When people think about energy efficiency innovation they often think of technology. LED lighting or the Nest thermostat come to mind. Technology innovation is cool. Who wouldn’t want to get bought by Google? And new gadgets are fun. But for energy efficiency, much of the most important innovation has nothing to do with developing new efficient technology and everything to do with delivering that new efficient technology that’s already out there to energy consumers.
Buildings don’t have just one energy-using technology. They have hundreds. Lights, fans, motors, chiller, drives, and pumps all contribute to energy use, to say nothing of appliances, computers, and other equipment. An improvement in the efficiency of one of these technologies helps, but increasing the efficiency of a single piece of equipment does not transform a building’s use. For that transformation to happen, many pieces of equipment need to be efficient. Then, to achieve energy efficiency on a large scale, that efficient equipment needs to be installed across millions of buildings. Therein lies the key challenge: How to deliver a range of newer, more efficient technologies to millions of buildings.
The need to meet this challenge is driving innovation by policymakers, companies, and utilities. These innovations are not as easy to see as the latest gadget, so they get less PR than Nest. But they span all aspects of the energy market, they are real, and they are enabling big gains in energy efficiency. A few examples follow.
Commercial vendor innovation
In Massachusetts, a change in how utility programs are delivered enabled one company to transform the business of providing residential weatherization services. When you come down to it, this business is primarily about installing insulation – hardly an area of rapid technological change. However, this company has both expanded the market and captured big market share by delivering this old “technology” in new ways. One of many firms authorized to deliver the utility’s residential program, this firm works with cities and towns to brand the services as a municipal efficiency program as well. This is great for the municipalities because they get to offer a program without having to pay for it. And, it is great for the firm. The municipal brand gives them credibility with potential customers and boosts sales by creating the sense that home weatherization is part of a group initiative of societal importance and not just a home improvement project.
A second innovation comes as their relationship with the consumer evolves. Once they are working with a consumer, they sell other energy services, like solar. The end result is they become the one vendor that consumers think of when they think of any kind of energy service. This increases the odds that homeowners will explore a broader array of clean energy services than they would have otherwise.
Key to this program delivery strategy was a change in the way utility programs are delivered. In the past, a single vendor delivered the utility’s residential program. Now, the utility has opened the market to multiple companies. This open market has created competition, which has spurred the kind of creative thinking that made it possible for this company to work with more than 75,000 households already.
Energy efficiency program administrators at utilities in several states have been changing the point at which they intervene in the market. Traditionally, equipment replacement programs have focused on the point of sale. They have offered customers a financial incentive for choosing an energy efficient product at the time they make the purchase. While this approach has been quite effective in many ways, it is less effective when equipment fails. At that point, typically the equipment must be replaced immediately, and consumers have little time or patience for deliberating about making a change to a more efficient model. Also, there is no time to special order an efficient model. The failed equipment will be replaced with whatever the distributor has in stock.
In contrast, “upstream” programs pay an incentive to the distributor in exchange for stocking the efficient equipment. These incentives also enable distributors to offer that efficient equipment, which can come at a premium price, at the same price as standard equipment. With efficient equipment both available and price competitive right when the consumer needs it, efficiency becomes an easy choice when replacing failed equipment.
In Virginia, a state program focused on reducing barriers to the delivery of energy and stimulated more than $500 million in energy performance contracting in state and municipal buildings. The program’s success comes from three key changes:
- The state modified procurement laws to fit performance contracting
- It adopted a standard contract to reduce transaction costs
- It funds a single staff person to educate customers about the value of performance contracting and how it works and provide technical assistance
Importantly, the state’s success does not come from developing new technology, or installing technology, or even paying for technology. Instead, the success comes from making it easier for existing service companies to deliver existing efficient technology to customers.
The state as catalyst
State governments fall prey to the allure of technology innovation just like the rest of us. Many make it a public priority and even put money behind it. But without big budgets to support R&D, states have only a limited ability to move technology innovation forward. Yet state governments do have two unique and powerful levers: the laws they make that regulate business and energy and the fact that they are usually among the largest energy users in the state. Because of these levers, states are perfectly positioned to catalyze infrastructure innovation, which is fundamentally what delivering energy efficiency technologies is all about.
How do states drive energy efficiency innovation? By focusing on these three things:
- Regulating to support an open market. By insisting that utilities run programs in a market-oriented way, states will create a competitive market. A perfect example is the utility in the first example that changed its policy so that multiple companies could deliver its energy efficiency programs. To be successful, those companies had to establish a market for their services, which meant competing for customers. When you have market competition, you have innovation.
- Finding and removing barriers. While states are not in the best position to support technology development, they are perfectly positioned to remove barriers to technology delivery. Those barriers might include burdensome regulations or program rules that prevent businesses from reaching customers in new ways, as in examples two and three above. Procurement laws and program rules don’t always match the way business works, but with a little creative thinking about them, the states themselves become the innovators and can open up a pipeline of business.
- Becoming a demanding customer. This is less about policy and more about taking on a leadership role in the marketplace. State government is typically among the largest energy users in any state. Whatever they are buying, the market will start selling. So using their size of their own wallets and their own understanding of specific needs, states can spur industry innovation around energy efficient services and even technologies.
Paul Gromer is CEO and founder of Peregrine Energy Group. Previously, he was commissioner of Energy Resources for the Commonwealth of Massachusetts and chairman of the Massachusetts Energy Facilities Siting Council. Paul helped found and served as executive director of two energy trade associations. He is also an attorney.