A Regulator’s Guide for Multifamily Energy Efficiency

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The Need for Tailored Multifamily Energy Efficiency Programs

When it comes to energy efficiency planning, many utilities and regulators have traditionally overlooked the multifamily sector, which does not fit neatly into the commercial or residential categories that typically delineate energy efficiency programs. The owners and managers of multifamily buildings face challenges that their commercial building counterparts do not. In recent years, utilities and others have developed creative approaches for achieving significant energy savings in these buildings.

The multifamily sector represents a large, relatively untapped opportunity for cost-effective energy savings. ACEEE’s Engaging as Partners in Energy Efficiency: Multifamily Housing and Utilities estimated the potential cost savings if cost-effective energy efficiency programs served the entire multifamily sector. Using 2010 national average residential energy prices, the researchers estimated that energy savings of 15% for electricity and 30% for natural gas would save multifamily households approximately $2.0 billion in electricity bills and $1.3 billion in natural gas bills annually.

Since multifamily building residents contribute to energy efficiency program funds through their utility bill charges, they should arguably have access to the programs they help support. This is especially true for low-income customers. The lack of energy efficiency investments in this sector has contributed to high energy costs that place a heavy energy burden on low-income residents of multifamily buildings. Indeed, looking across major metropolitan areas, ACEEE found that low-income multifamily households faced a median energy burden of 5%, while all households in these areas had an energy burden of only 3.5%. The researchers estimate that improving the energy efficiency of these buildings could eliminate up to 35% of the energy burden on these families.

Successful multifamily energy efficiency programs also provide several benefits beyond cost-effective energy savings. Energy efficiency upgrades can result in lower ongoing maintenance and repair costs for building owners and operators. Upgrading to more energy-efficient equipment can also help avoid the high costs of major maintenance and last-minute replacements. A paper published by the Green and Healthy Homes Initiative found that tenants see the advantages of equipment upgrades, air sealing, and insulation not only in lower utility bills, but also in positive health outcomes and more comfortable living spaces. These tenant benefits can translate into greater financial stability for building owners through lower rates of tenant vacancy and arrears.

Barriers to Energy Efficiency in the Multifamily Sector

Multifamily programs face unique challenges. Among them, owners and tenants of individually metered multifamily buildings often have split incentives to participate in energy efficiency programs. Owners, who are typically responsible for providing the approval and upfront capital for energy efficiency retrofits, often do not directly benefit from the utility bill savings associated with in-unit upgrades. Tenants who pay their own energy costs do benefit from efficiency measures in their units, but they usually lack the responsibility or financing for such upgrades. To address this barrier, ACEEE’s Apartment Hunters: Programs Searching for Energy Savings in Multifamily Buildings recommends that multifamily programs align upgrades with a planned building sale, renovation, or refinance project. Furthermore, individual apartment units should be allowed to receive direct install measures when building owners receive common-area incentives.

Another barrier is lack of capital. For multifamily buildings that receive housing subsidies to keep rents affordable for those with low incomes, it can be difficult to obtain capital for energy efficiency improvements. These owners often have limited access to financing because housing subsidy requirements limit both their cash flow and flexibility. Energy Efficiency for All’s (EEFA) Program Design Guide: Energy Efficiency Programs in Multifamily Affordable Buildings argues that beyond aligning upgrades with a planned sale, renovation, or refinancing, multifamily programs can address a lack of capital by providing on-bill financing or by collaborating with a lender, such as a community development finance institution (CDFI), to provide low-interest loans.

To further respond to these challenges, a growing number of utilities are creating energy efficiency programs that specifically target multifamily owners rather than attempting to appeal to owners and tenants separately through residential and commercial programs. Because the multifamily sector is complex and highly segmented, these customers are more likely to participate in a streamlined energy efficiency program that caters to their unique needs. Referred to as a one-stop shop, these multifamily programs offer participants a single point of contact to guide them through the application, planning, implementation, and verification processes. One-stop shops work on behalf of multifamily customers to coordinate with relevant utilities, contractors, finance organizations, and community stakeholders.

Recommendations for Regulators

We have identified several actions that utility regulators can take to support the creation of multifamily energy efficiency programs:

  • Direct utilities to develop stand-alone multifamily energy efficiency programs
  • Provide funding flexibility for multifamily energy efficiency
  • Encourage coordination across fuel sectors
  • Facilitate access to whole-building energy usage data
  • Apply balanced cost-effectiveness tests
  • Support the creation of on-bill financing opportunities for building owners

By pursuing these recommendations, state regulators can pave the way for widespread efficiency upgrades in the multifamily sector.

Direct Utilities to Develop Stand-Alone Multifamily Energy Efficiency Programs

Utility regulators will likely need to provide explicit support or direction to their regulated utilities to ensure that multifamily buildings and residents are adequately served by their energy efficiency programs. As discussed above, multifamily buildings typically do not fit neatly into standard residential or commercial programs. As a result, they face numerous barriers to improving their energy efficiency.

In state after state, regulators have found that directing utilities to develop stand-alone programs for multifamily buildings is a necessary step toward meeting this important sector’s efficiency needs. Building owners who are considering a retrofit may want to upgrade both building system equipment (like boilers) as well as in-unit appliances or lighting. Energy efficiency programs that specifically cater to this sector can assist with both. As National Housing Trust reports, several state regulators have explicitly directed utilities to develop and offer stand-alone multifamily programs as part of their energy efficiency program portfolios. While such direction sometimes occurs through regulatory order, many regulators have found that less formal means of guidance are adequate and effective.

Most regulatory commissions have processes in place for approving and reviewing utilities’ program plans. To help with these activities, regulators may convene a multi-stakeholder working group of housing agencies, community-based organizations, financial institutions, environmental advocates, clean energy groups, utilities, and commission staff. These groups often allow stakeholders to effectively address disagreements outside formal commission proceedings.

Provide Funding Flexibility for Multifamily Energy Efficiency

No ratepayer-funded efficiency programs are immune to the uncertainties associated with budget cycles. The Lawrence Berkeley National Laboratory documents that the budgeting process can be driven by a utility’s management, by state regulators, or by a legislature. When a funding gap occurs, a program may be suspended temporarily, potentially disrupting plans for various stakeholders and undermining the program’s effectiveness.

Compared to other energy efficiency programs, multifamily programs are particularly vulnerable to funding uncertainties. The Program Design Guide published by Energy Efficiency for All points out that multifamily projects have long construction timelines. Because upgrades often must coincide with refinancing or renovation projects that can be years in the making, a last-minute funding gap can prove disastrous. Short planning cycles and gaps in funding make it difficult for program administrators to support large, comprehensive projects in multifamily buildings.

Utility regulators can play an important role in ensuring reliable funding for multifamily programs by providing flexibility in the time allowed for program participants to complete projects. For example, the Maryland Public Service Commission gives participants an additional year beyond the end of a funding cycle to claim incentives if they have been approved for a project prior to the end of that cycle. In Minnesota, a joint CenterPoint Energy and Xcel Energy program allows participants to be pre-approved for rebates in the early stages of renovation project planning, and energy savings estimates and rebate values are valid for two years from that pre-approval date. Minnesota’s utility regulators have also allowed rebate commitments to overlap program years.

Encourage Coordination Across Fuel Sectors

While most energy efficiency programs focus on a single fuel sector, multifamily buildings often need to improve both electric and natural gas efficiency. ACEEE documents that, in many regions, it can be easier to develop and implement multifamily programs that address both fuels in communities served by a combined gas and electric company. An example here is Maryland, where Baltimore Gas and Electric delivers efficiency services in coordination with state-run programs, thereby saving both electricity and natural gas.

In many communities, however, electricity and natural gas are provided by different, often competing, utilities. This can complicate multifamily programs’ attempts to incentivize comprehensive retrofits. Several jurisdictions have programs that let multiple utilities work together seamlessly to provide comprehensive multifamily efficiency services:

  • In Minnesota’s Twin Cities area, the electric and gas utilities collaborate on delivering efficiency services to multifamily buildings. Xcel Energy and CenterPoint Energy provide electric and natural gas direct install measures and equipment rebates through their coordinated low-income multifamily programs. Xcel program applicants are automatically considered for CenterPoint programs.
  • In 2013, four Chicago-area electric and gas utilities launched the Multi-Family Comprehensive Energy Efficiency Program (MCEEP) to provide comprehensive energy efficiency services to multifamily building owners. Since that time, utilities and building owners have benefited from having both electric and gas measures offered through one streamlined program (see Apartment Hunters).
  • The municipally owned Los Angeles Department of Water and Power (LADWP) partners with Southern California Gas (SoCalGas) to administer the Energy Savings Assistance Program (ESAP). LADWP provides low-income multifamily customers with several electric direct install measures in addition to natural gas weatherization and equipment upgrades provided by SoCalGas.

Some utilities have found that cross-fuel cooperation can be challenging, but they acknowledge that coordinated energy efficiency programs work better for customers. As regulators of the competing utility sectors, state regulatory commissions can play an important role in bringing together the necessary players and facilitating coordination across fuels.

Facilitate Access to Whole-Building Energy Usage Data

Utilities can improve the ability of multifamily building owners and managers to pursue efficiency upgrades by offering them easy, consistent access to whole-building energy usage data. Building owners can use these data to identify and prioritize energy-savings opportunities, better respond to energy market price signals, and make full use of energy management tools and technologies. When states issue guidelines and requirements for data access, all customers gain access to these data, regardless of the utility that serves them. Regulators can help clear the way for multifamily building owners to gain access to whole-building data while also establishing necessary protections, such as consent processes and meter thresholds, to ease customers’ privacy concerns.

Access to energy usage data is critically important to any party seeking to improve multifamily end-use efficiency, including utilities, building owners, third-party service providers, and residents. Access to these data may be necessary for owners to justify energy efficiency investments in a single building or an entire portfolio. Because energy usage data is often the property of individual tenants, arranging for the collection of aggregated whole-building data can pose a significant barrier to multifamily buildings retrofits.

How a multifamily building is metered can significantly affect the motivations of tenants, landlords, and building owners with respect to energy efficiency investments. In a master-metered building, the entire building’s electricity or natural gas is measured through one meter. In this case, the data from the meter are presented in aggregate (as it encompasses all units and shared spaces). As a result, a third-party or building manager has no way to distinguish individual tenant usage. Typically, the landlord alone pays the energy bills for a master-metered complex, and the costs are passed onto tenants in their monthly rent. Although energy efficiency retrofits of these properties will generate energy and cost savings for a property owner or manager, there is no guarantee that tenant rents will be reduced as a result.

In most multifamily buildings, however, each unit’s energy usage is individually metered and the tenant is billed under a unique utility account. Energy used in common areas (such as hallways and elevators) runs through a single meter, and the landlord typically pays that bill. Privacy laws are often in place to keep building owners from accessing tenants’ usage data without their consent. Thus, it can be very time-consuming for building owners to collect each individual tenant’s usage data to gain a complete picture of their property’s energy performance.

Regulators and utility companies, eager to tap a large reservoir of potential energy savings, have pursued several approaches for providing aggregated whole-building energy-use data to the multifamily sector. In several states, utilities and government agencies have developed procedures and protocols for accessing and protecting individual customers’ account-level data. A multifamily building owner can use this energy data to see the usage across an entire building, and separate the energy used in common areas of the building from that used in tenant units, thus identifying energy-saving opportunities that might otherwise be overlooked.

Utility regulators in several states have found that data access is critical to driving new energy models that rely on customer service innovations. The National Association of Regulatory Utility Commissioners (NARUC) details these opportunities in its report Value of Customer Data Access—Market Trends, Challenges, and Opportunities. By proactively considering data access, regulators can also eliminate the need to play catch up as cities pass benchmarking ordinances that require access to utility data. Further, taking a forward-looking view lets regulators combine data access proceedings with other issues, including information technology system upgrades, advanced metering infrastructure (AMI), and smart grid considerations.

At the national level, NARUC adopted a resolution directed at its member regulatory commissions that encourages the following:

Taking all reasonable measures to facilitate convenient, electronic access to utility energy usage data for building owners, including aggregated building data that does not reveal customer-specific data to protect individual customer privacy, as well as the sharing of customer-specific data to the extent provided for under State law and regulations.

Following this resolution, the National Association of State Utility Consumer Advocates (NASUCA) adopted a similar one. Both NARUC and NASUCA are members of the Data Access and Transparency Alliance (DATA), a coalition of nonprofits and real estate associations working with utilities and various levels of government to promote electronic access to whole-building energy use data.

State regulators can play an important role in streamlining the existing patchwork of city and utility approaches to managing customer data by supporting the adoption of statewide data access policies. Arizona, California, District of Columbia, Illinois, Massachusetts, and New York are among the jurisdictions where regulators or legislators have implemented such policies. Regulators can also standardize the procedures used for authorizing the release and use of aggregated customer data (see Illinois Commerce Commission Docket 15-0073). Doing so removes the risk that utilities will misinterpret state data release policies.

Regulators can encourage the adoption of data access policies at the local level as well. In 2012, Philadelphia’s electric and gas utilities collaborated with utility regulators and other stakeholders to address access to whole-building energy data. This culminated in Philadelphia Electric Company developing an automatic energy usage data download system for customers. In addition, the city of Philadelphia enacted a benchmarking and disclosure mandate for large commercial and multifamily buildings (see “Improving Access to Energy Usage Data”).

Access to whole-building energy data makes it possible for local municipalities to require that multifamily buildings benchmark and make transparent their energy use. Currently, 18 cities have adopted these ordinances. Benchmarking refers to the tracking and recording of a building’s aggregate-level energy data to compare it with that of its peers. Analysis of benchmarking data shows how a building uses energy over time. Multifamily benchmarking has proven beneficial to many building owners and city officials, but it has value for utilities as well. Several utilities have combined multifamily benchmarking and building segmentation data to determine cost-effective energy efficiency program offerings. Other utilities have saved on program costs by using benchmarking data to target program audits for customers with the least efficient buildings.

Apply Balanced Cost-Effectiveness Tests

With respect to energy efficiency programs, among the most critical decisions that utility regulators make relate to the cost-effectiveness tests they use to approve potential efficiency measure and programs. The criteria used for assessing energy efficiency’s performance can make or break program funding and, if not carefully considered, potentially overlook its full value to society.

Most jurisdictions with ratepayer-funded programs rely primarily on the total resource cost (TRC) test, which, in principle, considers a broad range of benefits associated with energy efficiency measures. In practice, however, regulators that apply the TRC test typically focus on energy saved as the primary benefit and exclude other important societal benefits, even though the tests are designed to include them.

Societal benefits are the benefits of energy efficiency improvements that accrue to the public at large, beyond those received by individual customers or utilities. Typically, cost-effectiveness tests fail to include non-energy benefits, but they do include all costs. ACEEE reported that when applying the TRC test less than one-third of jurisdictions included customer benefits other than energy savings, but more than three-quarters of them included all participant costs. The implication is that consumers undertake projects only to save energy and reduce utility bills. However saving energy is not the only motivation for property owners, managers, and cooperative boards who choose to undertake a retrofit. In the multifamily sector, non-energy benefits for participants include reduced maintenance costs, improved appliance and equipment performance and lifespan, greater property value, increased building durability, and increased tenant comfort, health, and safety.

An effective way of including multiple benefits in cost-effectiveness tests is to use monetized estimates of benefits expressed in consistent units (that is, in dollars per participant per year). The Resource Value Framework produced by the National Efficiency Screening Project can help guide cost-effectiveness testing that accurately represents the value of multifamily programs.

Using a hypothetical multifamily retrofit project in Massachusetts, ACEEE demonstrated that cost-effectiveness testing can be performed in a balanced way. Beyond the obvious benefits of energy savings, the researchers pointed out five additional areas in which owners and managers could derive benefits:

  • Marketability of rental units
  • Savings on equipment maintenance
  • Savings on lighting maintenance
  • Durability of equipment
  • Tenant satisfaction

Including these benefits made a measurable difference: when the value of non-energy benefits was included along with energy savings, the study’s project was projected to pay for itself in less than three years instead of five.

Support the Creation of On-Bill Financing Opportunities for Building Owners

Multifamily building owners often face difficulties in securing financing for energy efficiency retrofit projects. Several utilities sought to address this challenge with on-bill financing programs that let customers repay the cost of improvements on their utility bill. Regulators have frequently played an important role both in approving the design of these on-bill programs and in establishing the degree of flexibility program administrations have in implementing them. This often requires regulators to carefully consider how on-bill financing might affect program administrators’ ability to meet other program goals.

On-bill programs should include strong consumer protections and underwriting criteria that reduce risk for borrowers, utilities, and investors. ACEEE researchers argue that regulators can ensure that the effect of on-bill financing on a customer’s bill is fully disclosed and that the effect is bill neutral, meaning that the energy savings will cover the monthly loan cost. Regulators can also establish strong underwriting criteria and approve ratepayer-backed bonds to reduce investor risk.

Conclusion

Energy efficiency program administrators have been pursuing innovative programs tailored to the multifamily sector, but these programs function most effectively when regulators provide their support and guidance. Regulators can help create multifamily programs that generate tremendous cost-effective savings, reduce building maintenance and operation costs, improve tenant health and safety, and address the high energy burdens faced by those with low-incomes. To achieve this, regulators can take several specific actions:

  • Direct utilities to develop stand-alone multifamily energy efficiency programs
  • Provide funding flexibility for multifamily energy efficiency
  • Encourage coordination across fuel sectors
  • Facilitate access to whole-building energy usage data
  • Apply balanced cost-effectiveness tests
  • Support the creation of on-bill financing opportunities for building owners

Such regulator actions have proven effective in encouraging multifamily energy efficiency programs in states across the country. Combined, they have the potential to save energy and provide multiple other benefits to building owners, managers, residents, and utilities.