As many of you are aware it’s hard to shoot a moving target. Since its inception the Energy Upgrade California (EUC) rebate program has been a moving target. This can be challenging for participating contractors as they must constantly stay abreast of the changes and incorporate them into their workflow. Why is this the case and what can we do about it?
What are Incentives For?
The first question that needs to be addressed is what are incentives for? It seems pretty straightforward until you dig a little deeper. I think the obvious answer is to motivate people to make a decision, that’s true for sure. In the case of rebate programs the incentives are designed to help get the industry off the ground until it can stand on its own, widely referred to as Market Transformation. So incentives are there to motivate people to, in this case, invest in energy upgrades for their homes with the intent of building a self-sustaining market. Sounds good on paper but how do you get there?
In all fairness to the folks who design rebate programs, this is a huge challenge. Why? Like many other things in life if you follow the money things get a bit clearer. Perhaps the biggest hurdle is that California’s energy incentive programs rely on Ratepayer funds. This means the incentives are actually being paid by you and me, not the Utilities, I hope that is no surprise. With ratepayer dollars come huge strings, strings in the form of regulations intended to protect the consumer.
Back to the money trail.
So rebates are funded by consumers, paid out by utilities who use program administrators to run the programs and the whole process is overseen by the California Public Utilities Commission (CPUC) using outdated and often irrelevant regulations with the intent of transforming a market. What’s so complicated about that? I think you can see this is not an easy nut to crack.
This brings up the recent changes to the Home Upgrade rebate program which effectively lower the incentives for Home Upgrade vs. Advanced Home Upgrade. To those of you who having been playing in this arena I am sure this is no surprise, as we have seen it coming since the start of the Home Upgrade program. A brief history might help you understand why. Again, please realize how hard it is to design effective programs. There have been many attempts over the years and far more failures than successes.
In the Begining
Let’s start off when Energy Upgrade California was rolled out. The program had two options the Basic and Advanced “paths”. The idea was the Basic path would be a simpler approach for those entering the industry and the Advanced Path was for the most seasoned players looking for more savings and higher rebates. As it turns out the Basic path was not much easier to participate in than the Advanced path and the incentives were much lower. The end result was very few contractors were submitting Basic Path jobs. I believe it was less than 15% of the total, if even that. A second concern was the numbers of jobs. EUC jobs were not being submitted at anywhere near the rates predicted by the program designers. The challenge became how do we get more contractors and homeowners to participate? The CPUC was turning up the heat on the program administrators to get more jobs done each year so what were their options?
This is where it gets tricky.
Do you increase the incentive amounts? Do you reduce the effort required from contractors to participate? If volume goes up does savings go down? How do you get the number of jobs submitted up to meet the CPUC’s demands? This is where the Home Upgrade program was born. The logic that perhaps if there were two programs, one simple and one more complex, we could get more players sounds familiar. This time, though, the simpler program had greater potential incentives and a new structure.
The new Basic Path, now revived as Home Upgrade, required much less contractor time, no energy models to predict savings, easier paperwork and a simple to understand checkbox (prescriptive) approach. From the contractor’s perspective, I think many asked the question of why would I want to go through the hassle of an Advanced Home Upgrade job, and the required energy modeling, when I can get almost the same incentive with much less of my valuable time? As it turns out, the Home Upgrade program swayed many contractors away from Advanced Home Upgrade. It was simple, easy to use and required much less of a very limited resource - time. So why did they recently change it and create yet another moving target?
Let’s go back to what incentives are really for.
Energy efficiency rebates are intended to save energy, it’s that simple. In the most basic sense, the metric is how many ratepayer dollars are being spent per unit of energy saved. What does this have to do with program changes? The answer is in the details.
It turns out that last year (2015) there were 1819 Advanced Home Upgrades in California compared to 1832 Home Upgrade jobs. (Sabrina Gomez PPT from Contractors Exchange) The average modeled savings for Advanced Home Upgrade jobs was 22%, I think we all recognize by now that this does not represent actual savings (the M word) but none the less this is the savings prediction. In comparison, the Home Upgrade projects averaged 9% predicted savings in 2015. Honestly, any upgrade that only generates 10% is a pretty poor effort if you ask me. Think about this for a minute, as it is your money they are spending. How do you feel about a program that delivers less than half the savings for the nearly the same price? The CPUC wasn’t very happy either.
I think now you might recognize what needed to be done. Encourage more contractors to do Advanced Home Upgrade jobs and deliver greater energy savings. How do you do this? Make the Home Upgrade path less attractive and persuade more contractors to do Advanced Home Upgrade jobs. This is why the Home Upgrade program has been changed - to encourage more Advanced Home Upgrade jobs, deeper retrofits, and potentially larger energy savings. The potential downside is job volume will likely go down. This is the Yin and Yang world of program design and administration. It is not an easy game to play.
We do believe there is a better way.
The future is heading towards a market where incentives are paid out based on actual energy savings. This means using empirical data versus modeled savings to determine savings and incentive amounts. This is referred to as a Pay for Performance approach. It might frighten some as this is a paradigm shift in thinking.
Imagine how the layers and layers of program designers and program administrators must feel. If we simply pay-out on energy savings they will not have complicated programs to manage and constantly change. The results will be clearly defined and measurable, no more predictions or software surprises. In this model there is the potential for private capital to fund the rebates, this removes layers and layers of regulation intended to protect the consumer and relies on profits to shape the market, as with most other things in our world. Contractors can build business models based on what works, not what the program requires.
Pay for Performance won't be easy as there are many questions to be answered and problems to be solved, but at least, it is a new approach that has great potential. We have supported this effort for years and feel it is a much better solution than what we have today.
The bottom line is if something doesn’t change how long do you think the current program can last? I can’t predict the future but I assure you that a program that is complicated to run, expensive and only delivers 10% predicted savings is not a long term solution. With the State’s new aggressive energy savings goals of 50% reduction where does a 10% effort fit in? How long do you think the current status quo can continue before the CPUC pulls the plug? This is not just fearful speculation but the truth about what policy makers are dealing with today. We say embrace change, support a new model, learn about Pay for Performance, and perhaps you will spend more time working and less time chasing moving targets.
Efficiency First California