Can NMEC Move Efficiency Forward?

Co-authored by Jim Kelsey and David Jump.

We’ve shown leadership but now it feels like we’re stumbling.

We’ve been pretty optimistic about normalized metered energy consumption (NMEC) as a streamlined platform for achieving and demonstrating savings in buildings (see our prior post for more on why). And, like many in the industry we were shocked and disappointed to see the CPUC’s ruling last month seeking comment on the NMEC approach, and proposing that the method fall under the same rules and process as custom projects. To be clear, that ruling seeks public comment on the issue before a decision will be made. Our hope in this post is to state clearly why we strongly oppose the , that we think there are viable alternatives that should be used, and provide some essential background.

We Have Huge Goals to Meet

In October of 2015 California’s State legislature passed bold legislation to increase energy efficiency in the state. Under Senate Bill 350 California committed to double statewide energy efficiency savings in electricity and natural gas end uses by 2030. For a state that regularly spends $1Billion Dollars a year on energy efficiency programs and scores near or at the top of ACEEE’s Energy Efficiency Scorecard, setting out to double its impact in 15 years is a tall order.

The day after SB 350 was signed into law by Governor Jerry Brown, he then signed Assembly Bill 802. A lot of us saw an enormous amount of potential for meeting those high goals through some of the streamlined approaches (like NMEC) that AB 802 endorsed. For those of us in the energy efficiency industry, we had a lot of reason for hope. We had a fundamental platform policy with high goals, a newly approved method to simplify and pave the path. We felt that we were on our way to meeting the CA Energy Efficiency Industry Council’s[1] goal of “Moving Efficiency Forward.”

It’s now two and a half years later, and we still feel like we are dead in the water – at least when it comes to approaches for deep and comprehensive retrofits and reasonable measurement in the markets we serve – our commercial and industrial clients. That’s because since the July 2011 decision to implement a custom review process for these projects, we’ve seen the number of customers who apply for those incentives steadily decline, year over year to only a trickle.

What’s Wrong with Custom?

Custom energy incentives have been around for a long time in CA – at least since I started kW 20 years ago. The idea seems simple – pay incentives to unique projects based on the amount of savings (kWh and kW) that we deliver. The hard part is that nobody has a meter for savings – and we’ve been arguing about the appropriate baseline conditions to compare to ever since.

Back in 2011 those arguments (and resulting poor NTG performance of custom programs) caused the CPUC to require review of custom projects, prior to approval of incentive amounts. The Custom Project Review Process was born out of concern that the parties responsible for savings estimates and claims weren’t doing a good enough job, and that the CPUC had to intervene in the process, to provide oversight on a project-by-project basis for “sampled projects” that were pulled from the mix. However, since that sample was weighted towards projects responsible for a lot of savings, for some market segments nearly all projects have been “pulled for review.”

While well intentioned, that plan did not work. There are many reasons why but, for brevity, let’s stick to the bottom line of what is required by the decision that set the Custom Review Process into action.[2] Let’s follow the path of information needed to approve a custom project in California under a 3rd-Party Administered Program. The customer works with the 3rd Party to develop a project. The 3rd Party develops recommendations, custom savings estimates (using different baseline definitions for each measure), projected costs, etc. Then that application goes to the IOU for review (often additionally to a 3rd Party Review Firm). If everything passes muster, it goes to the CPUC, and then to their consultants for review. Under the best circumstances that project goes back through the hands of the IOU, the 3rd Party Implementer, and back to the customer. Consider also that CA efficiency code requirements change every five years, and that we must use “industry standard practice” for facilities outside the purview of our efficiency codes. It’s easy to see that the process provides about 10 opportunities for information or requests to be miss-communicated, miss-interpreted, or just plain omitted. In practice, this results in multiple requests for information and there are constant loops of communication among the parties involved. Typically, a project gets stuck in the review cycle while interpretations of policies are eventually made. Quite simply, this is a program implementation design that cannot work. While intended to improve overall process flow from efficiency program implementation through evaluation, it has had the opposite effect. The process is contentious, confusion and uncertainty reign, and the interests of parties are never communicated directly between those concerned and those reviewing their project. E.g. the 3rd Party Implementer rarely has an opportunity to communicate directly with the CPUC consultant reviewer who is approving or denying their savings claims – a sure way to create miscommunication and mistrust.

The result of this highly contentious, and inefficient process is that custom projects are now rare. We’ve seen the volume of custom projects drop consistently since the Custom Review Process was put into place and now it’s a trickle. Have we decreased the expenditure of ratepayer money on projects that don’t “deserve” it? Probably, but at what overall cost? We’ve also decreased the availability of a program to any commercial customer who needs to make decisions quickly (i.e. most of them), while increasing the costs to arrive at this conclusion. Is this success? We think not. Rather than the unique, deep and often complicated large equipment retrofits that we used to see in the custom programs, now we only see projects that fall under deemed rebates for standard, cookie-cutter projects. For our private clients, we no longer pursue these incentives, and there are a lot of projects “on the bubble” that don’t meet the client’s cost-effectiveness thresholds. So instead they direct us to focus on low-cost, short payback projects. In EM&V jargon, our clients have become “cream skimmers. I can tell you from the front lines – we are saving less energy. The custom system is broken, and cannot be fixed by a system that requires CPUC approval on every big, new and innovative project. It is simply not viable or in the best interests of California Ratepayers. We’ve “fixed the problem” of overspending on custom projects by spending hardly at all.

“spending hardly at all” in energy efficiency may sound like a benefit to ratepayers, in the big scheme of things it isn’t.  For every deep energy efficiency project that was killed by the custom review process, ratepayers will pay much more for renewables and storage and other greenhouse gas mitigation measures that are more costly.  In fact, since ratepayers typically only pay about 50 cents on the dollar for energy efficiency projects, and pay 100% of the cost for renewables, they are buying a bad deal twice: more expensive resources and at full cost.

And the irony is that the efficiency resource was throttled by trying to make sure ratepayers didn’t overpay for a project that might have happened anyway.

Is NMEC Simpler?

NMEC promised to establish a simpler approach. We were encouraged in 2015 when NMEC methods were endorsed by AB 802. These methods leverage the value of metered data and use near real-time M&V to demonstrate savings. The bill also clarified one of the biggest issues that complicates determination of energy savings – the question of “what is the baseline.” AB 802 reset the baseline for projects that use an NMEC to “authorize electrical corporations or gas corporations to provide financial incentives, rebates, technical assistance, and support to their customers to increase the energy efficiency of existing buildings based on all estimated energy savings and energy usage reductions, taking into consideration the overall reduction in normalized metered energy consumption as a measure of energy savings.” [emphasis added]

Under the law, programs should no longer be responsible for tracking baselines and should focus their attention on saving energy at the meter. This is not to say that we don’t still have a baseline issue. It’s obviously still important from a program delivery standpoint to not pay twice for energy savings. But that is a program EM&V issue (program Evaluation Measurement and Verification, which analyses how much additional savings programs actually achieve) rather than an M&V issue (project Measurement and Verification, which determines how much actual savings was achieved from a project). EM&V has an entire body of approaches to determine overall programmatic effectiveness without putting that burden on every project. In some cases, project M&V can be integrated with program EM&V, but EM&V shouldn’t substitute as the goal, as the custom review process has made it to be. We cannot meet our ambitious goals through an approach that examines every kWh of savings on a project-by-project basis in terms of baseline, code impacts, free ridership and influence. This evaluation must be shifted to a more aggregate approach if we’re going to have an impact at scale. Energy efficiency is a diffuse resource that requires high-level impact assessment. Adding regulatory process within every project cannot result in a program that is cost effective to ratepayers.

Custom Project Review was Designed to Solve a Different Problem

The Custom Project Review Process put in place to address CPUC’s justified concerns with net-to-gross issues in the existing portfolio. At the time, evaluations of program impacts were seeing record discrepancies between program claims and evaluated savings estimates. The basis of those discrepancies could be debated for decades but the decision by the CPUC was clear. They wanted to require project-level assessment, during program implementation, rather than waiting until the evaluation cycle was complete to provide oversight and feedback.

But those are problems that don’t exist with the NMEC approach. The baseline for reporting savings is clear – existing energy use is the baseline to report savings. And every project is required to provide M&V at the meter to demonstrate, and claim savings. We’re not talking about savings claims based on engineering calculations compared to artificial baselines. These are savings claims based on an approach that requires reporting of statistical validity and uncertainty from the onset.

AB 802 directs efficiency programs to quantify all savings from an existing conditions baseline, and forces this approach into the existing portfolio of programs, creating an accounting problem: custom and deemed style programs use code and ISP as baselines to determine savings, NMEC programs use existing conditions. We believe much progress can be made to resolve this issue with planning and cooperation in program design and evaluation.

We recognize that NMEC isn’t a panacea; it doesn’t work for all buildings, all sectors or all measures. Although the M&V methods that underlie the approach have been around for a long time, it’s still new as a utility-program construct. Our experience with the approach in California ratepayer-funded programs is limited to the “HOPPs” pilots, whose savings and impacts have yet to be evaluated. We need to review those pilots, make adjustments to our methods, and propose evaluation methods that work. If we burden the NMEC approach with the Custom Project Review Process it will kill the approach before it’s had a chance to be tested.

Public and Private Cooperation will be Essential

Although California spends about $1 Billion a year on energy efficiency programs, it’s going to take a lot more than that to achieve the efficiency goals of SB 350. We’ll need approaches that can be deployed at scale, and we’ll need to leverage private sector investment and involvement. From our point of view, the latter is actually the easy part. There are fantastic opportunities in the private sector – many institutional investors are ready and willing to invest in CA’s green economy. The harder part is creating a process that fosters that investment.

It’s no secret what kind of environment is needed for businesses to utilize energy efficiency programs, act and invest. Talk to any business leader about the climate they need to make decisions and you’ll hear various versions of “certainty.” Uncertainty is the great enemy of progress. They need:

  • Simple program rules that are easy to understand
  • Reliable program rules (i.e. that don’t change frequently)
  • Speed of delivery

When these factors are met, businesses can act because they can make decisions they can count on.

NMEC, if implemented in an Informed way, offers us the opportunity to focus on achieving the savings, rather than counting and proving them.

For energy efficiency program implementers who are willing to be paid on performance, the NMEC approach offers an opportunity to spend less time trying to account for energy savings and more time achieving savings. This is exactly what we need to focus on to meet the ambitious goals of SB 350 and double our impact. We need more people in the field, identifying projects, helping our clients get them done, commissioning those projects to make sure the savings show up, and reviewing trend logs to ensure savings persist. NMEC, if implemented in an informed way, offers us the opportunity to focus on achieving the savings, rather than counting and proving them at a level that causes damage to the overall goal.

We can contribute a lot more to California’s future than trying to count every last kWh that is saved, based on theoretical models and theoretical baselines. We have huge goals, need to make big impacts on lots of buildings! If we count every kWh that comes through the EE Program pipeline in NMEC, we’ll choke the very pipeline we’re trying to grow. Instead, let’s set up a system that aligns our goals with our customers, and with the state’s ratepayers.

[1] The Efficiency Council, or officially the “California Energy Efficiency Industry Council”, has since be renamed the California Efficiency and Demand Management Council.”

[2] THIRD DECISION ADDRESSING PETITION FOR MODIFICATION OF DECISION 09-09-047, A.08-07-021 et al. ALJ/DMG/hkr/jt2. Attachments A-B.

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