Beyond Green Hype

Getting realistic about energy efficiency.

BY SARTAZ AHMED ET AL.

28 PUBLIC UTILITIES FORTNIGHTLY APRIL 2010

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nergy efficiency has emerged as a prominent component of our nations energy agenda. This, however, is nothing new. Efficiency always has been perceived as a panacea, particularly during times of rising electricity prices, electricity supply shortages, or transmission constraints. It remains the ultimate low-cost solution that benefits all stakeholders from the federal government to the individual and everyone in between. At the individual level, energy efficiency helps consumers lower their energy bills. It allows utilities to both manage capacity additions during supply shortages and maintain grid stability during transmission constraints. Finally, governments at all levelsfederal, state, and localrely on this low-cost solution to improve supply security and to garner support during times of electricity price escalation. Today, faced with an additional and unique challenge of reducing greenhouse-gas (GHG) emissions on a global level, energy efficiency once more is emerging as an apparent silver bullet solution.

Studies over the past several years have analyzed various measures to reduce GHG emissionsfrom transportation to power generation to industrial productionand each cite energy efficiency as the cure-all solution. Many have claimed it not only to be the low-cost, or no-cost, solution, but the nolose investment that will provide the nation with substantial net savings in the process. According to one report issued earlier this year, efficiency can provide $1.2 trillion in energy savings from only $520 billion in upfront investment by 2020, reducing demand by 23 percent. With these numbers, who wouldnt want to retrofit an entire house (or business) today? Unfortunately, experience shows that energy efficiency is far from a simple solution, and that many top-down abatement projections are wildly unrealistic. Energy efficiency can, and will, play a critical role in addressing our nations energy problems, but the tone must be both pragmatic about the savings opportunities that can be achieved and clear about the paths that will enable the realization of these savings in a cost-effective manner. Therefore, a practical approach is necessary that goes beyond whats theoretically or technically possible, to what is realistic and can be planned for, given the suite of barriers that exist today. Many of the studies that have been conducted to date fall short on these two aspects, and consequently present overly optimistic and misleading scenarios.
Barriers to Savings

Barriers to energy efficiency adoption can be broken down into two distinct categories: Marketplace barriers affecting efficiency measures within the commercial, industrial, and residential communities; and program and policy barriers affecting development of a coordinated and coherent set of programs and policies to address these constraints and accelerate adoption.

Sartaz Ahmed is principle at Booz & Co. (N.A.). Contact her at sartaz.ahmed@booz.com. Andrew Clyde, Jim Hendrickson and Joe Vandenberg are vice presidents at Booz & Co. (N.A.). The authors acknowledge contributions by consultants Eric Adamson and Bryan Bennet.
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While the first has become increasingly well documented, the second has received considerably less attention. Without a coordinated effort across key stakeholders involved in program and policy development, however, efficiencys impact will be muted significantly. Particularly illustrative is the recently documented failures of the stimulus bills residential energy efficiency program where a fraction of 1 percent of planned homes have been addressed due in part to numerous inhibiting regulations. For example, higher-potential older homes are possibly subject to preservation codes, while governement prevailing wage rules raise costs to less attractive levels. Barriers to adoption in the commercial, industrial, and residential communities will limit our nations ability to achieve the technical potential for efficiency savings that have received substantial hype. Within the commercial and industrial market (C&I), proportionally high energy costs historically have led to more energy efficiency activity relative to the residential market. Several barriers to further adoption still exist. The first barrier is awareness. While C&I customers are more sophisticated in their understanding of efficiency opportunities than are their residential counterparts, many still believe that serious savings requires serious investment, and consequently take little action (addressed by Lesson#1 below). Second is site diversity. Energy use, energy pricing, and efficiency opportunities differ based on the characteristics and geography of a building. Consequently, the most cost-effective efficiency measures change site by site (addressed by Lesson #3). Third, debt financing, often required to make energy efficiency improvements financially attractive, has become increasingly difficult to obtain in the current credit-constrained environment. The fourth issue involves alignment with business priorities. Given the number of priorities on companies agendas at any given time, efficiency upgrades often need to align with existing priorities and the net energy contribution to

Without a coordinated effort, efficiencys impact will be muted significantly.

APRIL 2010 PUBLIC UTILITIES FORTNIGHTLY 29

FIG. 1

have an attractive payback, individual consumers tend to Long Second Wave - Pursue Pursue only with Opportunistic Funds base decisions on a very Fleet short time horizonespeStructure Building Appliance Envelope Upgrades cially during periods of HVAC ILLUSTRATIVE financial strain. Replacement Behavioral Given these marketplace Automation Regional Fleet barriers, stimulating effiCard ciency adoption will require Payback Period programs and policies to Lighting Retrofitting address key constraints. Two Behavioral Operational key barriers to doing this Structural effectively are customer HVAC Maintenance Vehicle diversity and coordination. * Size of Bubble relates to Behavior Vehicle Space Size of Annual Savings Lighting & Diversity is a barrier because Maintenance Conditioning Appliance Behavior Behavior customer needs, preferences, First Wave - Pursue Third Wave - On Hold Quick and behaviors vary signifiLow High Complexity/Difficulty cantly by segment. To drive real efficiency gains, one must understand these differences and develop programs that the cost of goods sold to gain traction. Additionally, split incentives can impede efficiency efforts. reflect them (addressed by Lesson #4). Coordination is a barrier Within the commercial real estate market, tenants often reap because developing a coherent set of programs and policies requires the benefits of investments the owner makes, creating a disin- coordination across a diverse set of stakeholders with different centive for owners to take action. Fourth, the economics of effi- agendas, budgets, and operating models. Utilities are critical actors ciency upgrades are highly dependent on energy prices, which in any conservation program, and they typically have an inherent can fluctuate considerably based on commodity prices, sup- conflict in energy efficiency gains that reduces their revenue, and ply/demand balance, and state or federal policies. And fifth, consequently shareholder value. Federal, state, and local governbehavioral change can be a low- or no-cost way to reduce energy ments must design policies and incentives to address marketplace consumption, but has historically been difficult to realize, and constraints, while coordinating with utilities and implementation even harder to sustain (addressed by Lesson #2). facilitators. And a handful of additional actors are critical in impleWhile historically not a focal point of efficiency efforts, the menting programs and policiesmost notably non-profit organresidential market will be critical to realizing the full potential of izations, local community groups, contractors, and educators (e.g., the nations energy savings. A few of the key barriers are similar energy efficiency vocational training). to those affecting C&I customers. Awareness, for example, presQuite simply, the number of stakeholders that must be ents a major issue. While many consumers know that energy involved in developing a coherent set of programs and policies, efficiency can provide energy and cost savings, few are aware of combined with their often competing agendas, is a considerwhere these opportunities lie and how to take advantage of them. able barrier in itself (addressed by Lessons #6 and #7). Also, competing priorities reduce the effect of efficiency programs. Even if the opportunities Efficiency Lessons Tenants are understood, on a single household basis, the By working to identify energy reduction opportunities often reap opportunity is relatively marginal and often takes with leading businesses, utilities, and municipalities a backseat to other priorities. And as with the the efficiency ultimately, critical actors in driving any real efficiency C&I market, behavioral change is the logical noimpacta series of lessons has surfaced that can be used benefits of or low-cost alternative, but it can be difficult to to drive efficiency improvements in a cost-effective way. owner realize and sustain (addressed by Lesson #2). Lessons 1 through 3 deal with driving such improveOther issues are more peculiar to the resideninvestments, ments for businesses, Lessons 4 and 5 outline a path for utilities to achieve energy efficiency mandates in a costtial market. For example, many consumers are creating a effective manner, and Lessons 6 and 7 deal with drivunwilling to sacrifice individual preferences for disincentive. ing efficiency improvements at a municipal level. more efficient products (e.g., incandescent or LED lighting). And while energy efficient upgrades can Lesson#1: Focus on operating and behavior

Source: Booz & Co.

MORE BANG

FOR THE

BUCK

30 PUBLIC UTILITIES FORTNIGHTLY APRIL 2010

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Source: Franklin Energy, Positive Energy

changes, not structural FIG. 2 improvements. Structural improvements can provide CA Electric 4.0% considerable energy savings, but are much less cost-effec3.5% tive than other more simple 3.0% operating and behavior 2.5% changes. This has been documented in several studies; 2.0% however, the belief persists 1.5% that serious savings requires serious investment. This sim1.0% ply isnt the case (see Figure 1). 0.5% Lesson #2: Behavioral 0.0% change is difficult to realize, 0 1 2 3 and even harder to sustain; automation and competition are keys to success. Automating energy-intensive appliances and devices (e.g., lighting, HVAC) can provide much more sustainable change by removing the human element. For commercial and industrial facilities, an attractive payback period often can be achieved due to high energy costs. For residential customers, recent pilot results suggest that competition might be the key to realizing behavioral change at a minimal cost (see Figure 2). By using monthly reports showing consumers their energy usage relative to peer groups, sent by mail separate from the electricity bill, energy savings of 1.5 to 3 percent have been realized and sustained for well over a year.
Energy Savings Relative to Control Group

RESULTS
CA Electric 2

FROM

PILOT PROGRAMS
MN Electric WA Gas

Program Savings Over Time

WA Electric

Savings at cost of ~$10 per customer per year

10

11

12

13

14

15

16

Months Since Program Start

Lesson #3: Theres no one-size-fits-all solution to energy efficiency. What makes sense for one site wont always make sense for another. However, custom tailoring energy efficiency solutions for every site isnt scalable and often results in analysis paralysis and little action. Therefore, a compromise approach should be taken whereby sites are segmented into clusters and efficiency solutions are developed for each grouping (see Figure 3). This approach can be defined by four steps: 1) Segment sites into clusters based on easy-to-identify building characteristics building square footage, age, and geography; 2) Within each clusSource: Booze & Co.

FIG. 3
$/Sq ft.

HOW
Small Cluster Utility Costs
2008 Utility Spend; n=25

TO GO FROM

WORST

TO

BEST
CLUSTER CHARACTERISTICS
Size Average square footage: 2,190 Median square footage: 2,200 Attendance Average ADA: 38.5 Median ADA: 35 Utility Spend (Electricity and heating fuel) Average 2008 spend: $10,120 Median 2008 spend: $5,064

18 16 14 12 10 8 6 4 2 0
0 1 2 3 4 5 6

Top of Bottom Quartile = $5.54 Bottom of Top Quartile = $1.88

7 8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

COST DIFFERENTIAL
Behavioral: Top quartile Clubs require better behavioral practices around lighting, appliances, HVAC, and automation controls providing an estimated 15% savings Computers off at night: Top quartile Clubs turn their computers off when they are not in use, saving $700 per year Lighting Investments: Energy Audits suggest that Clubs can achieve approximately 15-20% savings with more efficient lighting

Bottom to Top Quartile Cost Reconciliation

$/Sq ft. (How can a bottom quartile improve to top?)
5.54
0.83 0.35

6.0 5.0 4.0 3.0 2.0 1.0 0.0

ILLUSTRATIVE
1.11 1.37

1.88

Building inefficiencies: There are certain differences, particularly within older buildings that may not be mitigated by bottom quartile Clubs

Bottom Quartille Cost

Better Behavioral Practices

Computer Off at Night

Lighting Investments

Natural Differences

Top Quartile Cost

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APRIL 2010 PUBLIC UTILITIES FORTNIGHTLY 31

FIG. 4

to drive efficiency savings in cities, such as utilities, Electricity Savings By Customer Class Customers Buying Characteristics (2007) (Residential Segments) NGOs, foundations, and F1 Accumulated Wealth 3 community groups, will have 189 6 different objectives that are M2 Conservative Classics 157 Mid Market unlikely to be aligned. Some 4 M1 Affluent Empty Nests 156 might even have hidden 6 F2 Young Accumulators 14% 147 agendas. The key to moving Residential 12 Y1 Midlife Success 11% 128 forward is to avoid fighting 7 M3 Cautious Couples 101 the conflicting agendas, and 75% 12 F3 Mainstream Families instead to understand 80 M4 Sustaining Seniors 8 unique objectives and build Large C&I 49 29 Y2 Mainstream Singles an efficiency coalition based 34 27 Y3 Striving Singles on the commonality that 23 % of Company A Customers runs across them. F4 Sustaining Families 14 DSM Penetration Index (0-1000) 22 For example, an IOUs core objective is to maximize ter, identify energy expenses per square foot to break the segment shareholder value while meeting regulatory obligations (e.g., energy into performance quartiles; 3) Identify drivers of cost-differential savings targets). A private market representatives goal is likely to minibetween top and bottom quartile sites to surface actions that can mize regulation and accelerate job creation. And NGOs might want be taken to improve performance; and 4) Implement actions across to support low-income housing or improve the lives of disadvantaged cluster, with particular attention to bottom-quartile sites. citizens. While each agenda is different, common threads can be tied across them. Once this common purpose is Lesson #4: Investor-owned utilities (IOUs) must defined and agreed upon, stakeholders must be understand their customers. They arent all the same. There is no organized into a coalition operating toward conReaching unsaturated segments is critical to achievone-size-fits- crete, specific tasks that tie into each stakeholders ing deeper and more sustainable energy efficiency objectives. Cities can be critical to this process, buildsavings. However, doing so requires a thorough all solution ing the coalition and continually communicating to understanding of customer needs, preferences, to energy each stakeholder in terms of their individual goals. behaviors, and barriers within segments to ensure efficiency. that products are designed and marketed to achieve Lesson #7: Force explicit program decisions maximum adoption. Without customer insight, prothrough program portfolio analysis that includes gram performance will vary significantly by segment all stakeholder groups. Energy savings arent always and deep and sustainable savings will be difficult to attain. the only objective of every energy efficiency program. Many will Lesson #5: Be smart about rebates. Utilities historically have relied have other purposes, such as job creation or decreasing energy on rebates as one of the primary incentives to encourage adoption of costs for low-income communities. Full benefits comparisons efficiency technologies, and rebates are becoming even more prevalent. force these trade-offs. For example, program spending should be However, increasing rebates aggressively can have negative impacts. assessed on factors ranging from effectiveness in eliminating or First, it leads to unnecessary lost margins in early years, which might deferring new supply spending, to reducing emissions (e.g., dolnot be compensated by regulatory incentives, or it might be subject to lars per MTCO2e reduced), to extending the life of existing plant, recovery lag. Second, it results in early market saturation, making it etc. difficult to achieve future goals. To ensure utilities achieve their goals consistently over a sustained period, its essential to set rebates at the Smart Efficiency optimal level by aligning rebates to customers buying characteristics. Energy efficiency will play a critical role in addressing todays For example, rather than adopting a one-size-fits-all approach, the energy challenges. It has become abundantly clear that the way rebate level for sustaining families could be higher than for accumu- we produce, and use, energy in the 20th century will have to lated wealth to overcome cost barriers. But again, regulatory reluctance change in the 21st. However, we need to be reasonable about to, in effect, price discriminate could prohibit rebate customization. our expectations. Its important to look beyond much-hyped Lesson #6: Municipal governments and other policy makers theoretical potential, and to focus the discussion on the specific must build coalitions of their most important stakeholders, and paths that will enable businesses, utilities, and municipalities to work together to develop the market. Key stakeholders necessary realize energy efficiency savings in a cost-effective manner. F

Source: Katzenbach Parters LLC

DEMAND RESPONSE: RICH MANS GAME?

32 PUBLIC UTILITIES FORTNIGHTLY APRIL 2010

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