What’s the best way to motivate people to cut the energy waste in their homes and businesses? Most energy efficiency programs offer rebates and incentives upfront to promote smarter energy use through things like highly efficient appliances and weatherization. But a new analysis published by NRDC today finds that a “pay-for-performance” (P4P) approach also may encourage energy savings and innovation.
There is a diverse spectrum of pay-for-performance programs but, at the most basic level, these programs track and reward energy savings as they occur, usually by examining data from a building’s energy meters—as opposed to the more common approach of estimating savings in advance of installation and offering upfront rebates or incentives in a lump-sum payment.
P4P programs have existed in some form for 20 years, but primarily in the commercial and industrial sectors. With the increasing availability of household and business energy meter data and evolving data analysis techniques, there are new opportunities for deploying P4P programs based on that data. Further experimentation and pilot programs will help determine how widely they could be used, according to our issue brief and report Putting Your Money Where Your Meter Is.
The analysis, conducted for NRDC and Vermont Energy Investment Corporation, reviews 22 case studies of past and current P4P approaches. Based on lessons learned from these examples, the report provides recommendations for policymakers to guide them in designing P4P energy efficiency programs.
While the analysis finds that P4P has the potential to encourage energy savings and should be explored further, there is still significant uncertainty about how P4P stacks up in terms of cost-effectiveness and level of energy savings compared with more common efficiency program designs.
There are two primary ways that P4P programs have historically paid for energy efficiency savings:
- Standard-offer programs set a price for each unit of energy saved (e.g., 5 cents per kilowatt-hour saved);
- Bidding programs allow implementers or customers to compete for contracts that specify an amount of energy savings to be achieved, and pay the price offered by bidders for savings as they occur.
Promising Opportunities for P4P
There are a number of energy-saving opportunities for which updated P4P approaches may be particularly well-suited:
- P4P programs can aid in assessing savings and motivating persistence in savings from complex, multi-measure efficiency projects including those with behavioral or operational changes, where it is difficult to estimate savings in advance based on average historical data. For example, a commercial building that installs a new cooling system, insulation, and efficient lighting along with an energy management and control system could benefit from a P4P approach with savings estimated with meter data.
- P4P has been most successful when aimed at “aggregators” rather than individual customers. Aggregators provide energy program services to multiple building owners and can include energy service companies (ESCOs), program implementers who work with utilities, and new private businesses that help customers finance and manage projects. P4P approaches that make payments to aggregators appear better able to drive innovation in energy efficiency service delivery, because competition among aggregators to attract customers and private investors can lower costs of delivering energy savings. In contrast, the few P4P programs aimed at individual customers (e.g. large commercial or industrial businesses) have attracted relatively low participation.
- P4P can deliver efficiency as a verified energy or capacity “resource” for the electric power system, where efficiency may compete against other resources such as natural gas power plants or energy storage. In California and New York, utilities have allowed projected energy savings from smarter energy use to compete with other resources as a way to avoid overloading the wires that connect the electric grid, displace supply-side energy generation, and defer upgrades to transmission and distribution infrastructure. In addition, when utilities buy energy resources to meet the projected future energy needs of their customers, future energy efficiency savings can be bid into some forward capacity markets just like power plants.
- A P4P approach generally shifts the responsibility for obtaining energy savings from utilities and efficiency program administrators to aggregators, implementers, or individual customers (depending on the program design). This may motivate more persistent savings because the entity bearing the performance risk is responsible for installing and maintaining the energy-saving measures.
Limitations of P4P
The pay-for-performance approach also has limitations:
- Unless carefully designed, P4P programs may skim off only the cheapest and easiest-to-acquire energy efficiency savings, leaving significant opportunities on the table. For example, several early programs got most of their savings from lighting upgrades until the program explicitly encouraged more comprehensive efficiency projects that increased the savings in each building.
- P4P is not appropriate to replace efficiency programs that either do not have a metered baseline, like new construction programs and building energy codes and efficiency standards, or savings that cannot easily be tied to measurable reductions in energy use at a specific customer site. These include upstream programs that work with manufacturers to ensure that efficient products are available to the market, midstream lighting and HVAC programs that provide discounts for efficient products at the point of sale (without tracking where the efficient equipment is installed), and other market transformation programs that may have longer-term and more diffuse impacts.
- P4P may not be appropriate for buildings with energy usage that fluctuates in ways that are difficult to predict, that is, in ways that are not correlated to weather, occupancy, or other measurable and predictable factors.
- P4P is generally not a good fit for hard-to-reach customers, such as low-income households and small businesses where energy savings can be more expensive and complicated to obtain, unless specially designed to meet the needs of these customers.
Recommendations for Policymakers
Policymakers should experiment further with P4P programs to learn more about the best applications of these programs. One no-regrets step is to begin tracking real-time metered savings alongside the savings estimated by traditional programs, to assess where a shift to P4P approaches may be appropriate to motivate persistent energy savings. The report offers a set of recommendations—including designing incentives to encourage more comprehensive projects, screening for buildings with predictable energy usage, and pairing payments for installation milestones with performance-based incentives. Going forward, the rapid sharing of lessons learned—across program administrators, implementers/aggregators, the private sector, and regulators—will be essential to learn about the best applications of P4P programs.
Many thanks to Julia Szinai, primary author of Putting Your Money Where Your Meter Is, and Emily Levin of Vermont Energy Investment Corporation who contributed substantially to all aspects of this work.