Change Incentive Programs
How do we create the conditions to go beyond cream skimming in society as a whole? How do we increase project ROI itself? One way is to change how utilities create incentives for savings.
The funny thing about many utility rebate programs is that they incentivize retrofits, such as lighting, that are so lucrative that any business or homeowner in their right mind would do them anyway. Perhaps the incentives do help by making customers aware of opportunities, but that can be done with education, not rebates. Rebates, instead, should be used as incentives for energy efficiency measures that would not occur without the rebates—for example, anything with an ROI below 15 percent. These measures are the “deep efficiency” we’ve been talking about, which get us to the scale needed to solve climate change. They include retrofits of pumps, motors, drives, boilers, furnaces, insulation and windows.
Put in Your Eight Cents: Influence Policy
Changing rebate programs to change the return on investment of energy efficiency projects requires something unexpected from corporations and individuals: policy advocacy. You’ll have to lobby your utility or government to help you out. At a national level, we’ll never solve the cream skimming problem until energy costs more in America. If we want deep efficiency, we need a carbon tax, which acts like a rebate program but on a national scale.
Here’s how and why. I live in Colorado with two small children. I come home every day to a sink full of dishes. To hire someone to do those dishes, perhaps an hour of work, would cost me $15 on the free market. Instead, though, I will load the dishwasher, and in an hour, I’ll have clean dishes for a total cost of eight cents. But that’s insane: It doesn’t remotely scale with the market value of the work done, and the eight cents doesn’t account for the fact that the electricity used to do the dishes comes in large part from coal, which increases my children’s risk of asthma and other diseases, loads their blood with toxic mercury and crushes their chance of future prosperity by warming the planet. Eight cents.
The extreme fix to this problem is to tax carbon to the point that energy price reflects its true cost (and value) to society. But while that would be nice some day, even if the price of energy goes up just a little, it will strengthen the market signal and drive more change. Another story further illustrates the problem of cheap energy. Touring an industrial plant in Minnesota, I asked the facilities manager why he hadn’t retrofitted the lights. “Do you know what I pay per kilowatt-hour for electricity?” the manager asked. “Four cents.” So all the projects I can barely get through in Colorado at eight cents are twice as hard in the land of ten thousand lakes.
Who would have thought that a corporate energy manager’s job (or a mom’s or dad’s) is also to change energy policy, and perhaps even lobby for a carbon tax? But it is.
Creative Financial Solutions
Some good news is that problems like cream skimming and ROI thresholds aren’t simply being admired. There has been a lot of effort to overcome barriers to deep climate solutions such these and others. While there is no silver bullet, and all solutions come with their own baggage, two are worth mentioning: MESA and PACE.
Managed Energy Services Agreements (MESAs) or just Energy Services Agreements (ESAs) are one way to approach energy efficiency that provide upfront capital and off-balance sheet accounting. Use your house as an example—today, you pay your energy bills, do efficiency projects and get your payback. A MESA program turns all that over to a third party, which manages energy procurement and efficiency. The third party charges for energy like a utility. It then installs more efficiency equipment in your house, which is maintained and operated by the third party. Last, the third party uses some or all of the costs savings from its retrofits to finance those improvements and earn a profit. Businesses can move the cost of efficiency retrofits off their balance sheets because what was once a capital expense (a new furnace) becomes an operational expense (your energy contract).
Property Assessed Clean Energy (PACE) programs allow local governments to offer sustainable energy project loans to property owners. One of the big problems with home energy retrofits—particularly high-cost projects like window replacements or solar panel installation—is that they cost a lot up front. Many people don’t have thousands of dollars sitting around, and they’re reluctant to take on the debt. Another problem is that many homeowners don’t plan to own their houses long enough for investments like solar panels or new windows to pay for themselves, so they don’t pull the trigger. What’s unique about PACE is that the loan is tied to the property, not the homeowners mortgage, and repayment happens through property taxes. In short, project debt stays with the house, even after a homeowner moves. Often, a PACE annual payment will be exactly offset by the energy saving or energy generating project it funds.
A New Reality
Kevin Anderson, from the Tyndall Center for Climate Change Research at the University of Manchester, and many others have argued that society is at risk of missing the opportunity to keep warming below 2 degrees Celsius (2 C), the threshold widely seen to be the difference between adaptation and disaster. A 4 C rise in global temperature would threaten civilization. He writes: “There is a widespread view that a 4 C future is incompatible with an organized global community, is likely to go beyond ‘adaptation,’ is devastating to the majority of ecosystems and has a high probability of not being stable. (Meaning 4 C would be an interim temperature on the way to a much higher equilibrium.)”[7]
In short, we live in a new world, one in which the best efficiency efforts of the past are not good enough by, roughly, an order of magnitude. Clearly, the challenge is enormous. But from a purely financial standpoint, the benefits are substantial. And if you add ethics to the mix, the rewards of rapid and aggressive action become infinite.
REFERENCES1. http://tinyurl.com/9m7v5de2. http://tinyurl.com/7ds3gc53. A good question for further discussion is “What in fact is a corporation’s full energy efficiency potential?” Amory Lovins would say it’s very high—perhaps 75 percent reduction—while others might argue that 20 percent is all an average business can expect to achieve while still focusing on its core business.4. http://www.c2es.org/docUploads/Final%20ACEEE%20survey%20paper.pdf5. http://tinyurl.com/9zop8986. ESCOs are a good way to achieve deeper savings, but they tend to discriminate based on scale. Because ESCOs need big savings to make their financial models work, they focus on huge energy-using entities like schools, hospitals or corporate campuses. That leaves out companies that are aggregates of smaller buildings, smaller businesses or households.7. http://tinyurl.com/5ub7cfn
Auden Schendler is Vice President of Sustainability at Aspen Skiing Company and author of the book Getting Green Done: Hard Truths from the Front Lines of the Sustainability Revolution. This article originally ran in the November 2012 issue of EDC and was reprinted with permission.
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