November 30, 2011
More than half of the states in the nation have created programs to increase the energy efficiency of homes through a comprehensive approach that looks at all opportunities to save energy, from insulation to upgrading heating and cooling systems. When taxpayer and ratepayer dollars are used, it is essential that these programs are reviewed with a cost-effectiveness test that provides policymakers with adequate knowledge about the programs’ effectiveness. Unfortunately, in many states, the testing system is deeply flawed. The way cost-effectiveness tests are currently applied frequently hinders the design and implementation of residential energy efficiency programs, particularly programs intended to support comprehensive energy efficiency upgrades.
For three decades, the Total Resource Cost (TRC) test has been the principle screening tool that regulators have used to assess the cost-effectiveness of energy efficiency programs and make decisions regarding the use of ratepayer dollars to support the programs. Unfortunately, the way the TRC test is applied often leads to support for single-measure programs rather than whole-house retrofits – despite the fact that the whole-house approach actually delivers deeper and more cost-effective energy savings. Because of this, the TRC test, when poorly applied, impedes the realization of significant, cost-effective energy savings through state-run energy efficiency programs.
In general, whole-house programs do not tend to score as well in the TRC test as single-measure programs that encourage highly cost-effective measures, such as lighting. This is due in part to the different ways in which the TRC test is implemented, some of which cause particular difficulties for whole-house programs. The TRC test typically includes participant contributions to the cost of an energy efficiency upgrade, resulting in a poor score for a highly leveraged whole-house program – even if leveraging public dollars with private investment is generally seen as desirable in other contexts. On the flip side, the TRC test fails to capture the full benefits of energy efficiency, such as increased comfort, which are frequently significant, although difficult to quantify. To make matters worse, the TRC is sometimes used to screen each individual measure or project, which might sound cost-effective in practice, but creates confusion about what jobs are eligible, decreases customer interest, and adds to a program’s administrative costs.
New York, which for years has been a leader in home performance programs, recently implemented a rule requiring application of the TRC at the measure-level. As a result, the program’s output is declining after years of steady growth. Elsewhere, the application of the TRC has discouraged the creation of strong whole-house energy efficiency programs, or has forced program administrators to develop create programs designed to pass cost-effectiveness tests, rather than to deliver real energy savings to homeowners.
So what should be done to ensure the cost-effectiveness of energy efficiency programs across the country is more accurately evaluated?
Policy-makers and commissioners should adopt a different tool, the Program Administrator Cost (PAC) test, which compares the cost of reducing energy consumption to the cost of supplying an equivalent amount of energy. The Program Administrator Cost test makes sense as the primary screening tool for energy efficiency programs because it is relatively simple to administer, and provides a good measure of whether an energy efficient program delivers savings at a cost comparable to the cost of generating and supplying energy.
If the PAC test is not adopted as the primary test, a set of “best practices” should be used to administer the TRC test. Examples of best practices include testing cost-effectiveness on a program-wide or portfolio basis (not at the level of individual projects or measures), and including all benefits as well as all costs.
It is clear that the current process of evaluating the cost-effectiveness of energy efficiency programs needs fundamental change. The existing cost-effectiveness tests, as currently implemented, frequently undermine important public policy goals, such as job creation, carbon reduction, and energy independence. We need to stop undermining these important policy goals and ensure that policymakers have the right information, thanks to the right testing, to help homeowners save energy.
For a more detailed report on these issues, please see the National Home Performance Council’s new report entitled, Getting to Fair Cost-Effectiveness Testing: Using the PAC Test, Best Practices for the TRC Test, and Beyond.
Kara Saul Rinaldi is the Executive Director of the National Home Performance Council, a 501-c3 dedicated to encouraging improved home energy performance using a whole-house approach. For more information on NHPC, please call (202)463-2005, or visit www.nhpci.org. She is a guest blogger for Energy Efficiency Markets newsletter. Pick up the free newsletter at www.RealEnergyWriters.com