Risks and Rewards in the Brave New World of Energy Efficiency Programs

by Dennis Quinn, President, JouleSmart


I wrote a few weeks ago about the proliferation of smart meters (See Current state of the electricity power market). Among related industry changes, I noted “New energy efficiency pilots in California, Oregon, and New York will pay for savings calculated from Normalized Metered Energy Consumption.” This cryptic-sounding sentence touches on a topic that deserves fuller exploration. Energy efficiency programs are changing in ways that may directly affect your business.

You’ll recall that smart meters record energy consumption in 15-minute and hourly intervals rather than monthly. That’s a lot of really rich information. One of the first things people have done with this data is to develop new, automated analysis methods to estimate energy savings from changes in metered energy consumption. The consumption is “normalized” for weather so that variations in seasonal weather patterns from one year to the next do not skew the results. In industry techno-speak, the result is Normalized Metered Energy Consumption (NMEC) savings.

After developing these new methods, the next thing people did was to compare the metered energy savings from the traditional engineering-based savings estimates. The results were not pretty. Some customers were saving more energy than predicted; many more were saving less than predicted; and overall, the engineering estimates were over-stating actual savings. That means customers were being promised and ratepayers were paying for energy savings that did not actually occur.

You can almost see the light bulb go on in utility program managers’ heads— “Let’s just pay for the actual metered savings, instead of the engineering-based predictions!” This new generation of utility energy efficiency programs, dubbed “Pay for Performance” (P4P), is a great idea in concept: it shields ratepayers from performance risks, demonstrates responsible stewardship of public funds, and moves us towards valuing energy efficiency as a grid resource, equivalent to power generation assets. The idea is gaining traction in California, New York, and Oregon, with signs it may get adopted elsewhere.

But that performance risk that ratepayers formerly faced doesn’t just go away; someone has to manage it. Should that be you, the program participant? Think about these two program offers: (1) under the old engineering-based model, you’re offered a known incentive amount, payable about the time you invest in the energy upgrades; or (2) under the new P4P model, you make the upgrades and then the utility waits to pay an incentive until energy savings shows up at the meter (up to a year, depending on the nature of the upgrade). The incentive amount is tied to the magnitude of the savings. Under the P4P scenario, if you, the program participant, have to shoulder the performance risk, then the utility incentive comes too late and is too uncertain to be of any value in defraying the cost of the upgrade.

The good news is that you can participate in P4P programs without shouldering the performance risk from the upgrades. Third-party intermediaries like JouleSmart are able to manage that risk on your behalf. JouleSmart integrates innovative technical, operational, and financial solutions to give small and medium business owners and operators access to the benefits of “smart” building management with no capital outlay and no energy savings performance risk on your part.

The financial heart of the JouleSmart solution is a Managed Energy Savings Agreement, or MESA. While common in large public and governmental projects JouleSmart’s offering to small and medium businesses is unique. JouleSmart makes the financing of the system simple and requires no-upfront capital investment on your part. The cost of the equipment is paid for over time out of the savings generated each month after the new system is commissioned. Once the equipment has been fully repaid, you then receive the majority of the savings annually.

JouleSmart delivers a turn-key concierge service that connects you to incentives and qualified contractors; helps you analyze and optimize your rates; pursues load management opportunities; reports on property portfolio performance; rewards operational changes through its innovative shared savings model; and provides installation oversight and management. By shielding you from project performance risk, JouleSmart minimizes your need for in-house technical expertise, which frees you to focus on your core business.

JouleSmart’s MESA works equally well for owner-occupants, for tenants operating under triple net lease arrangements covering the term of the MESA, and for those tenants operating under leases where the owner maintains the equipment, but the tenant pays the utility bill.

Now is a great time to explore how your business can benefit from transformations in the energy efficiency sector.