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28 PUBLIC U TILITIES FORTNIGHTLY APRIL 2010 www.fortnightly.com

B Y S ARTAZ A HMED ET AL .

BeyondGreen

HypeGetting realisticabout energy efficiency.



While the first has become

increasingly well documented, the

second has received considerably

less attention. Without a coordi-

nated effort across key stakehold-

ers involved in program and policy

development, however, efficiency’s

impact will be muted significantly.Particularly illustrative is the

recently documented failures of the

stimulus bill’s 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 pos-

sibly subject to preservation codes, while governement prevail-

ing wage rules raise costs to less attractive levels.

Barriers to adoption in the commercial, industrial, and resi-

dential communities will limit our nation’s ability to achieve

the technical potential for efficiency savings that have receivedsubstantial 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 mar-

ket. Several barriers to further adoption still exist.

The first barrier is awareness. While C&I customers are

more sophisticated in their understanding of efficiency oppor-

tunities than are their residential counterparts, many still believe

that serious savings requires serious investment, and conse-

quently take little action (addressed by Lesson#1 below ). Second

is site diversity. Energy use, energy pricing, and efficiency oppor-

tunities differ based on the characteristics and geography of a

building. Consequently, the most cost-effective efficiency meas-

ures change site by site (addressed by Lesson #3).

Third, debt financing, often required to make energy effi-

ciency improvements financially attractive, has become increas-

ingly difficult to obtain in the current credit-constrained

environment. The fourth issue involves alignment with busi-

ness 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

Studies over the past several years have analyzed various

measures to reduce GHG emissions—from transportation to

power generation to industrial production—and 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 no-

lose investment that will provide the nation with substantial

net savings in the process. According to one report issued ear-

lier this year, efficiency can provide $1.2 trillion in energy sav-ings from only $520 billion in upfront investment by 2020,

reducing demand by 23 percent. With these numbers, who

wouldn’t 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 nation’s energy prob-

lems, 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-effec-

tive manner. Therefore, a practical approach is necessary thatgoes beyond what’s 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 pres-

ent 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 devel-

opment of a coordinated and coherent set of programs and poli-

cies to address these constraints and accelerate adoption.

APRIL 2010 PUBLIC U TILITIES FORTNIGHTLY 29www.fortnightly.com

Sartaz Ahmed is principle at Booz & Co. (N.A.). Contact her at

[email protected]. 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.

Withouta coordinatedeffort,efficiency’simpact will

be mutedsignificantly.

nergy efficiency has emerged as a prominent component of our nation’s energy agenda. This, how-ever, is nothing new. Efficiency always has been perceived as a panacea, particularly during timesof rising electricity prices, electricity supply shortages, or transmission constraints. It remains theultimate low-cost solution that benefits all stakeholders from the federal government to the indi-vidual and everyone in between. At the individual level, energy efficiency helps consumers lowertheir energy bills. It allows utilities to both manage capacity additions during supply shortages and

maintain grid stability during transmission constraints. Finally, governments at all levels—federal, state, andlocal—rely 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) emis-sions on a global level, energy efficiency once more is emerging as an apparent silver bullet solution.

E

http://www.fortnightly.com/





the cost of goods sold to gain traction.

Additionally, split incentives can impede efficiency efforts.

Within the commercial real estate market, tenants often reap

the benefits of investments the owner makes, creating a disin-

centive for owners to take action. Fourth, the economics of effi-

ciency upgrades are highly dependent on energy prices, which

can fluctuate considerably based on commodity prices, sup-

ply/demand balance, and state or federal policies. And fifth,

behavioral change can be a low- or no-cost way to reduce energy

consumption, but has historically been difficult to realize, and

even harder to sustain (addressed by Lesson #2 ). While historically not a focal point of efficiency efforts, the

residential market will be critical to realizing the full potential of

the nation’s energy savings. A few of the key barriers are similar

to those affecting C&I customers. Awareness, for example, pres-

ents a major issue. While many consumers know that energy

efficiency can provide energy and cost savings, few are aware of

where these opportunities lie and how to take advantage of them.

Also, competing priorities reduce the effect of

efficiency programs. Even if the opportunities

are understood, on a single household basis, the

opportunity is relatively marginal and often takes

a backseat to other priorities. And as with the

C&I market, behavioral change is the logical no-

or low-cost alternative, but it can be difficult to

realize and sustain (addressed by Lesson #2 ).

Other issues are more peculiar to the residen-

tial market. For example, many consumers are

unwilling to sacrifice individual preferences for

more efficient products (e.g., incandescent or LED

lighting). And while energy efficient upgrades can

have an attractive payback,

individual consumers tend to

base decisions on a very

short time horizon—espe-

cially during periods of

financial strain.

Given these marketplace

barriers, stimulating effi-

ciency adoption will require

programs and policies to

address key constraints. Two

key barriers to doing this

effectively are customer

diversity and coordination.

Diversity is a barrier because

customer needs, preferences,

and behaviors vary signifi-

cantly by segment. To drive

real efficiency gains, onemust understand these differences and develop programs that

reflect them (addressed by Lesson #4 ). Coordination is a barrier

because developing a coherent set of programs and policies requires

coordination across a diverse set of stakeholders with different

agendas, budgets, and operating models. Utilities are critical actors

in any conservation program, and they typically have an inherent

conflict in energy efficiency gains that reduces their revenue, and

consequently shareholder value. Federal, state, and local govern-

ments must design policies and incentives to address marketplace

constraints, while coordinating with utilities and implementation

facilitators. And a handful of additional actors are critical in imple-menting programs and policies—most notably non-profit organ-

izations, local community groups, contractors, and educators (e.g.,

energy efficiency vocational training).

Quite simply, the number of stakeholders that must be

involved in developing a coherent set of programs and policies,

combined with their often competing agendas, is a consider-

able barrier in itself (addressed by Lessons #6 and #7 ).

Efficiency Lessons

By working to identify energy reduction opportunities

with leading businesses, utilities, and municipalities—

ultimately, critical actors in driving any real efficiency

impact—a series of lessons has surfaced that can be used

to drive efficiency improvements in a cost-effective way.

Lessons 1 through 3 deal with driving such improve-

ments for businesses, Lessons 4 and 5 outline a path for

utilities to achieve energy efficiency mandates in a cost-

effective manner, and Lessons 6 and 7 deal with driv-

ing efficiency improvements at a municipal level.

Lesson#1: Focus on operating and behavior

Payback

Period

Long

Quick

Complexity/DifficultyLow High

* Size of Bubble relates to

Size of Annual Savings

First Wave - Pursue Third Wave - On Hold

Second Wave - Pursue Pursue only with Opportunistic Funds

Behavioral

Operational

Structural

ILLUSTRATIVE

FleetStructure

HVAC

Replacement

Building

Envelope

Vehicle

Behavior

Behavioral

Automation

Appliance

Upgrades

Lighting

Retrofitting

Lighting &

Appliance

Behavior

HVAC Maintenance

Space

Conditioning

Behavior

Vehicle

Maintenance

Regional FleetCard

MORE BANG FOR THE BUCK

S o u r c e : B o o z &

C o .

FIG. 1

Tenantsoften reap

the efficiencybenefits ofownerinvestments,creating adisincentive.





Lesson #3: There’s no one-size-fits-all solution to energy efficiency. What makes sense for one site won’t always make

sense for another. However, custom tailoring energy efficiency

solutions for every site isn’t 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 clus-

changes, not structural

improvements. Structural

improvements can provide

considerable energy savings,

but are much less cost-effec-

tive than other more simple

operating and behavior

changes. This has been docu-

mented in several studies;

however, the belief persists

that serious savings requires

serious investment. This sim-

ply isn’t the case (see Figure 1).

Lesson #2: Behavioral

change is difficult to realize,

and even harder to sustain;

automation and competition

are keys to success. Automat-

ing 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 attrac-

tive payback period often can be achieved due to high energy costs.

For residential customers, recent pilot results suggest that compe-

tition might be the key to realizing behavioral change at a mini-

mal 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.

APRIL 2010 PUBLIC U TILITIES FORTNIGHTLY 31www.fortnightly.com

E n e r g y S a v i n g s R e l a t i v e

t o

C o

n t r o l G r o u p

Savingsat cost

of ~$10 percustomerper year

0.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.0%

Months Since Program Start

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

CA Electric CA Electric 2 WA Electric MN Electric WA Gas

Program Savings Over Time

RESULTS FROM PILOT PROGRAMS

S o ur c e: Fr ank l i nEn er g y ,P o s i t i v eEn er g y

FIG. 2

0

2

4

6

8

10

12

14

16

18

$/Sq ft.

10987654 25242322213 2019181716151413121121

“Small” Cluster Utility Costs2008 Utility Spend; n=25

0.0

1.0

2.0

3.0

4.0

5.0

6.0

$/Sq ft.

BetterBehavioralPractices

ComputerOff at Night

LightingInvestments

NaturalDifferences

Top QuartileCost

BottomQuartille

Cost

Bottom to Top Quartile Cost Reconciliation(How can a bottom quartile improve to top?)

Top of Bottom Quartile = $5.54

Bottom of Top Quartile = $1.88

5.54

ILLUSTRATIVE

1.88

0.83

0.351.11

1.37

0

HOW TO GO FROM WORST TO BEST

S o

u r c e : B o o z e &

C o .

FIG. 3

• Behavioral: Top quartile Clubs require better behavioral practices

around lighting, appliances, HVAC, and automation controls providingan estimated 15% savings

• Computers off at night: Top quartile Clubs turn their computers offwhen they are not in use, saving $700 per year

• Lighting Investments: Energy Audits suggest that Clubs can achieveapproximately 15-20% savings with more efficient lighting

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

• 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

CLUSTER CHARACTERISTICS

COST DIFFERENTIAL





ter, identify energy expenses per square foot to break the segment

into performance quartiles; 3) Identify drivers of cost-differentialbetween top and bottom quartile sites to surface actions that can

be taken to improve performance; and 4) Implement actions across

cluster, with particular attention to bottom-quartile sites.

Lesson #4: Investor-owned utilities (IOUs) must

understand their customers. They aren’t all the same.

Reaching unsaturated segments is critical to achiev-

ing deeper and more sustainable energy efficiency

savings. However, doing so requires a thorough

understanding of customer needs, preferences,

behaviors, and barriers within segments to ensure

that products are designed and marketed to achievemaximum adoption. Without customer insight, pro-

gram performance will vary significantly by segment

and deep and sustainable savings will be difficult to attain.

Lesson #5: Be smart about rebates. Utilities historically have relied

on rebates as one of the primary incentives to encourage adoption of

efficiency technologies, and rebates are becoming even more prevalent.

However, increasing rebates aggressively can have negative impacts.

First, it leads to unnecessary lost margins in early years, which might

not be compensated by regulatory incentives, or it might be subject to

recovery lag. Second, it results in early market saturation, making it

difficult to achieve future goals. To ensure utilities achieve their goals

consistently over a sustained period, it’s essential to set rebates at the

optimal level by aligning rebates to customer’s buying characteristics.

For example, rather than adopting a one-size-fits-all approach, the

rebate level for sustaining families could be higher than for accumu-

lated wealth to overcome cost barriers. But again, regulatory reluctance

to, in effect, price discriminate could prohibit rebate customization.

Lesson #6: Municipal governments and other policy makers

must build coalitions of their most important stakeholders, and

work together to develop the market. Key stakeholders necessary

to drive efficiency savings in

cities, such as utilities,

NGOs, foundations, and

community groups, will have

different objectives that are

unlikely to be aligned. Some

might even have hidden

agendas. The key to moving

forward is to avoid fighting

the conflicting agendas, and

instead to understand

unique objectives and build

an efficiency coalition based

on the commonality that

runs across them.

For example, an IOU’s

core objective is to maximize

shareholder value while meetingregulatory obligations (e.g., energy

savings targets). A private market representative’s goal is likely to mini-mize regulation and accelerate job creation. And NGOs might want

to support low-income housing or improve the lives of disadvantaged

citizens. While each agenda is different, common threads can be

tied across them. Once this common purpose is

defined and agreed upon, stakeholders must be

organized into a coalition operating toward con-

crete, specific tasks that tie into each stakeholder’s

objectives. Cities can be critical to this process, build-

ing the coalition and continually communicating to

each stakeholder in terms of their individual goals.

Lesson #7: Force explicit program decisionsthrough program portfolio analysis that includes

all stakeholder groups. Energy savings aren’t always

the only objective of every energy efficiency program. Many will

have other purposes, such as job creation or decreasing energy

costs for low-income communities. Full benefits comparisons

force these trade-offs. For example, program spending should be

assessed on factors ranging from effectiveness in eliminating or

deferring new supply spending, to reducing emissions (e.g., dol-

lars per MTCO2e reduced), to extending the life of existing plant,

etc.

Smart Efficiency

Energy efficiency will play a critical role in addressing today ’s

energy challenges. It has become abundantly clear that the way

we produce, and use, energy in the 20th century will have to

change in the 21st. However, we need to be reasonable about

our expectations. It’s important to look beyond much-hyped

theoretical potential, and to focus the discussion on the specific

paths that will enable businesses, utilities, and municipalities to

realize energy efficiency savings in a cost-effective manner. F


11%

14%

75%

22

23

34

49

80

101

128

147

156

157

1893

6

4

6

12

7

12

8

29

27

14

Electricity Savings By Customer Class(2007)

Customer’s Buying Characteristics(Residential Segments)

F1 Accumulated Wealth

M2 Conservative Classics

M1 Affluent Empty Nests

F2 Young Accumulators

Y1 Midlife Success

M3 Cautious Couples

F3 Mainstream Families

M4 Sustaining Seniors

Y2 Mainstream Singles

Y3 Striving Singles

F4 Sustaining Families

% of Company A Customers

DSM Penetration Index (0-1000)

Mid Market

Residential

Large C&I

DEMAND RESPONSE: RICH MAN’S GAME? S o u r c e : K a t z e n b a c h

P a r t e r s

L L C

FIG. 4

There is noone-size-fits-all solutionto energyefficiency.



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