Designing a ‘One Knob’ Incentive Program
A proposal for a better way for utilities to subsidize energy-efficiency upgrades
Author's note: This series is aimed at the home performance industry. My company values transparency, so we put it in the public sphere for homeowners to see and understand our thinking.
In a recent article, I told the warts-and-all story of how energy efficiency program design was a huge factor in putting my award winning business under. I promised to talk about solutions this time.
If you are the type whose initial response to new ideas is typically; “No, No, NO!”, you probably should read no further.
... If, on the other hand, you are comfortable having your schemas stretched and altered, if you are open to and enjoy having your thinking challenged, hopefully you will enjoy this.
You’ll note that my tone in this article may be a little harsher than usual. There was no other way to write it. At some point, no matter how nicely you put it, those who stretch the truth may find the truth offensive. Ultimately this is not an attack on bad people, but rather bad structures. This series of articles is an attempt to expose harmful program structures that pervert process and prevent optimized outcomes — and then to offer a different path, a path that removes perversities and aligns all stakeholder interests.
The phrase “energy efficiency programs” (or just “programs”) refers to utility-sponsored or state-sponsored programs that offer homeowners a rebate, incentive, or subsidized financing to make energy efficiency upgrades in their homes. Many of these programs work under the Department of Energy’s “Home Performance with Energy Star” program (HPwES).
Goals of “One Knob”
Whining without proposing a solution is an awful thing to do, so here are three key goals that any good program should achieve. These three things are necessary components to keep programs on track. Without these attributes it is unlikely that Home Performance (HP) will ever scale:
- Focus on results. Let market forces rule. Free contractors to sell projects that solve homeowner problems. Get bureaucrats out of project decisions and leave the improvement decisions to the collaboration between homeowners and contractors. Stop telling how to achieve program goals — just provide rewards to the extent that program goals are achieved.
- Accountability. Provide real accountability and real energy savings. No more claiming credit for “hopeful projections.”
- Market transformation. Deliver remarkable results to homeowners so that they tell everyone they know.
These sound nearly impossible, don’t they?
They’re not. They can all be achieved with a program called One Knob (as in “one volume control”). Even better yet, this can be achieved with current contractors, current employees, current programs, current equipment, and current technology. It will take a little retraining, but not much.
(Briefly, the “One Knob” proposal calls for the level of incentives paid to be based on saved energy. If 10,000 kWh per year are projected to be saved, and the rebate is $.40 per kWh saved, then the homeowner gets a check for $4,000. Contractors have the most control over results, so the contractors will make the projections. The program will publish contractor metrics — that is, actual energy savings compared to projected savings — and will rank the contractors based on these metrics. High-ranked contractors will get automatic job approval, leading to less administrative overhead for the contractor and the program.)
I'll eventually fill out the program concept. But first, a discussion of what currently exists, and then what is possible to attain for the three desired goals (a focus on results, accountability, and market transformation).
What exists today: Programs built without considering results
Energy efficiency programs are complicated. The simple ones like the one that killed my business have simple rules, but they complicate work scopes, the sales process, and the jobs themselves. More complicated programs have rules so complicated that they are laughable, except it’s not funny. (1)
In part, this comes from programs trying to make sure homeowners, ratepayers, and taxpayers don’t get cheated, but they end up cheating homeowners out of results and contractors out of sustaining profits.
Stakeholder priorities are badly misaligned, as well. Program objectives are for high project count and to claim the highest amount of dubious energy savings possible. Homeowners don’t care that much about saving energy; they’re more interested in solving comfort and control problems, and frankly they are very skeptical of energy savings claims.
Programs control from above
Currently, either directly or indirectly, project work scopes are created by bureaucrats who don’t actually do or sell the work. These bureaucrats don’t talk to the homeowner, they don’t have to manage the crews, they don’t have to worry about overhead or any of the other things that come with running a real company, and they don’t worry about homeowner outcomes.
This is true of both the simple rebate programs like the Dominion East Ohio program in my region, or the programs created by Efficiency Vermont, or the much more complex programs in New York and California. This makes working with programs very complex and screws up incentives, because all parties are pulling for different things.
Incentives are misaligned and often perverse. Check this out: "There was a huge emphasis on quantity even if the quality was very poor. Managers often resorted to lying to meet unrealistic quotas. They suffered from perverse incentives that placed fulfilling political goals ahead of efficiency. Firms in general had little incentive to be efficient or control costs."
That sounds like home performance programs, doesn’t it? It’s actually from a blog by Robert Nielsen about why communism failed. The author goes on to say, "One of the greatest failings of communism was its inability to innovate."
In the end, what was one of my biggest complaints about the program I worked with in Ohio? My flexibility was severely limited; I couldn’t innovate. I had to do work one way: the way the program wanted. I was not able to let market forces work and deliver what clients were looking for. We just chased rebates, taking our eyes off solving systemic problems. This seems to be true of every program in the country.
While it’s still early, my current projects which receive no program assistance are running in the $15,000 to $40,000 range. My old average job was $2,500. This is what happens when you slow down, build trust, and really focus on homeowner wants and needs. There are still trust barriers that impede sales. If these projects had third-party results tracking and could get incentive for energy savings, or on-bill financing, this approach is likely to take off.
Trouble at the kitchen table
Programs make life at the kitchen table, where all projects are sold, much harder. They are friction when we need grease.
Complex rules change; work scopes get changed to fit rebate or fuel type requirements; jobs get adjusted on the fly; rebate structures change; jobs get shut down because they don’t meet payback requirements… and on and on.
One of the worst problems caused by managing projects from above is that it creates a culture of collusion. Contractors are often forced to lie to get a job approved and pay their bills. (2) Program implementers spend time teaching contractors to game models to “pass” instead of helping them improve diagnostic and design skills.
Programs are essentially trying to control home performance work from the top down, not unlike the communist-controlled Soviet economy. How did that work out again? To be fair, this is true of most large bureaucracies. The term “red tape” exists because of bureaucracy.
Summing up: programs just aren’t simple or results-focused, and this leads to all sorts of accidental barriers that keep home performance work from scaling up.
Focusing on results: What could be
What if programs only had One Knob to adjust? What if this simple adjustment was aimed specifically at delivering actual energy savings and solving homeowner problems?
One singular adjustment that could be changed, with changes that could be announced months in advance, so there weren’t ugly surprises at the kitchen table? What if this knob could be used to speed up or slow down the market predictably like the Fed does with the discount rate? What if this could drive us towards performing comprehensive energy retrofits to millions of houses instead of thousands because it actually solves homeowner problems?
What if a massive industry focused on results could come into existence, one that could finally put a happy ending on the Great Recession? One Knob can do this. Details are coming. Stay tuned.
Accountability: What exists today
Currently there is no real accountability for results, either for solving homeowner problems or for actual energy savings.
Contractors can blame programs for hamstringing them when projects don’t deliver what was promised. Programs can blame contractors for doing shoddy work. Utilities take the “lies” from programs to give to Public Utility Commissions mandating energy savings, and nothing really gets accomplished. Fingers point every which way.
Homeowners spend lots of money with mediocre results, and contractors are exhausted by constant program changes created by bureaucrats who make these changes to justify their existence. No one party actually is accountable or rewarded for actual results.
To repeat, this is not the fault of people; it is the fault of the structure. Programs are not market-based.
Programs often have absolutely shocking costs per project due to a lack of accountability. Energy Upgrade California has spent $200 million in overhead costs since inception to deliver 3,615 jobs. That’s $25,000 per job in overhead, before incentives. (3) This is for jobs that are substantially smaller than $25,000 each. Worse, those projects deliver to the consumer only one third of the energy savings projected by Energy Upgrade California. This program has achieved less than 10% of its goal, by the way.
California is easy to shoot at because it has been so ridiculously wasteful. Their 34% realization rate is the worst of the published program results. New York is in the 45% to 75% range, depending on fuel.
Other states have published results which hover in the 40% to 60% range. Who is holding these folks accountable? If a friend borrowed $1,000 and paid you back $600 and said, “We’re square,” would that be good? That’s what programs and our industry are effectively doing. We’re lucky no one actually tracks their energy bills, or there could be a lawsuit. It doesn’t have to be this way.
All the while, naive and idealistic contractors struggle to make a living in the home performance field. I tapped out with a program-dependent business model. The system is wasteful, inefficient, and can’t provide a decent standard of living for contractors.
In the current world of contracting there is a fervent race to the bottom on price and quality. I starved to death trying to provide quality without charging enough for it, and Energy Smart is far from alone. Chris Dorsi, author of Residential Energy and founder of the Habitat X Conference, advocates for higher pay scales for insulation contractors, so it’s a common problem.
Without metrics for quality or accountability for results, doing anything more than the bare minimum is a competitive disadvantage.
Accountability: What could be
Accountability, through the trust it creates, can be its own reward. One Knob can create a system where excellence is recognized and exalted. This will push the best contractors to the top and allow them to charge more for their services.
J.D. Power and Associates did this for the automobile industry. The company took an industry with terrible quality and no metrics and created a ranking. The ranking rewarded Honda and Toyota and almost bankrupted the Big Three. Now quality is significantly better throughout the industry, and ten-year-old cars with 150,000+ miles are common. Consumers and the high-quality companies won; low-quality companies had to raise the bar or die.
Once you make quality a ranking metric, quality matters. What is quality in home performance? Measurable results.
The home performance industry is one of the few construction disciplines that actually has measurable results, not just customer satisfaction metrics. We have lots of metrics to rank contractors on: actual energy saved, actual vs. predicted energy saved, actual blower door reduction, actual vs. predicted blower door reduction, $ invested/energy saved — the list goes on and on.
With HPXML, we have access to ALL of this. (HPXML is a central database that pulls information from various energy modeling software for easy analysis by programs.) We have this right now. Today. Very little new is required.
Market transformation: What exists today
I was born in 1978. Energy efficiency programs have been in place in one form or another since then. I’ve heard that at current job volumes, it will take 500 years to retrofit the homes that need to be retrofitted in the next 20 years.
The large Home Performance with Energy Star (HPwES) programs were projecting 0.5% growth for 2013. Wouldn’t we need just a little bit faster growth than that to get there? Tell me how we’re achieving market transformation right now?
I’m a home performance consultant. I was an home performance contractor. Yet I couldn’t define home performance for you three years ago. We only barely have a name for ourselves. Consumers have no clue who we are. About one home performace job per 1,000 HVAC(Heating, ventilation, and air conditioning). Collectively, the mechanical systems that heat, ventilate, and cool a building. jobs is done, according to the recently passed Phil Jeffers. How is that “winning”?
California has only hit 10% of its goal. New York is watching contractor participation, job size, and job count fall. My program with Dominion East Ohio has turned into a glorified HVAC rebate program. One program in Connecticut is an HVAC-only program — how is that home performance? How is that comprehensive, whole-house thinking? How are we winning again?
Currently, the parallels between communism and current energy efficiency programs are so strong that I can literally lift passages of articles about what made communism fail and drop them into this paper.
Could anything that can be so directly and easily compared to communism possibly be expected to achieve capitalistic market transformation?
Market transformation: What could be
What makes someone excitedly tell their friends about something? A spectacular result.
Comprehensive home performance work that goes beyond an attic insulation job, but stops short of a deep energy retrofit, can deliver spectacular results. If we gain sufficient control over heat, air, and moisture movement, we can deliver the Four Tenets of Home Performance: comfort, health & safety, durability, and efficiency. These are projects that anyone with about $75 a month or more to improve their home can do.
How nice is it to be comfortable in your home all the time? Or to not worry about icicles ripping down your ceiling ever again? Or to have your kid’s asthma, that landed him frequently in the hospital, subside? The home performance industry can deliver remarkable results. It truly requires systems thinking, but we can do it. And those results can help create a groundswell. Programs can play an important role.
Here are some of the benefits of home performance market transformation:
- A healthier, longer-lived populace, with reduced allergies, asthma, flu, colds, carbon monoxide poisoning, etc. (Health & safety is the second tenet of home performance, after all.)
- A more comfortable populace. Home performance work improves indoor environmental quality, or total comfort.
- A more productive populace. Comfortable people are more productive.
- A healthier planet: substantially reduced usage of fossil fuels (and an easy transition to pure renewables at little or no additional cost).
- Jobs. This is literally a trillion dollar industry at a very conservative $10,000 per home times 100 million existing homes. Think that could help out a bit in providing jobs?
- Happier, more productive, more innovative contractors. If programs were ridiculously simple yet provided solid accountability, contractors would be free to figure out results driven best practices.
That sounds pretty nice, doesn’t it? It’s within our grasp. We just have to get programs out of the way by focusing on results, implementing accountability, and using both of those to drive towards market transformation. This new program design, One Knob, is very simple and easy to understand.
More details on my One Knob proposal are coming in an upcoming article.
Want to help?
- Share the heck out of this! Comment! Make noise! Nothing is going to change unless we push for it.
- Go join the Linked In “Get Energy Smart” group. We’re going to need help making enough noise to get things changed, so please add your voice! We’ll update you with action steps there as well.
- Connect with me on Linked In and mention “One Knob.” Feel free to email me at nate [at] energysmartohio [dot] com.
1. Here is an example of bad program design, but first a definition. A negawatt is a saved watt of energy, or negative watt, defined by Amory Lovins of the Rocky Mountain Institute. Here is an actual example of how the Negawatt kicker (incentive) works in the Energy Upgrade California program. Would you like something that works like this? Or something simple? The kicker is $0.75/kWh if the home doesn’t have existing AC, $0.30/kWh otherwise, and $1.60/therm. A minimum 10% total site savings needs to be projected. The percentage-based component starts at $1,000 and increases by $500 for every addition 5% projected. The electric and gas savings are then modified by factors designed to counter (as you might have guessed) historical over-projection. Kwh savings are left alone if no AC, but hit with a 0.4 modification otherwise (60% reduction). Gas savings are hit with a 0.8 factor. For instance, a home without AC that models 25000/18000 kwh existing/improved, and 1100/800 therms existing/improved would be 27.6% site savings. Modified by the therm factor, it would be 24.5% savings, which puts it in the $2,000 tier with a $5,250 kwh and $480 therm kicker, for $7,730. Is this the best we can do?!
2. In New York, jobs must “pay for themselves” and have a 1 SIR or better, meaning the energy savings from the project will pay for the project within the lifespan of the improvements. The trouble is, with current low energy prices, that just doesn’t happen. So what do you do? You lie. You inflate initial blower door numbers. You fudge the model to show really high initial usage. I have this directly, and off the record, from multiple contractors in New York. This also leads to crappy realization rates. If I promised to make your pickup truck get 50 mpg, is there any prayer I might deliver? Nope. But I had to say that to get the program to say yes to the project and feed my family. That is a great example of a perverse incentive.
3. This is per Ori Skloot in an update video about EUC 2.0. (Go to 2:30 in the video).
Nate Adams is a recovering insulation contractor turned Home Performance consultant. His company, Energy Smart Home Performance, is located in Mantua, Ohio. Using a comprehensive design approach, he fixes client woes with a market-driven process that he hopes will lead to market transformation for our industry.
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