Towards a true energy efficiency market: Getting it right the first time

Towards a true energy efficiency market: Getting it right the first time
July 17, 2017 Tim Guiterman
Multiple Meters on a red background

For utilities, regulators and grid operators, energy efficiency has traditionally been the least-cost resource. Reducing energy consumption and demand has allowed utilities to delay or avert investments in generation, transmission and distribution systems and provided value to customers. However, as the contemporary energy system faces the combined challenge of flat load growth and the emergence of distributed energy resources (DERs), energy efficiency must modernize. Energy efficiency has to become a reliable resource that can compete with other DERs, while remaining the least cost resource that can serve the 21st century grid.

One advantage to DERs, such as solar or storage, has been that they can be metered and precisely measured, whereas energy savings is more challenging to quantify–and for that reason, it has often been treated as a quasi-resource. In order to scale, energy efficiency has to evolve into a dependable resource that can reliably serve the grid and compete with other DERs. This requires upending the existing model for achieving energy savings, and enabling a market-based delivery system for energy efficiency.

But to move energy efficiency toward a market-based approach, two essential changes need to take place: First, measurement practices must move away from pre-set savings estimates assigned to individual ‘widgets’ in the home (e.g., smart thermostats, heat pumps, LED light bulbs) and shift to a meter based approach that captures the actual savings impacting the grid.

Second, the delivery system for energy efficiency must shift from this widget-based approach with pre-baked incentive levels, to a more market-based approach that places economic value on savings itself. With these two critical changes, energy efficiency can successfully scale as a reliable resource that is delivered through innovative models that value performance, competes with DERs and provides value for the smart grid.

Measuring with Normalized Metered Energy Consumption (NMEC)*
The first step is moving energy savings measurement to the meter. Traditionally, meter-based measurement has been time consuming and expensive, but with the arrival of cloud computing, cutting-edge data science and modern software tools, this has all changed. Calculating savings from large quantities of meter data is no longer a tedious, expensive, and manual task. Today, modern software can automatically run continuous algorithms that estimate savings in near real-time and provide utilities a measure of the actual savings being achieved.

Still, methods for meter-based measurement can vary. This requires the development of common and consistent measurement methods that are transparent, interoperable, accurate and reliable. Essentially, it means creating an measurement and verification (M&V) standard; and standards for different sectors (e.g. residential, commercial) which can then enable markets for energy savings to become a reality.

These new, standard measurement methods must meet some critical requirements, including:

  • Transparency: Standardized methods must be clear and understandable for the market. This will invite outside actors to participate in energy efficiency markets and create confidence in savings estimates.
  • Accuracy: Inaccurate measurement is useless to the market and will erode confidence in energy efficiency for both regulators and ratepayers. Getting the right answer will drive investment and encourage the industry to scale.
  • Replicability: Being able to reproduce similar results with similar data sets is a critical function to create trust in energy savings as a resource. The standard must be replicable and interoperable across different measurement platforms and tools.

The creation of standard methods also requires agreement from all stakeholders, each with a critical interest in ensuring transparency, accuracy and replicability. For utilities, these savings would be a procured resource, bought alongside other generation resources and must be as reliable as any DER (e.g., solar, wind or storage). These methods must allow for consistent measurement of savings by time and location, to enable programs and markets to pay for energy and demand savings that address capacity constraints and “duck curve” issues, for example. For energy efficiency providers, the standard methods can provide the calculation approach that determines their compensation for the delivery of savings. For regulators, the standard methodology will provide the regulatory oversight necessary to ensure that these savings are a prudent use of ratepayer dollars. This agreement on common and standard methods allows for a streamlining of the M&V approach and puts all parties on the same page and under “one set of books.”

With these common standard M&V methods, utilities can procure savings and foster a competitive marketplace that creates and delivers energy savings as a resource that can compete with other DERs to provide value for the grid.

Establishing a Pay for Performance (P4P) Market

Modern measurement enables the second critical shift for efficiency to scale. Efficiency must begin shifting away from flat-rate rebates that are paid for each energy efficiency measure installed, towards a market-based (e.g. pay-for-performance) approach that places the economic value on the savings itself that is actually achieved – through installed measures, customer actions, or a combination of both. By valuing actual energy savings, efficiency can serve as a resource that can be bought and sold.

Utility as the Market MakerHowever, buying and selling energy savings requires a market, and therefore requires the creation of a centralized market maker who will help facilitate the entire process. In such a system, the role of the market maker will be to:

  • Run the pricing and valuation system for savings
  • Register market participants
  • Settle payments
  • Validate savings claims
  • Release and accept bids for savings
  • Administer a centralized Normalized Metered Energy Consumption (NMEC) platform that calculates and displays savings in adherence with the standard methodology.

In most cases, the market maker will be the utility. The utility is uniquely suited for this role because it holds all the data needed (including non-participant data, important for normalizing savings) to operate the measurement platform and have visibility into the needs of the distribution system. Furthermore, the utility can decrease data security risks and prevent unnecessary transfers of customer data and multiple layers of methodology review. Whereas the alternative, a decentralized approach to savings calculation, would lead to market failure because no two market entities will calculate savings down to the same precise result (though they should be close with a standard methodology). The utility-centric market maker model also enables the development of a pricing system that values energy and demand based on both temporal and locational needs.

Registered market participants, upon meeting basic participation criteria set by the market maker, should face as few barriers to entry as possible. These barriers include:

  • Barriers to avoid include significant inconsistency in calculated savings across initial estimates, payment, and evaluation
  • Long delays in quantifying savings that slow down payments thereby discouraging market participation
  • Administrative or technology-related costs that make it difficult for mid-sized and small actors to participate.

Moving Forward
Like any seismic industry change, the transition towards the future of energy efficiency will not happen overnight. In many jurisdictions, this new model will need to grow over time. As the market matures, pricing signals and energy savings procurement contracts will spur deeper retrofits, leverage private capital, invite new market participants and scale energy efficiency. Entities such as Energy Service Companies (ESCOs), product manufacturers, lenders, aggregators or other innovative business models can then create new ways to achieve energy savings (e.g., Whirlpool selling savings from smart dishwashers) and be paid for performance measured in a standard way based on the meter. Future applications of emerging technology such as blockchain (for uniquely identifying energy savings from projects) can be layered in if needed for cross-organizational tracking. And the utility, as the market maker, could then use the savings to meet regulatory or statutory goals, reduce the need for capital investments or sell savings up to a regional transmission operator market.

In fact, the shift towards a market-based energy efficiency delivery model is already happening. The introduction of meter-based savings measurement technology is allowing for energy savings to be estimated quickly, accurately and with greater granularity than has ever been possible. Utilities are testing performance contracting with implementers and slowly growing more comfortable with meter-based savings measurement. Other utilities are experimenting with pay-for-performance approaches that buy savings from market actors.

The industry needs to act now to create a standard measurement system that enables energy efficiency to scale across the country. If the industry tackles this challenge, efficiency can then emerge as a true resource that can grow alongside other DERs to provide dependable savings to the grid for many years to come.

* Normalized Metered Energy Consumption (NMEC) is a term originally defined by the California Public Utilities Commission (CPUC) in Attachment A of the Order Instituting Rulemaking Concerning Energy Efficiency Rolling Portfolios, Policies, Programs, Evaluation, and Related Issues (Rulemaking 13-11-005). It is well-suited to generally describing the measurement of pre- and post energy usage at the customer meter, adjusting for external factors to reveal savings due to program intervention, and accounting for key drivers such as weather and sector-specific factors.