Deep Energy Efficiency is Finally Ready to Scale and Utilities Will Actually Love It

Ian Guerry

To say the electric grid is transforming at an unprecedented pace would be a major understatement. For utilities, customers, energy service providers, investors and all who are connected to and reliant on the grid, these are exciting and uncertain times. According to GTM Research, residential solar has reached grid parity in more than 20 states. A recent blog post from The American Council for an Energy-Efficient Economy (ACEEE) details energy efficiency’s steady annual increase as a component of the PJM capacity market since 2009, demonstrating how energy efficiency has become a reliable and predictable resource on par with traditional sources of generation. The recent Paris Agreement and reports from Citigroup and the Economist Intelligence Unit all seem to underscore the urgency around curbing carbon emissions and the potentially disastrous environmental and economic impact of inaction. Whether motivated by environmental, geopolitical or economic reasons, the unanimous consensus seems to be that energy efficiency just makes sense.

With a recent boom in new financing mechanisms such as Commercial and Residential PACE and On-Bill Repayment/Financing (OBR/OBF), various iterations of performance contracting and shared savings agreements and the emergence of energy efficiency performance insurance mechanisms, stakeholders have more opportunities to invest in energy efficiency products than ever before. So why haven’t we seen a bounty of deep energy efficiency retrofits, a large scale capital deployment or the emergence of multiple secondary markets for energy efficiency loans? For example, the first securitization from the Warehouse of Energy Loans (WHEEL) was issued in 2015 at just over $12 million – a far cry from the estimated hundreds of billions in potential energy efficiency investment opportunities available. In addition to barriers such as an insufficient pipeline of projects, insufficient project data to evaluate risk, inconsistent regulatory environments and tenant / landlord split incentives, utilities are often disinclined to invest in energy efficiency beyond regulatory requirements. Declining revenues and fixed costs make it challenging to find a financing structure that maximizes the value for all stakeholders.  Traditional energy efficiency transaction structures and nearly all of the emerging structures rely on reducing utility sales of energy to a building.  We should not be surprised that utilities find that troubling.

In response to these complex challenges, the Metered Energy Efficiency Transaction Structure (MEETS™) model emerged. MEETS, which operates on Amory Lovins’ principal that efficiency is energy, just might be the solution to fix the transaction imbalance, moving utilities away from a reliance on publicly funded incentive dollars towards metered, whole building energy efficiency projects self-financed through an Energy Efficiency Power Purchase Agreement (PPA). The first MEETS PPA was launched in 2015 by Seattle City Light in partnership with the Bullitt Center. Essentially, the PPA is similar to a standard wind or solar power-purchase agreement with the utility purchasing negawatts—a unit of power representing the energy saved—instead of megawatts. The process works as follows:

  • An “Energy Tenant” enters into a long-term MEETS PPA with a utility to deliver a specified amount of kWh or Therms savings at a specified price.
  • The Energy Tenant enters into an agreement with a building owner that matches the duration of the PPA and allows access to the building and its energy-related systems.
  • An investor provides capital to the Energy Tenant to fund building improvements.
  • After the improvements are made, the utility bills the customer using a new type of virtual meter called a “normalizing baseline meter” or a “dynamic baseline energy efficiency meter”. This new meter calculates what the building would have consumed if no changes were made.
  • The difference between the dynamic baseline meter and the actual utility meter represents the actual metered energy efficiency.
  • The utility collects revenue from the traditional sales of energy to the building plus sales of the metered energy efficiency.
  • The utility then pays the Energy Tenant for the metered energy efficiency; the Energy Tenant in turn repays the investor and pays a portion to the building owner.

This approach yields the following stakeholder benefits:

  • Utilities maintain unit sales while acquiring a predictable and reliable resource.
  • Building owners receive improved assets and a steady cash flow that increases net operating income.
  • Tenants experience an improved operating environment that is more efficient, comfortable and healthy.
  • Ratepayers avoid the need for their utility to spread fixed costs over fewer units and raise rates.

Because financing for MEETS projects is based on a long-term PPA with the utility, the depth of energy efficiency retrofits increase substantially—conserving valuable natural resources and benefitting society at large.

While MEETS is just one of many new promising financing mechanisms, it’s the only one that we’re aware of that truly maximizes the value for all transaction stakeholders: building owners, tenants, ratepayers and utilities. To learn more about MEETS and the Seattle City Light pilot, visit: http://www.meetscoalition.org/in-the-news/

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