ACEEE Blog

Challenges and Opportunities in the Land of Lincoln
March 04, 2015 - 3:51 am

By Steven Nadel , Executive Director


Illinois—the land of Lincoln according to its license plate—has made great strides in energy efficiency in recent years. In 2014 it ranked 11th overall in ACEEE’s annual State Energy Efficiency Scorecard, up 15 slots from its score 5 years earlier. The main reason for its rise in rank was the state’s performance on utility-sector energy efficiency programs and policies. Energy efficiency measures installed under utility-sector programs reduced statewide electricity use by about 1% of the state’s total electricity consumption in 2013, the most recent year for which data are available. This placed Illinois 13th among US states in electricity savings, up from a tie for dead last in the 2009 Scorecard.

Under Illinois law, utilities collect the money for efficiency programs through rates, keeping 75% of the funds to operate their energy efficiency programs. They remit the remaining 25% to the Illinois Department of Commerce and Economic Opportunity (DCEO), which uses these funds to operate energy efficiency programs for low-income households and for state and local government facilities. Both the utilities and DCEO have done well. A 2014 ACEEE analysis found that Illinois electric utilities have exceeded their energy saving goals every year, while the gas utilities have just about met theirs. A 2014 independent evaluation of DCEO’s programs estimated that they have an overall benefit-cost ratio of 2.26.

Unfortunately, in late February, Illinois’ new governor, Bruce Rauner, proposed a budget that would divert $265 million of ratepayer funds intended to be used for energy efficiency and low-income energy assistance to the state general fund, to apply to a state budget shortfall (further information here ). This includes DCEO’s energy efficiency programs that are discussed above as well as the Low Income Home Energy Assistance Program (LIHEAP), which helps pay the energy bills of low-income families. Even though the proposed budget isn’t effective yet, it’s reported that senior staff at DCEO’s energy efficiency programs have already been laid off, and remaining staff told not to sign any new contracts or to approve any new rebate applications. Most legal observers believe the legislature must approve the diversion—its approval is far from certain—but the governor appears not to be waiting.

In addition to considering budget issues, the legislature will also be debating energy legislation this year that could increase energy efficiency activity in the state. Current Illinois law calls for savings that are double what the utilities are currently achieving. The savings are lower than the law requires since the law also includes cost caps that limit the amount of money the utilities can spend. This keeps them from reaching their full savings goals even if the additional spending is cost effective to ratepayers. As part of the forthcoming energy bill, a coalition of business, environmental and labor leaders is proposing to raise the cost caps while still requiring programs to meet cost-effectiveness tests.

If the governor doesn’t want DCEO to operate energy efficiency programs any more, it might also make sense to use this legislation to let utilities keep all the energy efficiency funds they raise instead of diverting a quarter of the money to the state. If such a change is made, the utilities should be directed to provide energy efficiency services to the customers DCEO used to serve.

While Illinois does have budget problems, the solution shouldn’t divert utility ratepayer funds that are intended by statute to achieve cost-effective energy savings and reduce energy bills for public facilities and low-income customers. This diversion is penny wise and pound foolish. These funds not only save energy, they reduce costs for all taxpayers and ratepayers in Illinois.


ACEEE introduces updated website and launches smarterhouse.org, new home of Consumer Guide to Home Energy Savings
March 02, 2015 - 8:32 pm

By Eric Schwass, Web Manager


ACEEE celebrates its 35thanniversary this year. To commemorate that milestone, we’ve updated the design of our online home, aceee.org, to include larger, darker text, a simpler layout, and bigger images.

But the changes are more than cosmetic. We’ve improved our site’s search function, combined the blog and press release sections into one feed, and improved the way the site displays on mobile devices.

We’ve also expanded our popular consumer resources section, putting it on its own brand-new website: smarterhouse.org. Besides offering advice on what options to consider when upgrading or replacing home appliances, SmarterHouse can help homeowners and renters discover energy efficiency improvements that fit their budgets and pay dividends in energy savings.

These improvements arrive on the heels of our redesign of greenercars.org, ACEEE’s vehicle ratings site. For the first time, all of the ratings are available to everyone, subscription-free! And, we’ve just released the ratings for model year 2015.

I hope you will take a few minutes to browse the three sites. It is our goal to provide energy efficiency information that’s relevant to you, as an energy manager, researcher, policymaker, homeowner, or new car shopper. Your feedback is welcome and appreciated!


California building codes: to analyze the forest you need to understand the trees
February 26, 2015 - 4:38 am

By Steven Nadel , Executive Director


ACEEE is a strong supporter of analyzing energy efficiency programs in order to see what they have accomplished and to learn lessons so we can do even better. It was thus with interest that we reviewed “How Much Energy Do Building Energy Codes Really Save? Evidence from California” by Arik Levinson. In this paper Levinson conducts several analyses and concludes that “there is no evidence that homes constructed since California instituted its building energy codes use less electricity today than homes built before the codes came into effect.” On the surface his conclusions about the efficacy of building codes are very different from other recent analyses such as papers by Aroonruengsawat et al., Deason and Hobbs, and Jacobsen and Kotchen, so we took a deeper look.

Building energy codes in the United Sates primarily address energy used for space heating and air conditioning, with some impact on water heating energy use. In addition, commercial building codes also address lighting in a substantial way. Therefore any analysis of the effect of codes needs to look at energy consumption for these end uses. Levinson is examining California, so we should start by looking at how California heats and cools its buildings and water. The California Energy Commission had a consultant prepare a report looking at residential appliance saturations in 2009. They found that 93% of California homes are heated with gas and only 5% are heated with electricity. Likewise they found that 87% of homes have gas water heating and only 7% use electricity for water heating. Central air conditioners are used in 49% of homes, with an additional 15% using room air conditioners. California added a limited lighting provision to its 2008 residential code, but the savings are too recent and too small to show up in a long-term analysis.

Based on this information, an analysis of California residential building codes should concentrate on natural gas use and only secondarily on electricity. Unfortunately, this is the opposite of what Levinson does. Most of his analysis is on electricity use, and he generally excludes homes with electric space or water heat. He does so because the saturation of electric space heat has been changing over time, and according to Levinson, therefore doesn’t fit well into his time series analysis. Thus his analysis looks for the effect of building codes on air conditioning energy use.

The fact is, though, that California has a mild climate, and, according to a recent analysis by the Energy Information Administration (EIA), only 4% of California home energy use is for air conditioning. Using EIA figures we can go on to calculate that air conditioning represents about 10% of home electricity use. If we make a ballpark estimate that codes reduce air conditioning electricity use by 30%, Levinson is looking for 3% savings in the data.

Furthermore, a majority of the savings in air conditioning energy use is probably due to air conditioner efficiency standards that also apply to replacement equipment in existing homes. Since Levinson is comparing new and existing homes, of the 3% savings mentioned above, perhaps 2% are also being achieved in his comparison group of existing homes. Thus he’s looking for a 1% savings effect in new homes. It’s very difficult to find such a small effect in a statistical analysis; with an effect that small, it would be more surprising to see such savings show up in a statistical analysis than if the savings did not show up. In addition, it should be noted that the rising saturation of electronic gadgets in US homes may be affecting new home energy use, a factor Levinson does not examine but that perhaps explains some of the increasing energy use he found in new homes.

A good analysis of the impact of California’s building codes should focus on natural gas use. Levinson does do one analysis of natural gas use, finding that homes built since California’s building energy code began use less natural gas than earlier homes. However he then dismisses this finding since the trend started before the building codes took effect. He presents no evidence that prior trends would have continued, and therefore his claim that building codes had no effect is speculation.

Finally, if the objective is to examine all building codes and not just some codes, then it’s also important to look at commercial buildings. According to an analysis by Pacific Northwest National Laboratory, nationwide about 69% of building code savings in 2012 were in the commercial sector and only 31% in the residential sector. More than 80% of the commercial savings were in electricity.

Bottom line: Levinson is on the wrong path if he’s trying to see the impacts of building codes. If he wants to see the forest—the impacts of codes or their absence—he needs to understand the trees. He needs to look where the impacts are supposed to be, and in California this means residential natural gas and commercial building electricity use.


Water heaters get an efficiency makeover courtesy of the Department of Energy
February 25, 2015 - 8:19 pm

By Marianne DiMascio, Outreach Director, Appliance Standards Awareness Project (ASAP)


From the rustic 1850s pump shower to the 1920s Humphrey automatic to today’s modern units, water heaters have made great strides in performance and efficiency. On April 16, 2015, water heaters will take the next great stride when manufacturers must comply with new Department of Energy (DOE) efficiency standards. The most common water heaters manufactured on and after this date will get a modest boost in efficiency, while units over 55 gallons will shift to next-generation technology, cutting utility bills by one-fourth to one-half depending on the technology.

What is covered?

Completed by DOE in 2010, the standards cover gas, oil and electric residential tank water heaters, usually between 20 and 80 gallons. (DOE also upped the efficiency levels for instantaneous—tankless—gas water heaters, but most models already meet the new efficiency levels.) Water heating is on average the second largest household energy expense behind space heating, representing about 18% of total household energy consumption in the US. Consumers annually pay an average of about $170 (gas) and $300 (electric) to operate a water heater just meeting current efficiency standards. About 50% of US households use natural gas water heaters, 41% electric, and the remainder propane or oil.

New standards will save money for consumers, save energy, and reduce emissions

DOE estimates that the new efficiency measures will save 2.6 quadrillion Btus (quads) of energy over 30 years and net consumers up to $8.7 billion in savings. Over the same period, the standards will reduce CO2 emissions by 154 million metric tons. To put these long-term savings in perspective, the savings are enough to meet the total energy needs of 13 million typical US homes for a year, and the CO2 savings are equivalent to taking 32 million passenger cars off the road for a year.

Most storage water heaters to get a modest boost in efficiency

For storage water heaters with volumes of 55 gallons and below (representing the vast majority of sales), the new standards will increase the efficiency of typical-sized units by 4% on average. Manufacturers plan to meet the efficiency levels with incremental improvements such as improved heat exchangers (gas) and more insulation. Water heaters that comply with the new standards are already on the market, including models from the three large domestic manufacturers (A.O. Smith, Bradford White, and Rheem) that make most water heaters sold in the United States.

Big jump in efficiency for storage water heaters over 55 gallons

Water heaters larger than 55 gallons will see a much bigger jump in efficiency. The new standards for these larger water heaters can be met using electric heat pump and gas condensing technology. Heat pump water heaters save at least 50% and condensing gas units about 25% compared to today’s conventional water heaters.

Heat pump water heaters (also known as hybrid water heaters) transfer heat from the surrounding air to the water. When hot water demand is very high or the ambient air temperature drops below a threshold level, the hybrids switch from heat pump mode to electric resistance mode. According to DOE’s analysis, a consumer purchasing these highly efficient units will save more than $600 over the life of the product compared to a water heater just meeting the current efficiency standards. While the upfront cost to purchase and install these products is higher, consumers will recoup the added cost in about six years on average through lower electricity bills. Consumer Reports tested heat pump water heaters and found that “Those we tested provided annual savings of about 60% over electric-only models.”

One key concern about heat pump water heaters is low temperature operation. When the heat pump water heater operates in electric resistance mode, it doesn’t save energy or money compared to a conventional unit. Research by the Northwest Energy Efficiency Alliance showed that some early heat pump water heater models were cutting over to electric resistance mode at relatively high ambient temperatures. Manufacturers have been working to lower the minimum temperature at which water heaters operate in heat pump mode. Recent models have made significant progress, ensuring heat pump operation down to ambient temperatures as low as 35 degrees. The vast majority of utility programs in the Northwest point to the Northern Climate Specification Qualified Products List to determine whether a heat pump water heater qualifies for utility incentives

Condensing gas water heaters are not as prevalent as heat pump water heaters, but consumers have more choices today than they did just a few years ago. Conventional gas water heaters lose much of the energy burned up the flue. Condensing water heaters are designed to reclaim much of this escaping heat by cooling exhaust gases well below 140 degrees F, where water vapor in the exhaust condenses into water.

Details on the new standard levels

The table below shows the current and new standards for typical-sized storage units. The water heater standards vary as a function of tank size. The energy factor (EF) is the ratio of useful energy output from the water heater to the total amount of energy delivered to it.

Size change: a bit bigger, but there are options

A review of manufacturer websites shows that the height and/or diameter of some conventional products will increase 1 to 2 inches due to added insulation (some less than an inch). For many homes, particularly those with basement installations, the small increase in size will have little impact. Consumers with space constraints (e.g., water heaters in closets or crawl spaces) should consult manufacturer websites or local installers for options. Consumers may find that a product from one manufacturer fits better in their tight space than a similar product from a different manufacturer.

Manufacturers prepared for changes

Manufacturers are offering webinars, online videos, and educational materials to guide consumers, contractors, and installers through the changes. Several website include cross-reference guides to help consumers compare current models to models meeting the new standards. You will find most of the educational materials on manufacturer websites under NAECA (National Appliance Energy Conservation Act), the legislation that authorized appliance efficiency standards.

What about grid-enabled water heaters?

Utilities represented by the National Rural Electric Cooperative (NRECA) and the American Public Power Association, along with PJM Interconnection (regional grid operator) raised concerns that demand-response programs for water heaters over 55 gallons would suffer if they were required to switch to heat pump water heaters. In these programs, utilities control the use of grid-enabled (connected) water heaters to manage energy use at peak times, resulting in large savings. Though some stakeholders claim that heat pump water heaters can provide the services that NRECA and others desire, not all stakeholders are convinced that they will work as well. A legislative fix to establish a class of water heaters for demand-response programs is pending in Congress. In addition, some manufacturers have petitioned for waivers for this application.


Looking to the future of energy efficiency markets and programs
February 23, 2015 - 11:00 pm

By Steven Nadel , Executive Director


Part Three in a series where ACEEE examines the most effective roles for energy efficiency programs and market-driven solutions in scaling deployment of energy efficiency. To read Part One click here. For Part Two, click here.

My first blog post addressed the false dichotomy of choosing between energy efficiency programs and market-driven solutions, pointing out the successes and limitations of market-based solutions and the need for markets and programs to work together in order to maximize societal benefits. My second post reviewed the history of efforts to increase reliance on market-driven solutions, finding success in a few market segments, difficulties in some other market segments, and a tendency to focus on “low-hanging fruit.” However, the clean energy landscape is changing, and new approaches can and are being tried that may potentially have better outcomes in the future. In this final blog post in the series, we’ll explore recent developments and potential opportunities ahead, including both market-driven opportunities and opportunities for market-driven solutions and energy efficiency programs to work together.

Much has changed in energy efficiency and related markets in recent years, and further major changes are likely. New technologies and services continue to be developed, and new players enter the market every year. Recent developments include many new intelligent efficiency opportunities and the growing saturation of smart meters that make a wealth of new information available to customers and those who serve them. New firms are offering behavior-based services and nurturing interest in new financial products, such as those from green banks and from private firms. The utility industry is also going through profound changes, which could affect how energy efficiency services are offered. And proposed new regulations to reduce carbon pollution from existing power plants will likely increase the need to capture as much energy efficiency savings as possible.

In this environment, it is useful to divide energy efficiency opportunities into three segments: (1) those in which markets are largely functioning well, and in which only limited energy efficiency programs are needed; (2) those in which market barriers are particularly large, and in which programmatic support is likely to be needed for the foreseeable future; and (3) a large in-between category, in which it is appropriate to experiment with new approaches in the hope that many will work, but with the expectation that some will not.

Where market-driven approaches are largely functioning well

There are some market segments where market-driven approaches are doing well. Energy service companies (ESCOs) have refined their service offerings for the so-called “MUSH” market (municipalities, universities, schools, and hospitals) and now are doing nearly $6 billion a year in business, primarily in energy-saving performance contracts  (ESPCs) that guarantee a level of savings, often for ten years or more. Energy-efficiency programs can sweeten ESCO offerings by encouraging ESCOs to go broader and deeper with their energy efficiency retrofits and to reach some customers they might not reach on their own, particularly customers somewhat smaller than those they normally serve. A 2014 Lawrence Berkeley National Laboratory study found that 36% of ESCO projects involve energy efficiency program incentives.

ENERGY STAR® now certifies more than 70 different energy-consuming products, identifying roughly the top 25% to receive the ENERGY STAR label. More than 85% of consumers recognize the label. Market penetration ranges from about 1% (for electric water heaters) to nearly 100% (for some categories of televisions) with the average roughly 50%. Most of these products receive promotional assistance from energy efficiency programs but not direct incentives. However, a companion program, ENERGY STAR Most Efficient, recognizes the very best products on the market and needs help from energy efficiency programs, both promotion and incentives, to encourage both sales and increased product offerings.

Very large industrial customers often have in-house energy managers who are able to effectively manage a firm’s energy use and identify promising projects. Allocation of capital to fund energy efficiency programs remains the primary barrier to greater implementation of these projects. Energy efficiency program incentives, either in the form of cash or in-kind services can be a major inducement to move these projects up the list for project funding. For these large customers with well-established internal programs, self-direct programs have proven effective in providing incentives to customers for their internal energy management efforts.

Areas for experimentation

A number of additional market segments and services could potentially be attractive for market-focused strategies, although for many of them there are also significant roles for energy efficiency programs. Examples include:

ESPCs in Large Commercial Facilities and New Takes on the ESCO Model. ESCOs see substantial opportunity to serve the large commercial market, applying lessons they have learned in the MUSH market. The development of insurance products to manage risk around these types of projects could provide comfort to more building owners and ESCOs around deeper retrofits. The Vermont Energy Investment Corporation (VEIC) has also established a low-profit limited liability company (L3C), Commons Energy has developed a Public Purpose ESCO that hopes to address underserved markets including small- to mid-size multifamily affordable housing.

Smart Buildings and Smart Manufacturing. Sensors, controls, software, and data analysis are being used to optimize buildings and manufacturing. For example, new smart building services can help optimize building operations, saving 10% or more in some applications. There are similar opportunities in manufacturing. Payback periods are commonly only a few years, and can be expected to decline with time. Energy efficiency programs can help to encourage initial installations and document benefits, but over time, vendors may be able to sell these services without incentives, particularly in large facilities. Likewise, new smart thermostat products can optimize heating and cooling based on current weather and a household’s patterns. Heating and cooling energy savings of 10% or more have been documented in a few studies, although more data are needed. Sales are growing, but due to the high purchase cost, marketing has so far targeted upscale consumers. Upscale markets could flourish, although energy efficiency programs are likely to be needed if more downscale consumers are to enjoy the benefits as well. Integration of these thermostats with other sensors and controls could enable truly smart homes and businesses.

New Financing Strategies. There is a lot of creative activity happening to develop new financing strategies that hopefully will have much broader appeal than past programs. For example, on-bill finance and PACE finance have received a lot of buzz in the last few years for their ability to attract secondary markets, and for their potential to serve traditionally harder-to-reach markets. In a few cases thus far, PACE in particular has achieved significant market penetration. For example, Renovate America’s HERO Program has used PACE in California to finance approximately 25,000 home upgrades and has completed two rounds of securitization. It is important to note, though, that many entities realizing success with financing are also leveraging ratepayer incentives. In addition, there are new private sector start-ups that are closing deals, including NoesisKilowatt Financial, Joule Assets, and SparkFund. And, multiple states have started green banks to explore new models for delivering energy efficiency across multiple market sectors.

Home and Building Rating and Disclosure. Developing standardized energy efficiency ratings for homes and buildings, and disclosing this information to potential purchasers and tenants, can make it much easier for shoppers to consider energy efficiency as they make purchase and lease decisions, creating an incentive for home and building owners to improve efficiency before they sell or lease. Quite a few cities have established commercial building disclosure programs. Residential programs are also offered, but thus far are more limited.

Energy Use Feedback and Data. Providing consumers with information on their energy use and how it compares to peers has been shown to reduce energy use about 2% for monthly mailed reports, and by roughly 4% when feedback is in real time. Such approaches have also been used to reduce demand during peak times by an average of 3% without incentives. So far these efforts have been primarily offered under contract with utilities, but private firms could potentially offer these services if either they receive performance incentives from utilities, or if energy pricing is structured in ways to reward consumers who purchase these services. More broadly, with much more data now available from smart meters, and increased attention on ways to glean insights from “big data,” there should be many opportunities for both utilities and contractors working with customers to extract targeted information on specific opportunities for saving energy, and for targeted marketing of these opportunities.

Jointly Marketing Efficiency and Solar. Quite a few firms are aggressively marketing photovoltaic systems. A few of these, such as Solar City, are also marketing energy efficiency services, both as a way to increase bill savings and as a way to reduce system costs, since when loads are smaller, systems can be smaller. We see this trend growing.

Electric and gas vehicles. Electric vehicles generally use less energy per mile traveled than gasoline and diesel vehicles, even when considering the full fuel cycle, including energy losses at the power plant. As a result, while purchase costs are high, operating costs are generally lower, even after allowing for the fact that electricity is generally more expensive per Btu of energy than gasoline. Likewise, natural gas vehicles also generally have lower operating costs, due to the lower costs of their fuel, although their efficiency is similar to gasoline vehicles. We see growing efforts to promote these technologies, including by vehicle manufacturers, other private service providers, governments, and utilities. For example, the California Public Utility Commission originally asked utilities to not build charging stations in order to leave this field to private vendors, but recently reversed course, concluding that utilities have an important role to play in the development of this market.

These are just a sampling of potential areas where it is worth experimenting with market-oriented approaches but also where energy efficiency programs can perhaps partner with service providers in order to achieve savings while also providing valuable services to customers. If I were to revisit this topic in a few years, I am sure there would be additional examples to add, as the market for efficiency services is currently very dynamic.

Where market barriers are large and energy efficiency programs are clearly needed

Other market segments are likely to continue to be reliant on energy efficiency programs for at least quite a few years, although market-driven strategies can also play a role. At the top of this list are programs for low-income households, where, without significant incentives, energy efficiency actions are likely to be limited. The barriers to energy efficiency in low-income households include limited income to pay upfront costs and poor credit histories, making loan approval difficult.

Other challenging market segments include rental housing and small businesses. Rental units face the split incentive problem, where landlords have little incentive to invest if tenants pay the energy bills, and tenants have little incentive to use energy smartly if the landlord pays the bills. If buildings are rated on energy efficiency, and this becomes a factor in leasing decisions, then landlords will have some incentive to improve their units, although outside of high-rent buildings, there will likely be a long-term need for best-practice energy efficiency programs.

Likewise, small businesses can be hard to reach as owners and other decision makers generally have little time or expertise to consider energy efficiency opportunities; plus, marketing costs are high per unit of energy saved. So far, the most effective approach for this segment has been "direct installation” energy efficiency programs (see section starting on p. 186), where specific services are offered, and all the owner has to do is say “yes.” Noesis has done some small-commercial projects, working through contractors and providing financing, but thus far many of these projects are lighting only, and their large commercial projects significantly outnumber their small commercial projects.

Markets and energy efficiency programs working together

In most market segments there is a role for both market strategies and energy efficiency programs, with the relative mix of each varying by market segment. Of the areas discussed above, markets are ultimately likely to dominate in the large MUSH market, but help from programs will likely continue to be needed for smaller facilities. After the market develops further and benefits are clearly demonstrated, smart-building and smart-manufacturing systems may do well without incentives, particularly for large facilities, and as prices come down, medium-sized facilities may also benefit. For smart thermostats, markets may dominate for upscale homeowners, but programs are likely to be needed to promote their use for households where the high upfront cost is an issue.

For energy-efficient equipment, ENERGY STAR can generally promote equipment of above-average efficiency, but for the very best equipment, more active promotion from energy efficiency programs will be needed, helping to grow availability and market share until those levels can become the ENERGY STAR standard, and ultimately, levels mandated by minimum efficiency standards. A similar situation exists for new construction, where modest efficiency improvements can be encouraged by ENERGY STAR homes and LEED certification, but more extensive improvements, such as net zero energy homes and buildings, will need more active assistance from energy efficiency programs, such as providing technical assistance to architects, engineers, and developers on state-of-the-art design practices.

For existing single-family homes and small/medium-sized businesses, both markets and energy efficiency programs have important roles to play. Contractors often sell efficiency services to these markets and have achieved some success, but energy efficiency programs can substantially increase the number of customers who purchase these services and can also increase the depth of savings. For these market segments, neither the market nor efficiency programs can do it all, and new creative approaches are needed. To note just one potential approach, Nate Adams, founder of Energy Smart Home Performance, has proposed that programs just pay per unit of energy saved and leave all other details to the market.

Experimenting, but not gambling, with energy efficiency savings

Much of this blog post talks about new market-based approaches that show some potential for achieving energy savings and other benefits. I strongly encourage experimenting with these approaches, but we should be careful not to phase out proven, more traditional approaches until new approaches are proven to achieve similar participation rates and savings. If we phase out programs prematurely or rely on approaches that are less effective than current programs, the result will be less energy efficiency savings and more need to rely on new energy supplies. As discussed in the first blog post in this series, energy efficiency is generally the lowest cost resource. It helps keep energy bills down, and helps meet environmental objectives, such as reducing greenhouse gas emissions. We do not want to sacrifice these important objectives. Therefore the measuring stick for both programs and markets is to maximize the amount of energy savings that can be achieved at a cost below that of new power plants and other energy resources.

Conclusion

Clearly, markets are a major component of the success of today’s energy efficiency efforts, and can probably play an even larger role going forward. This post points out some potential market opportunities over the next five years or so; in the longer-term even more may be possible, although it is hard to predict where. The fundamental question in this debate, though, is not which policy works best, markets or energy efficiency programs, but how to build a mutually cooperative strategy, taking the best from markets and energy efficiency programs.

In addressing this question, two overriding issues apply, regardless of the market segment or service in question. The first is: Which approach is most cost-effective for a given market? Our research shows that right now, most traditional energy efficiency programs are hard to beat. The second is a question of reach: Which approach is more likely to scale to meet the breadth of the potential efficiency market, and which approach can reach the depth of consumers in any given segment? So far, the answer seems to be mixed. Finance and other market-based approaches can leverage resources to reach a scale that traditional programs may have trouble achieving, while those same market approaches may be fundamentally incapable of reaching the full spectrum of energy consumers—a critical consideration, particularly where ratepayer funds are being deployed. At the end of the day, the winning strategy will be the one that takes the best from markets and energy efficiency programs in order to maximize benefits to all ratepayers and to society as a whole.


A look at the history of efforts to increase reliance on market forces to drive energy efficiency
February 18, 2015 - 1:23 am

By Steven Nadel , Executive Director


Part Two in a series where ACEEE examines the most effective roles for energy efficiency programs and market-driven solutions in scaling deployment of energy efficiency. Click here to read Part One.

Last week, I wrote about the false dichotomy between energy efficiency programs and market-driven solutions, pointing out the successes and limitations of market-based solutions. We should encourage the private market where it works well, experiment with new market-based approaches in other promising market segments, but also continue to use other proven approaches, such as utility and state energy-efficiency programs, particularly for market segments where the success of market-focused approaches has yet to be proven. In this post I summarize research on the role of market-focused programs over the past few decades. In the final installment next week I will look at recent developments and potential opportunities ahead.

As philosopher and essayist George Santayana wrote in The Life of Reason (1905), “[t]hose who cannot remember the past are condemned to repeat it.” Things can and do change, so the past is far from an absolute guide to the future, but understanding the past is useful so we can better plan paths forward.

The recent history of market-based energy efficiency

There was a major push toward market-based approaches to delivering energy efficiency in the 1990s. ACEEE reviewed the success of these efforts in a 2001 report, which interviewed more than a 100 energy service companies, retail electricity service providers and distribution utilities. The research concluded that:

  1. While energy service companies played an important role, they tended to reach primarily institutional and large commercial customers and showed little interest and ability to serve residential and small business customers. They also had difficulty serving industrial markets.
  2. At the time, the competitive retail electricity suppliers had not demonstrated themselves to be effective vehicles for achieving energy efficiency improvements, due to a number of challenges, including: a high failure rate among supplier firms, a mixed interest in energy efficiency among suppliers, a lack of competitive electricity suppliers actually marketing tangible energy efficiency measures, and a lack of customer interest in obtaining energy efficiency from competitive suppliers.
  3. Absent legislative or regulatory requirements, there was strong evidence that in a restructured electric industry, utility companies would not choose to provide substantive energy efficiency programs. If they provided anything at all, they were more likely to provide minimal "information" type programs, largely as a customer service and customer relations mechanism.

Similarly, in the 1990s some electricity markets were deregulated based on the theory that retail competition among power providers would lower costs and improve service (both energy efficiency and other services). MIT economist Paul Joskow reviewed these efforts in 2003 and found that “the performance of retail competition programs has been disappointing almost everywhere, especially for residential and small commercial customers.” This should serve as a cautionary tale, particularly for services for residential and small business energy consumers.

Financing

Likewise, some observers have suggested greater reliance on financing options, such as loans, rather than incentives. Financing is an important and useful tool, but while some customers will take out loans, others will not, for a variety of reasons ranging from poor credit rating, aversion to debt, or accounting procedures which make “on the books” financing difficult for some companies. The limitations of loan programs are documented by a 2011 ACEEE report that looked at many of the leading energy efficiency loan programs around the country, operated by a variety of organizations (including utilities, states, non-profit and for-profit organizations and financial institutions) and found only two that had served more than 5% of eligible participants. Limited interest in energy efficiency loans is confirmed by reports from private small lenders convened as part of ACEEE’s Small Lender Energy Efficiency Community (SLEEC).

Also, if funds available for incentives are limited, past experience indicates that most customers prefer direct rebates to subsidized loans. For example, Wisconsin Electric and Puget Power in the 1980s found that when commercial customers were offered a choice of a zero-interest loan or a rebate of the same value, over 90% chose the rebate (see p.158-159). There are older studies on residential customers that found 15-49% of customers preferred subsidized loans, with the rest preferring grants equal to the loan subsidy. If the goal of customer-funded efficiency programs is to reach the broad base of energy customers, financing efforts can’t be the only or even the primary tool for achieving that goal.

The cost problem

There is also a question of whether relying on the market will raise or lower costs. In the 1990s and early 2000s there were experiments in which bids were solicited for energy efficiency improvements and the least expensive viable options were chosen. Likewise there were “standard performance contracts” in which standardized incentives per kWh and/or kW-saved were offered to energy service companies and other private firms. In these efforts there was a tendency to get only certain types of savings, and for the prices to be relatively high. Specifically, the bids received tended to emphasize projects at large commercial and industrial facilities, with little for small businesses and only a modest amount for residential customers. The service providers targeted the largest customers because these customers provide large savings per successful marketing effort. Marketing costs tend to be high when you need to recruit many small customers and as a result most private sector energy efficiency firms have shied away from the small business market.

With bidding programs, the firms quickly learned what the market-clearing price was likely to be and then bid just below it. As a result, as shown in the graph below compiled by Lawrence Berkeley National Laboratory, the bidding and performance contracting programs ranged in cost from about 5.5 to 8 cents/kWh saved. The average ratepayer-funded energy efficiency program had a total cost of about 4.4 cents/kWh saved, according to a report by Lawrence Berkeley National Laboratory, when both program administrator and customer costs were included. In other words, the bidding programs have tended to be more expensive, not less. Not all market-based efforts will cost this much, but to date, evidence is lacking that market-based efforts will cost less.

 

Cost per kWh Saved of U.S. Demand-Side Bidding and Standard Performance Contracting Programs

Source: Chuck Goldman, Lawrence Berkeley National Laboratory, presentation to the Oregon Public Service Commission. http://www.puc.state.or.us/meetings/pmemos/2012/040512/Goldman.pdf. The red and light blue inner bars are the costs per kWh if the analysis includes savings for the full measure life and not just the contract term.

Cream skimming

In addition to concerns about costs, past experience indicates that left to their own devices, many private sector firms will tend to do "cream skimming." For example, a Lawrence Berkeley National Laboratory study on the results of bidding found that these efforts emphasized lighting measures. These tended to be low-cost measures with a high return on investment, but that also only scratch the surface of cost-effective efficiency options. To address this, some programs established lower ceiling prices for lighting than for other measures, in order to encourage a diversity of approaches.

There are some markets where private suppliers of energy efficiency have done well, but many others where the success of market-only approaches has been limited. Financing approaches are useful because they can leverage private capital, stretching energy efficiency program funds further, and have proven useful for some customers. But the past indicates that markets alone will likely only reach a minority of customers, and only with some energy efficiency measures. Much more energy efficiency can be delivered if markets and energy efficiency programs work together.

Next, in the third blog in this series, I will talk more about paths forward, with an emphasis on recent and potential near- and medium-term developments that could potentially allow us to improve upon the results from the past. I will discuss areas where markets can lead and ways that markets and programs can work together to maximize positive synergies.


New national furnace standards will save consumers money, but stronger standards could save even more
February 11, 2015 - 10:30 am

By Andrew deLaski, Executive Director, Appliance Standards Awareness Project (ASAP)


Yesterday, the US Department of Energy (DOE) issued a proposed rule for furnaces that would provide significant savings for consumers on their home heating bills, and be among the biggest natural-gas saving standards ever completed by the agency. The new standards would reduce gas and propane furnace energy consumption by about 13% relative to basic furnaces sold today.

Improved furnace efficiency standards are a crucial energy-savings opportunity for homeowners and the nation, since about one-fifth of all the energy consumed in US homes goes to operate gas and propane furnaces. These furnaces provide heat for more than 40% of homes, and their minimum efficiency standards have been virtually unchanged since 1992.

DOE’s analysis published yesterday shows that efficiency levels higher than those in the proposed rule would achieve even larger savings for consumers, and increase national energy savings by 50% compared to DOE’s proposal. The agency cited concerns about potential impacts on manufacturers to explain its selection of the lower proposed levels.

Based on DOE’s analysis, ASAP estimates that typical consumers would save $600 to $800 over the lifetime of a furnace meeting new standards, depending on the standard level. A preliminary DOE analysis published last fall showed that consumers save money in both northern and southern regions, whether purchasing their furnace for a newly built home or to replace an older furnace, and at either the proposed standard level or the higher potential level. An updated version will likely be released soon.

On a national level, furnaces meeting the proposed new standards sold over 30 years would save about 3.1 quadrillion Btus (quads) of energy—enough to meet the gas and propane heating needs of all of New England for 17 years—and net savings of $4-19 billion for consumers. The higher potential standards would save 4.4 quads, or enough to heat New England for 24 years, netting consumers up to $25 billion.

The current furnace standards can be met using non-condensing furnaces, which send much of the heat from the combustion process up the flue and cannot achieve efficiencies higher than about 80%. (For DOE standards, furnace efficiency is measured by calculating annual fuel utilization efficiency, or AFUE.) The new proposed standards could be met with condensing furnaces, which extract additional heat by condensing the water vapor in the flue gases, resulting in efficiency ratings of 90% or higher. Condensing furnaces make up about 45% of current sales.

Improved furnace standards have been a long time coming. Efficiency advocates and states sued DOE over the first revision completed in 2007, because it did very little to improve efficiency. As a result, the agency committed to redo the standard. In 2011, DOE completed a new standard based on a consensus agreement between manufacturers and efficiency advocates that would have raised the minimum efficiency level for furnaces effective in 2013, but only in the northern region. However, the American Public Gas Association (APGA) filed a lawsuit objecting to the expedited process used to adopt the 2011 standards. In 2014, a settlement agreement was approved that vacated the 2011 standards and required DOE to complete yet another new rulemaking. Yesterday’s proposed rule is a key step in the process for achieving improved standards.

Critics of improved furnace standards argued that the prior DOE analyses for the 2011 final rule failed to fully take into account potential switching to electric heat and the full impact of new furnace standards on the installation cost of new furnaces. The agency’s new analysis is substantially revised to address those critics’ concerns and now estimates that about 10% of furnace purchasers would switch to electric heat, primarily heat pumps, as a result of the standard. Most fuel switching would likely occur in those regions of the country where heat pumps are a cost-competitive option compared to gas heating. DOE also updated its estimates of installation costs. A small portion of consumers may face unusually high installation costs when replacing an 80% efficient furnace with a condensing product. ASAP and our allies have worked to develop approaches that would potentially exempt very high-cost installations and remain open to exploring options to provide relief for consumers facing unusually high installation costs. Fortunately, new venting technologies already are bringing down the cost of venting condensing furnaces in even the most difficult circumstances, and may make any special treatment unnecessary. Examples are herehere and here.

Yesterday’s proposed rule would apply to non-weatherized gas furnaces. Non-weatherized furnaces are the most common type and are located indoors, while weatherized furnaces are generally part of an outdoor unit that provides both heating and air conditioning. DOE completed standards for weatherized furnaces in 2011 that took effect on January 1 of this year.

DOE is required by the settlement agreement to publish a final rule for new efficiency standards for non-weatherized furnaces by April 2016, and the standards would take effect five years later. ASAP and our allies look forward to working with other stakeholders and DOE to come up with a final standard that will deliver on the large savings possible with improved standards.


Why we don’t have to choose between energy efficiency programs and market-driven solutions
February 10, 2015 - 10:30 am

By Steven Nadel , Executive Director


Part One in a series where ACEEE examines the most effective roles for energy efficiency programs and market-driven solutions in scaling the deployment of energy efficiency.

The fundamental question that policymakers ask themselves is, Are we being the most responsible stewards of public dollars? For those tasked with finding ways to increase cost-effective energy savings, the gold standard for the last 30 years has been ratepayer-funded programs administered by utilities, or in some cases, by state agencies or third parties. This model has worked very well, saving customers billions of dollars and helping to contain increases in energy prices.

In the search for even more effective policy solutions, some have periodically asked if states and utilities should bow out and allow private-sector service providers in the market to completely take over. The reasoning is that the energy efficiency market will never mature as long as energy efficiency programs exist, so we must choose between these programs and the private sector. Our belief, founded on over 30 years of research, is that this is a false choice: private-sector providers are already the dominant player when it comes to energy efficiency, and energy efficiency programs still fulfill a vital role due to their proven track record of success and the impediments to energy efficiency that they address.

An extensive body of research documents the many factors that result in customers' underutilization of energy efficiency in the absence of energy efficiency programs. These factors include a lack of information, the scarcity of high-efficiency options in the local market, local suppliers' and contractors' lack of training and experience in the latest high-efficiency techniques, customer economic payback requirements that are vastly different than the utility system, the hassle factor of having to arrange an energy efficiency retrofit, and split incentives between building owners and tenants. Well-designed energy efficiency programs help overcome these barriers and allow private-market actors to provide their services more effectively.

This partnership between markets and programs should not be abandoned. As we discuss below, our research indicates that at the present time, private service providers alone will deliver less energy savings than if they continue to work together with successful energy efficiency programs. That said, we are excited about the possibilities of leveraging even more private-sector dollars and activity in the future as a vital complement to customer-funded programs.

In our research we find that the private market has done a lot to promote energy efficiency in the past, and even more may be possible in the future. There are some market segments, such as large institutions, where the private market has done well, but many others where the success of market-focused approaches has been limited. We should encourage the private market where it works well and experiment with new market-based approaches in other promising market segments. But we should also continue to use proven approaches like energy efficiency programs, transitioning to alternative approaches only when such alternatives prove their efficacy in specific market segments. If we reduce proven program approaches prematurely, energy efficiency savings will likely be lower, consumer costs higher, and impacts on the environment more severe.

This blog post is the first in a multipart series on these issues. Today’s blog post summarizes our findings but does not include the underlying details. In the coming weeks we will publish two additional posts: one on our findings from past programs, and one looking at recent developments and potential opportunities ahead. Subsequent posts in this series will look into the role of financing and the New York REV proposal in particular.

Our findings can be summarized in five points.

The market is already a major force in delivering energy efficiency.

2013 ACEEE study estimated that about $70–100 billion was spent in 2010 on energy efficiency measures, with a substantial majority of this funding coming from the private market. Well-developed and well-deployed energy efficiency programs leverage and enhance the role of private retailers and service providers. Utility incentives typically cover a third to half of the cost of measures, leaving end users to pay the rest. Efficiency measures are mostly purchased through privately-owned stores and service providers. And many customers will invest in efficiency without utility or government involvement. The question is not whether to rely on the market, since we already do that; the question is whether we can rely even more on the market in the future.

Energy efficiency programs have a record of cost-effective success.

Energy efficiency programs have done a very good job of improving energy efficiency cost effectively. Utilities and other program implementers began offering energy-efficiency programs in the 1980s because it generally cost less to save a kWh of energy than to build a power plant and generate a kWh. These programs have ramped up since then and are now offered in most states. According to data compiled by the Energy Information Administration (EIA), these programs reduced electricity use by about 138 billion kWh in 2012, enough to power more than 13 million average American homes for a year. A 2014 ACEEE study found that on average, these programs cost utilities 2.8 cents per kWh saved, which is less than half the cost of new generating plants. The EIA data show that some states have used energy efficiency programs to reduce energy use by more than 10% over multiyear periods.

Past experience shows us the pitfalls of abandoning energy efficiency programs.

It is instructive to look at times when policymakers sought to rely more on markets. For example, there was a major push for market-based solutions in the 1990s. A 2001 ACEEE evaluation of these efforts found that private-sector energy service companies could play an important role, but they primarily reached institutional and large commercial customers and showed little interest in and ability to serve residential and small business customers. They also had limited success serving industrial markets.

Likewise, the retail electricity commodity supplier industry did not show itself to be an effective vehicle for achieving energy efficiency improvements, due to such challenges as a high failure rate among supplier firms, their mixed interest in energy efficiency, their minimal effort to actually market tangible energy efficiency measures, and a lack of customer interest in obtaining energy efficiency from them. This period also saw experiments in which bids were solicited for energy efficiency improvements and "standard performance contracts" were offered; in both cases private firms received payments per kWh and/or kW saved. These experiments tended to yield only certain types of savings (such as lighting improvements) and relatively high prices—higher per kWh saved than the cost of utility-operated programs.

So far we also have seen limitations in the energy efficiency financing market. We agree that financing is an important and useful tool, and we encourage efforts to experiment with new strategies in order to extend financing's reach. However, financing should not be the only tool in our kitbag. Lack of access to capital is just one of the key barriers to energy efficiency, and not all customers want to or can access financing. Many firms currently have large cash reserves, and capital is available for low-risk customers at very attractive rates. For other customers, past experience indicates that while some of them will take out loans, others will not for a variety of reasons. These may include a poor credit rating, aversion to debt, or financial procedures that make on-the-books financing difficult for some companies. This limited use of loans is documented in a 2011 ACEEE report that looks at leading energy efficiency loan programs around the country and is also illustrated by reports from private small lenders convened as part of ACEEE’s Small Lender Energy Efficiency Community (SLEEC).

The future of the energy efficiency market is promising, although not a universal solution.

It is also important to look at what may be possible in the present and near future—and what may not. The past decade has seen market and technology developments that could enhance the role of market players in future years. For example, energy service companies have refined their offerings and now are doing nearly $6 billion a year in business, primarily in energy-saving performance contracts that guarantee a level of savings, often for ten years or more. These contracts are still primarily with institutional customers, with many fewer commercial and industrial customers and very little in the residential sector. There are also new smart thermostats available for homes that, while expensive, have been popular with early adopters. And in the commercial sector, new smart building services can help optimize building operations , saving 10% or more in some applications.

These are promising developments, but still only a fraction of the 20% plus savings opportunity from cost-effective energy efficiency measures that studies have found. In addition, these service providers tend to emphasize the largest businesses and upscale consumers, meaning that many customers are not receiving services.

The best results come from the market and energy efficiency programs working together.

Cooperation between the market and energy efficiency programs often produces the best results. For example, quite a few energy efficiency programs have promoted smart thermostats, contributing to their market growth. The Connecticut Green Bank has undertaken more than 20 projects with Commercial Property-Assessed Clean Energy (C-PACE) finance; most of these projects have also received rebates from energy efficiency programs. The ENERGY STAR® program has helped increase the market share of energy-efficient equipment, aided by program promotion efforts and incentives. Energy efficiency programs have also helped to advance efficiency in new construction by working with developers, architects, and engineers. We will provide further information on these and other examples in the third post in this series.

We believe the fundamental question is not which approach works best—markets or energy efficiency programs—but how to build upon a cooperative endeavor that has proven itself effective and that is already providing billions of dollars of energy savings. Look for subsequent posts in our series on this topic. We also encourage you to join the conversation in the comments section below; we will try to reply to as many posts as we can.

Click here to continue to Part Two.


Energy efficiency and community resilience: making the connection to keep the lights on and our homes warm
February 04, 2015 - 10:30 am

By David Ribeiro, Research Analyst


Communities face a growing number of stresses that pose risks to their energy systems and economies. These include aging infrastructure in need of costly maintenance upgrades and severe weather events. Energy efficiency is a strategy—albeit not a broadly recognized one—to enhance the resilience of energy systems and the communities they serve. One example is the role that CHP played during Superstorm Sandy to keep the power on at critical facilities, including hospitals and universities, when 8.5 million customers lost power. But efficiency could also be key to community resilience in less obvious ways, including helping communities to weather economic stresses. For example, natural gas customers in Massachusetts are paying more on their bills this winter because insufficient transmission infrastructure in the state is leading to congestion in the transmission system. Natural gas efficiency programs would help natural gas customers avoid paying these high congestion prices and allow them to spend more on other potential needs, further improving community resilience.

Communities that embrace energy efficiency are more “resource resilient.” That is, energy efficiency reduces a community’s natural resources demands, enabling it to instead spend its income on needs that directly benefit the local economy, including other resilience measures. Take energy efficiency improvements in homes. They make communities more resilient in several ways: spending on efficiency creates more economic activity and jobs; buildings have increased economic value, durability, and safety in case of disaster; energy savings from improvements means fewer emissions of greenhouse gases and other pollutants, improving public health; and smaller and less volatile energy bills allows households to spend their money in more beneficial ways.

ACEEE is kicking off a new research project this year to identify the connection between efficiency and resilience, and to identify opportunities for integrating energy efficiency into resilience strategies. As part of our research report, we’ll explore how efficiency can be specifically implemented to enhance resilience and which specific efficiency measures result in what resilience benefits. For example, what do investments in improved public transit systems mean for community resilience? Or which specific efficiency measures implemented by water utilities result in which resilience benefits? We’ll also work to determine which metrics are appropriate to measure efficiency-related resilience, and explore the opportunities in policy and program development to integrate efficiency into resilience efforts and vice versa.

We anticipate releasing our research report this coming summer. We are very interested in your thoughts, as members of the energy efficiency and resilience communities, on how you view the efficiency-resilience interconnection. We’re interested to hear your suggestions about valuable literature, case studies, potential metrics, and policy and program opportunities. Those interested should feel free to e-mail me.


Fewer dollars up the chimney with DOE’s proposal for gas fireplaces
January 29, 2015 - 10:30 am

By Marianne DiMascio, Outreach Director, Appliance Standards Awareness Project (ASAP)


Proposed new standards for gas fireplaces may make a cozy night in front of the fire a little cheaper. For decorative hearth products, the little blue flame that stands ready to light your gas fireplace at a moment’s notice can account for about 40% of the total annual energy consumed. Standing pilots lights are on 24/7, continuously burning small amounts of gas and sending dollars needlessly up your chimney. A proposed rule issued by the Department of Energy (DOE) yesterday would eliminate this waste with new energy-saving standards. ­­But don’t fret—with the energy-saving technology, you’ll still be able start up your romantic, cozy, or mood-setting fireplace with the press of a button or turn of a knob.

DOE estimates that the proposed standards would net the average consumer $165 in savings over the life of the product. On a national level, hearth products meeting the new standards sold over 30 years would reduce natural gas consumption by about 7 billion therms, which is equivalent to the annual natural gas consumption of 10 million US households, and net consumers up to $3 billion in savings. Over the same period, the standards would reduce CO2 emissions by 37 million metric tons, an amount equal to the annual emissions of more than 3 million US homes

The proposed standards, the first for hearth products, apply to all vented or ventless hearth products including space heating hearth products, decorative products, gas logs, gas stoves, and outdoor hearth products. The standards would require manufacturers to eliminate the continuously burning pilot light. Many products already use electronic ignition—similar to what is used on gas ranges and ovens—eliminating the need for wasteful pilot lights.

A final rule is expected in December 2015 with an expected effective date five years later.