Pay-for-Performance is different than traditional utility programs, and it’s starting to catch on nationwide. Will your next deep retrofit be a P4P?
The way energy efficiency incentives programs work almost everywhere in the United States, the utility takes all the risk. That’s because the customer gets the incentive payment up front, whether or not any energy is actually saved by the energy efficiency measures the utility paid for.
Pay-for-Performance programs are an emerging utility incentive model. Conceived in Seattle, Pay-For-Performance programs are different, including the way savings and incentive payments are expected to drive initial investments, and the emphasis on ongoing operations and maintenance.
P4P spreads risk by not paying all the incentives up front, instead measuring actual savings and making monthly or annual payments to the participating customer. Bigger savings, bigger check.
The greatest risk of Pay-For-Performance programs lay in the unknowns: it had seldom been tried. So Seattle authorized Seattle City Light to run a very limited commercial building pilot of Pay-For-Performance in 2012, the first of its kind in the country. The three-building pilot program ran from 2013 to 2016.
Today the three local utilities – Puget Sound Energy, Seattle City Light, and Snohomish PUD – are implementing performance-based incentives with varying degrees of caution. Several other utilities around the country are now experimenting with them in commercial buildings, and PG&E is piloting a residential program.
DURING THE SEATTLE PILOT, Stan Price was the executive director of the Northwest Energy Efficiency Council, which advocated for Pay-for-Performance. He believes P4P is the best next move for utility-incentivized energy efficiency in the commercial building sector.
“The deemed-savings method worked for 30 years of energy efficiency incentives. But now we have more data,” says Mr. Price. “We know more about how buildings work.”
Building energy models are sophisticated now, making the performance method possible by providing a baseline for normalized metered energy consumption and savings.
Black-and-white savings calculations make utilities more comfortable, but customer acceptance has more to do with their gray matter.
“We spent years trying to convince customers that energy savings are opex savings and affect the bottom line just like top-line revenue,” says Mr. Price. “P4P translates the savings into an annualized revenue stream, so finance people finally get it” – and, he hopes, will be more motivated to participate.
The flexibility of performance-based incentives should be another factor in persuading building owners to participate. Instead of picking from a list of approved measures, participants can find creative ways to eliminate energy waste.
THAT DOESN’T MEAN P4P programs are “measure blind.” Yes, spreading the risk means utilities can be more agnostic about how energy is saved, but not completely.
For one thing, measures with a predictably long life are worth more to a utility than savings that might fade quickly after the last rebate check, says Joseph Fernandi of Seattle City Light.
City Light and PSE both require a 15% immediate energy reduction as a way to force capital expenditures into the P4P measure mix. Otherwise, efficiency measures based purely on behavior change, or operations and maintenance, take longer to ramp up and don’t have the reliable persistence of capex investments.
“It’s about how we marble these things together,” says Mr. Price, “because with P4P we’re taking a whole building approach, a holistic view.”
Even though specifics shouldn’t matter, Snohomish PUD wants to know what’s being implemented. Jessica Mitchell of SnoPUD explains that it has to do with the financing mechanism. The annualized incentive payments are a bankable revenue stream. Should the utility cancel the contract, there needs to be a final payment – and to calculate that payment, the utility needs to know the measures so they can value them.
At this early stage of pay-for-performance programs, learning from the measure mix is important to utilities. Mr. Fernandi of Seattle City Light says that assumptions about the measure mix and their durability inform the incentive dollar amounts the utility establishes for performance-based programs.
HOW MUCH SAVINGS are we talking about? Seattle City Light hopes to see 40 percent energy savings over the life of a P4P program based on results from the pilot program.
That’s not as aggressive as it sounds, Mr. Price says. “The buildings that participated in Seattle’s pilot were already well performing buildings, so it’s possible we’ve been undercounting the viability of the resource.”
Stan Price has high expectations not only for the savings, but for the positive changes that Pay-for-Performance can bring to utility-run energy efficiency programs.
“Deemed savings overemphasizes the easy savings to meet annual efficiency goals,” Mr. Price says, referring to that model as “energy efficiency 1.0.”
“I hope a matured Pay-for-Performance model will blow that up, replacing it with energy efficiency 2.0, and change how we think about energy efficiency incentives.”
Stan Price, Jessica Mitchell and Joe Fernandi, together with PSE’s Corey Corbett, spoke on a panel at Washington’s Energy Future Conference.
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