Energy efficiency rebates under scrutiny as cost effectiveness is questioned
August 01, 2014
Oregon's utility regulators are struggling to determine whether ratepayers should continue to subsidize some of the most common and popular home weatherization measures, even when those measures are no longer considered cost effective for homeowners.
Blame the low price of natural gas. Blame the historical success of Oregon's energy efficiency efforts, which have already captured much of the low-hanging fruit. Or blame – as many energy efficiency advocates and contractors do – the cost benefit formulas that regulators use.
But the fact is, strictly from an energy savings standpoint, most forms of insulation and air sealing don't pencil out as a good investment for owners of existing homes heated with natural gas. The payback simply isn't there. In many cases, it's not even close.
The cost effectiveness math still works for homes heated with electricity, which is more expensive. And the problems aren't as pronounced for multi-family and new buildings heated with gas, though they exist in those programs, too.
This is not a new issue.
The nonprofit Energy Trust of Oregon, which funds rebates for conservation and efficiency measures from a monthly surcharge on customers' gas and electric bills, determined two years ago that the weatherization measures in existing homes weren't meeting the cost-effectiveness test. Its evaluations showed that energy savings were lower than expected and costs were higher. Low gas prices were also reducing its forecast of avoided costs.
It asked the Oregon Public Utility Commission for a two year exception to the cost effectiveness standards while it tried to improve results – a grace period that expires in October.
Fundamentally, the rules demand that the benefits, in the form of avoided costs from energy savings over the life of a specific measure – say 45 years for insulation - exceed its total cost.
It's a threshold test — whether the investments make economic sense when all the costs and benefits are counted. It also provides some assurance that homeowners aren't subsidizing utility energy purchases because they're misinformed about the payback and encouraged by the incentive.
But if the math doesn't work, it could also mean the end of the weatherization subsidies that some consumers find valuable, and a significant change for Oregon's efficiency industry as it exists today.
The Oregon Public Utility Commission's staff held a workshop in Salem on Tuesday to consider its options and get feedback from efficiency and ratepayer advocates. It will release a draft report recommending actions on Aug. 13 and is welcoming public comments. The commission will meet in late September to vote on those recommendations.
It's a controversial question, as the value of home weatherization is part of the region's energy orthodoxy, a bedrock assumption that has been drilled into Oregon consumers for three decades, heavily supported by ratepayer investments, and backed by an army of contractors who don't want to see the programs dismantled at a time of historically low gas prices.
That's what happened in the 1990s, when forecast electricity prices dropped so low that utilities shifted away from energy efficiency in favor of building new generation. Then energy prices spiked, leaving ratepayers worse off.
On another level, it's an equity issue.
With a monthly surcharge between 4 and 5 percent on their energy bills, residential and small business customers pay more than half the freight at Energy Trust of Oregon. Weatherization measures are some of the most accessible projects, homeowners' first point of engagement in the process.
Moreover, from a utility standpoint, most of the weatherization measures still make sense. Utilities are obliged to buy all cost effective energy efficiency before considering building new power plants. And the underlying energy savings on weatherization are still sufficient to provide a payback on the incentives funded by their ratepayers -- as long as homeowners are willing to foot most of the bill.
Overhead and program delivery costs account for about half of the Energy Trust's annual spending on efficiency in existing homes. And it has considered a variety of ways to tweak its delivery of the labor intensive, low-savings weatherization measures to make them more cost effective, said Fred Gordon, the nonprofit's director of planning and evaluation.
But in a recent filing with the PUC, the Energy Trust identified about two dozen efficiency measures that no longer meet its total cost benefit test in gas-heated homes. They included the mainstays of most home energy retrofits, like wall, floor and ceiling insulation, duct sealing and whole home air sealing. Last year, the gas portion of ETO's existing homes program as a whole didn't pass the cost-effectiveness test.
One focus of efficiency advocates at Tuesday's meeting was convincing the commission to change its total resource cost formulas to reflect non-energy benefits of weatherization.
Those include improved comfort, air quality, sound suppression and potentially higher property values. In many cases those benefits aren't quantifiable. But some contractors say they're often the primary reason homeowners go ahead with the jobs.
The PUC formulas already include a 10 percent premium for those benefits, but advocates think it should be higher, as it is in some other states.
"We don't think we're doing the calculations correctly," said Wendy Gerlitz, a senior policy associate at the Northwest Energy Coalition. "We've always been doing the test wrong and we just didn't realize or care because historically, these measures were a great deal for everyone. But there's a lot of research out there showing the actual values are much greater than 10 percent."
In fact, some contractors say the incentives make little difference these days.
"It's not the rebate that gets the projects," said Colleen Neel, director of energy services at Richart Family, Inc. "It's comfort and convenience. That's why most of our customers buy from us. We're incentivizing things that people are going to do anyway."
Neel says the Energy Trust would be better off redirecting its weatherization money into more effective measures, such as high-efficiency furnaces and heat-pump water heaters, which generate serious savings and pay for themselves in a matter of years.
Customer motivations are a complex mix, however.
Many advocates think rebates are a valuable part of the decision process. And they argue that weatherization reduces the risk to ratepayers of gas price volatility, which should be reflected in the cost effectiveness formula as a benefit.
Another idea: Bundling a set of weatherization measures into a basic utility service. Measures that help a home achieve a basic efficiency threshold would be exempted from the cost effectiveness strictures.
"This idea that we can look at each discrete measure and ask that it meet the cost effectiveness test may not be effective for the system," said Scot Davidson, with Clean Energy Works Oregon, which provides one stop shopping for whole-home retrofits and arranges on bill financing to cover the cost.
Clean Energy Works, along with other whole-home retrofit programs administered by the Energy Trust, have been singled out as a particularly high cost way of buying energy conservation. But Clean Energy Works contends its clients are getting a solid return in terms of overall home performance. The community is also benefitting from higher wage jobs it creates under so-called "high road contracting standards."
"We think homes should be regarded in a systems view, where we combine things, and get the right things out there so our customers can have efficient, healthy and comfortable homes," Davidson said.
Jason Eisdorfer, head of the PUC's utilities program, sounded a note of caution about the bundling approach.
"Don't go forward thinking that's where you're going to throw all your measures that just aren't cutting it," he said, adding that commissioners are unlikely to look favorably on a backdoor way around cost effectiveness. "Keep being creative, but make sure there's discipline around this."
Finally, efficiency advocates suggested that the PUC should stop requiring the Energy Trust to calculate separate cost effectiveness ratios for measures in gas and electrically heated homes. Homeowners move. They rarely realize all the benefits of their weatherization investments, many of which are permanent. In the end, it comes out in the wash, and the cost effectiveness should be calculated at a program level.
Advocates say Oregon has spent 35 years building a substantial weatherization industry, and encouraging residential customers to tighten up their homes. Those programs have garnered big savings over time, reduced the need for new resources and lowered ratepayers' energy bills.
"The system is working," Gerlitz said. "Lets keep it intact and tune up a few areas, not throw the baby out with the bathwater."