit — and a lot of it is already occurring — neither the grid nor the planet knows or cares if energy savings would have happened "anyway" and, importantly, neither can afford to wait. Policymakers and regulators need to get comfortable with the idea that ratepayers will spend less than what is being spent on supply and infrastructure in the status quo, but more than they "should" in a perfect command and control system.
While rate design is an imperfect science, it is clear that if a customer installs insulation, leading to a permanent peak load reduction, such a peak load reduction is an "externality" benefit, which helps all ratepayers, not just that customer. Keep this in mind: efficiency is a permanent load reduction, and therefore in many ways even more valuable than more sophisticated technologies such as energy storage.
What this means in practice is that a true "negawatt" market enables all achievable efficiency to be compensated based on the value of peak capacity reductions, avoided distribution spending, the social cost of carbon, as determined by state policy, and any other "externality" benefits that are defined by state policy. Simply put, it means paying a fair value for the benefits created.
Efficiency Not Tied to Specific Cost Reductions
The third challenge is the most difficult, but it is a familiar problem faced by all utility regulators. As a distributed energy resource ("DER"), efficiency is, well… distributed. While efficiency from an individual building usually cannot tied to specific cost reductions, efficiency can operate on a massive scale, with the ability to fundamentally change the trajectory of peak capacity and infrastructure needs in any given service territory.
Unfortunately, utility capital planning is necessarily based on projections for peak energy usage and costs, including energy and transmission equipment. And like most projections, those made for capital planning purposes are often wrong, sometimes spectacularly so. None of this is a reason to fundamentally change the utility planning process — it is a natural challenge of a regulated monopoly business model. But there is no reason to continue the double standard that efficiency (and other DERs) experience when it comes to calculating future expenditures.
It is always better to be more accurate in making projections for capital planning — smart meters and similar technologies help with this — but we mustn't throw out the proverbial baby with the bathwater. The only difference between traditional utility spending and efficiency investments is that the worst-case byproduct of efficiency is lower energy bills, local jobs, and a cleaner planet.
It should come as no surprise that the data shows efficiency has a huge impact. Here in New York, for example, electricity demand projections for 2016 were reduced by 13% between 2008 and 2016, with efficiency identified as a key driver. And efficiency, when combined with solar and other clean behind the meter resources, is expected to reduce peak load increases by an order of magnitude, from 0.73% per year to 0.07% per year, according to the NY ISO. Efficiency represents the bulk of this impact, more than double that of solar and other behind-the-meter resources combined.
In California, the impact is even more dramatic, with efficiency and other DER avoiding $2.6 billion in transmission costs. And McKinsey estimates that efficiency will drive the vast majority of load reductions between now and 2030 (an order of magnitude more than solar), essentially offsetting all of the intrinsic growth (including electrification) and then some.
The benefits of efficiency will be realized only if efficiency is treated as the resource that it is. Policy reforms like New York's Reforming the Energy Vision ("REV") hold the potential to fulfill efficiency's potential, but only if pre-existing biases and old ways of thinking can be overcome. Efficiency can be simple, cheap, and plentiful, but only if is treated as a valuable resource.
The good news here in New York is that this vision may soon be a reality. Governor Cuomo will be announcing a significant efficiency policy commitment for Earth Day 2018. Based on the most recent New York Public Service Commission ("PSC") order, this commitment is likely to include a mechanism to value efficiency as a resource. A commitment to treat efficiency as a resource would be game changing, with the potential to dramatically reduce customer bills and the electric power supply's carbon impact. Stay tuned.
Andy Frank is the Founder and CEO of Sealed, an energy and financial technology company that finances home upgrades with energy savings, enabling customers to affordably lower their environmental impact. Andy served on the Energy Efficiency Procurement & Markets ("EEPM") committee of the New York Reforming the Energy Vision ("REV") Clean Energy Advisory Council ("CEAC") that provided recommendations on efficiency policy to New York policymakers. Andy has a B.S. in Environmental Science & Public Policy from Harvard University.