Pioneering “Pay for Performance” in the Pacific Northwest

Washington State, the land of coffee and clouds, is at it again. As if it is not enough to lead the country in caffeine consumed per capita and cardiac arrest recovery rates [1], it is now hard at work innovating on how to capture building energy efficiency.

Utility-run efficiency programs in Washington have already accomplished a great deal—Washington state ties for fifth in energy efficiency, according to ACEEE. Finding additional savings nonetheless will require a new approach beyond the host of pioneering successes the region is known for—the early deployment of technologies like CFLs and ductless heat pumps, for example. An innovative program called “Pay for Performance” can deliver another caffeinated jolt of energy savings to the region, continuing its tradition of energy efficiency leadership.

Unlocking the Full Energy Savings Potential in Buildings

The Pay for Performance utility incentive program goes beyond the simple lighting or equipment replacements that are the focus of most current efficiency programs, specifically targeting whole-building energy savings. The program determines an energy-savings threshold for the entire building and provides incentives for energy savings beyond that threshold, encouraging retrofit partners to find deeper savings than they might otherwise pursue.

For example, a large office building participating in the program might target energy savings of 30 percent for the entire building, and receive incentives from the utility for each verified kWh reduction. Creating a win-win profit dynamic for developers and contractors alike while helping meet utility efficiency targets can help drive market transformation.

Participating owners and design teams will need to pursue energy savings by addressing multiple systems, and model and analyze the building as a whole. Done properly, this can create a more predictable efficiency resource at a scale of savings that can be quite impactful for utilities. According to Stan Price, of the Northwest Energy Efficiency Council, the program has the potential to offer a more attractive business case for an important market segment and improves the alignment between the financial reward structure and the long-term persistence of energy savings in facilities’.

Similar programs in California, Colorado, New York, New Jersey, and New Hampshire offer incentives for each kilowatt-hour saved above a certain percentage of savings (typically a 15 percent threshold) compared to the building’s prior use or the local energy code. The New York program, started by NYSERDA and administered by TRC Corp, achieves an average of 25 percent energy savings compared to prior use. Recent RMI experience suggests that educated pursuit of the prize can lead to even larger savings, with over 40 percent energy savings practically achievable at a positive return rate.

Barriers and Drawbacks

In theory, Pay for Performance is a proven solution for deeper savings—and a great fit for Washington State. The already advanced energy efficiency providers in the region can work with owners who, according to Price, “get the nexus of technology and human behaviors working together to maximize savings yield at the whole building level.”

Successful implementation will nonetheless require overcoming a few obstacles. First off, as anyone who has worked in retail knows, performance is not always a product solely of better practice. Even the best barista may have trouble collaborating with a less-expert colleague who happens to work the 8 AM Monday shift. Similarly, in buildings, a number of factors can skew performance. Weather, occupancy, and use of the space all impact results. To account for this, measurement and verification (M&V) of energy savings is required, and it carries both a modest cost as well as an operational consideration. Typical M&V occurs immediately after the project is completed, and therefore cannot ensure that the energy savings continue in the years to come.

While whole-building approaches generally offer deeper savings, they also require up-front analysis and energy modeling. The old incentive structure with single, pre-set incentives works for many people. Some owners may not have the time or money to invest in a more comprehensive project—and prefer routine incremental improvements.

In a workshop led by the Northwest Energy Efficiency Council and Rocky Mountain Institute, the local utilities, service providers, and major customers discussed the options and how to overcome these technical barriers.

Workshop attendees addressed the issues with known solutions. The cost of M&V decreases through standardization and repetition across projects. The issue of persistence of savings can be partially managed by structuring the performance incentive as an annual payment, determined through multi-year M&V and supported in some cases by ongoing retro-commissioning.

Other strategic issues, such as how Pay for Performance interacts with regulators’ requirements and current programs, require thoughtful coordination. And despite better service providers and more effective equipment, some energy projects do fail. Pay for Performance shifts the risk of failed projects more onto the building owners, as the utilities wouldn’t have to provide incentives due to a lack of energy savings.

Participants in the workshop heard many barriers and constraints through the day. But the key turning point was the afternoon session, when customers arrived to hear about the program and provide their input. Customers appreciated the support such a program would provide for improving their cost base and competitiveness. They saw exciting future possibilities in fuel switching, total demand reduction incentives, and instantaneous demand management. Overall, customers wanted greater energy savings and a whole-building approach, and voted overwhelmingly in favor of a pilot program to test the Pay for Performance concept.

Steps Forward

After the workshop, Seattle City Light committed to explore further the Pay for Performance concept. Seattle and the Pacific Northwest already lead the nation on implementing energy efficiency, and much of the easy lighting energy savings have already been tapped. Now the region is targeting a new business model around deeper whole-building savings.

Service providers, including Energy Service Companies (ESCOs), have in recent years discovered that their markets and customers increasingly demand deeper energy solutions and higher-performance buildings. Now utilities are participating in this new market as well.

Pay for Performance is an important lever that taps the knowledge and innovation of energy experts and building managers to find the deeper energy savings possible in buildings. This new approach will not only benefit the utilities running the programs, but ratepayers, service providers, and energy-using customers in the Pacific Northwest.

A new era of energy efficiency programs is nearing—and the Pacific Northwest is on the right track to once again lead the nation.

Highlighted Resources

[1] Much like an effective energy strategy, Seattle & King County’s strategy for improving cardiac arrest recovery rates incorporates many stakeholders, including bystanders often trained in CPR and emergency call responders prepared to walk callers through basic assistance. Program operators scrutinize collected data to produce year-over-year improvement in patient outcomes. And (unrelatedly), CNBC and others report that Seattle has the highest per-capita consumption of coffee.