Six ways to help price signals deliver energy savings

Guest Blog | November 16, 2011 | Climate Change, Energy Efficiency

This blog is one of a series of posts about how the “power of free markets” may be able to help solve climate change. You can view the rest of the posts here.

As discussed in the main post, Price signals don’t always work, creating a meaningful connection between energy price signals and consumers is challenged by a number of market barriers. Those market barriers are particularly acute when it comes to energy waste (but are also present for customer-sited renewable energy); overcoming barriers to energy efficiency requires creating better opportunities to make good choices and offering more information.  Creating those solutions with a coordinated package of measures and practices involves both government and private sector leadership. These solutions can be summarized in six categories.

The Building Codes Assistance Project tracks implementation of energy efficiency codes nationwide.
The Building Codes Assistance Project tracks implementation of energy efficiency codes nationwide.

1) Appliance standards and building codes

Standards and codes that reflect state-of-the-art knowledge about cost-effective energy efficiency measures are often the least-cost way to ensure that lack of choices doesn’t lead to energy waste.

It’s easy to understand the advantages of using codes and standards. In my example, the landlord who needs to install the new HVAC system has to choose a relatively efficient unit, thanks to existing appliance standards, and knows that it’s fair: other landlords will be making similar choices since the market doesn’t give landlords the choice to shift the cost onto the tenant. Also, the landlord doesn’t need to invest time and energy in learning about the latest energy efficiency technology to make a reasonably good choice – the information has been studied by experts and the standards and codes reflect their understanding.

But what about situations where there won’t be a new building or appliance purchase? Or what about encouraging buyers to go beyond the minimum?

2) Driving customer cost down

Using energy efficiency incentives such as rebates and tax breaks is an effective way to use price signals to affect the market. To use incentives wisely, it is important to link cost drivers with improved access to information.

This makes business sense: Price promotions are one of the key tools used in marketing to increase customer willingness to learn about and try new products. All too often, energy efficiency programs are designed from the perspective that a price promotion is needed to reduce the price to an acceptable level. If, instead, price promotions are a means of attracting customer attention to timely, targeted information, they can make better decisions in their own self-interest.

To simplify those self-interested energy decisions, energy efficiency program managers direct the businesses and the public to use independent ratings and accredited professional services. In the residential markets, product labels and energy audits are key tools that link incentives to information.

3) Product labels

The well-known Energy Star program provides a market signal for the most efficient products. Recently Savenia Labs has introduced independent energy ratings for appliances. Most other “EcoLabels” in the US cover a wider range of characteristics than just energy.

Energy Star is also a prominent label in the new home market, helping homebuyers save thousands of dollars during the time they live in the home. EPA estimates about 25% of new homes meet the Energy Star standard, which is based in part on a Home Energy Rating System (HERS Index) score.

Ivey Homes offers Energy Star (and better) homes in Georgia and South Carolina. Click on the image above: they offer a powerpoint on their website with pictures that explain exactly what building practices they use to save their customers energy.
Ivey Homes offers Energy Star (and better) homes in Georgia and South Carolina. Click on the image above: they offer a powerpoint on their website with pictures that explain exactly what building practices they use to save their customers energy.

Energy Star homes are valuable to the utility. It can be cheaper for a utility to provide a financial incentive for an Energy Star home than to build a power plant or operate an existing power plant. For example, Santee Cooper in S,C, offers a rebate of $1,600 for homes that meet the Energy Star standard, or $1,000 for new homes that reach a less stringent score using the HERS Index. Progress Energy incentives are less generous, most Energy Star homes would be eligible for $400-1,000 plus a 5% bill discount (for an efficient home, this may take a while to add up to much).

4) Energy audits

Homeowners and buyers of existing homes depend on energy audits to help identify failures in aging building systems as well as opportunities to upgrade to newer technology. For example, the City of Austin has modeled a program that requires homes (and some commercial properties) to undergo energy audits before the sale of the property. While no energy efficiency upgrades are required, some real estate agents advise sellers to consider making improvements before the home is put on the market, “to get the highest net for your home.”

For industry, more intense versions of the energy audit are encouraged by organizations such as the Institute for Industrial Productivity. Typically, energy managers from facilities and plants exchange advice and discuss challenges using business networks such as those led by the Southeast Energy Efficiency Alliance and the Southeast Clean Energy Applications Center (at the North Carolina Solar Center).

5) Contract provisions

Although not as widely applied, contract provisions are a recommended approach to address “split incentive” and information gaps. Encouraging commercial landlords and tenants to work together is a new challenge.

One approach is a “green lease” for commercial building tenants developed by Sean Patric Neill of Cycle-7 with support from NRDC and EDF. As experts recognize, neither governments nor utilities have good opportunities to require provisions to address energy use in private contracts. To the extent that parties wish to do so, Cycle-7’s guidance to including energy efficiency in a lease is a thorough starting point, and a model lease addendum is available.

Another approach is the Smart Energy Now program in downtown Charlotte, NC. It’s an intriguing and ambitious pilot project. To my knowledge, Duke Energy is only utility that is actively engaging the commercial office building challenge.

6) The opportunity to earn profits when saving energy

Utilities earn profits when they generate energy, and giving those utilities an incentive to help customers save energy helps balance their motivation a bit. In fact, this opportunity  is one reason Duke Energy is pursuing the Smart Energy Now program. With the approval of the North Carolina Utilities Commission, Duke Energy is now regulated using energy policies that work for, not against energy efficiency. Too often, utility management or planning practices are biased and favor the construction of power plants or other “supply side” resources over energy efficiency programs or other “demand side” resources. Utility regulators may be at fault, either because they are sustaining financial structures that only reward utilities that sell more power, or because they make it difficult for utilities to update their programs to respond to new opportunities and developments.

What the Leadership Group of the National Action Plan for Energy Efficiency wrote in 2008 is still true today: “Despite [the] benefits and the success of energy effi­ciency programs in some regions of the country, energy efficiency remains critically underutilized in the nation’s energy portfolio.”

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