Just pay for performance
Energy efficiency needs to meet reality
Imagine ordering a pizza, and it never shows up. You enter your address, input your credit card information, and hit deliver. Twenty minutes pass, then thirty, an hour, and still, nothing. This disappointment mirrors what researchers find in too many energy efficiency programs.
Take, for example, a field experiment conducted in Northeast Mexico. A team of researchers installed energy-efficient windows to reduce summer electricity use. These windows cost between $650 and $850 each. Based on engineering estimates, the windows should have reduced electricity demand by around 26%. That’s a sizable improvement–one in four electrons used before the installation would have been avoided!
The researchers have hourly data on temperature and humidity for 450 homes. So, they should be able to see what happens when installing these efficient windows. Yet when the researchers returned to assess the results, they found no evidence that the windows improved energy efficiency. The data showed no significant changes.
Why do engineers predict a significant reduction of electricity use in the summer that never shows up? The researchers came to a simple conclusion:
Part of the explanation for the disappointing results is that most households have their windows open on hot days. We document, for example, that 96% of households had at least one window open on a typical summer day in 2017 and that households report having windows open for an average of 16.7 hours per day.
The windows were installed, but by swinging them open, the residents did not receive the energy efficiency they were promised. Their $650 pizza never showed up.
This doesn’t spell total defeat for efficiency measures. Other efforts have shown positive results; even window upgrades can be beneficial if used correctly. The core problem was a failure to understand how people would use the technology. Energy efficiency programs worldwide need to learn this lesson: understanding user behavior and proper implementation is crucial.
The right move is to start requiring better verification programs before paying for energy efficiency updates. Rather than basing energy efficiency payments on what engineers believe the results will be, we should pay only for performance.
Energy efficiency programs are harder than you think
Of course, energy efficiency comes with economic challenges even when the program saves electricity. The rebound effect plagues many programs. Think about it like this: you buy more if something becomes cheaper. An efficient appliance uses less electricity, so you use it more often. The rebound effect is the broader term for this effect, or, even more broadly, the Jevons’ Paradox.
Consider a simple and lighthearted example from researchers in Japan studying the effects of Roombas (automated vacuums). There are two forms of rebound. Direct rebound is that you might vacuum more often because an automated vacuum can clean daily, running at night or while you’re away at work. This increased usage can lead to a rebound effect, where its more frequent use offsets the energy savings from using an efficient device. The second rebound, indirect, is where energy use rises because you do something more energy-intensive with the time you would have spent vacuuming. In the case of the Roombas, the rebound was tiny–electricity use increased by less than 2%.
The economic problem here is how to think about these rebounds. We should celebrate the cleaner floors Roombas provides just as we celebrate a washer and dryer freeing our time. Your electricity use will be lower if you wash clothes in the creek, but your life satisfaction may be lower as well. But if the intent was to lower energy use, then becoming more efficient may not hit the mark.
The key point is that rebound effects can make energy efficiency investments a net zero in real savings. They are a common challenge. An international study examining savings from efficiency investments in France, Germany, Italy, the United Kingdom, and the United States showed rebound effects between 78% and 101% two years later.
You should only pay for getting what you want when you want it
Policymakers need to learn to work with this rebound effect. That means proving that energy efficiency works by analyzing program performance and ensuring you and I only pay for actual results. In other words, if the pizza doesn't show up, don't pay for it.
Policymakers should apply a performance-focused mindset to every energy efficiency program across the country. Efficiency upgrades tend to be paid for with public dollars, so we shouldn't invest in new windows or updated lighting without seeing the benefits they’re supposed to bring. That means moving beyond the use of engineering study estimates alone and into a world where savings are verified.
As part of verifying the contribution of energy efficiency investments, we also need to ensure they’re contributing at the right time. If you save energy at night when the system isn’t strained and prices are low, that’s less valuable savings than shaving off the peak. Since a lot of the electricity grid is built to meet just a few tight moments each day, the right kinds of energy efficiency investments can go a long way.
But how do you find these kinds of worthwhile energy efficiency investments? California’s model has been to put a bounty on their heads. The state adopted a pay-for-performance model. It ties rebates to actual energy savings rather than estimates. Developed by the company Recurve, this approach uses real-world data to measure the effectiveness of energy-saving projects.
Recurve’s FLEXmarket platform incentivizes contractors to focus on projects that deliver significant benefits to the power grid, particularly during peak demand times. The results have been promising, with notable improvements in efficiency and substantial financial benefits. The FLEXmarket program is also open-source, so if you disagree with built-in assumptions from Recurve, then you can tweak the numbers.
Recurve’s model ensures that only effective projects receive funding, aligning payments with real energy reductions measured via utility smart meters. By prioritizing grid needs and optimizing energy use, California's efficiency programs are setting a new standard, potentially attracting more investment and improving the overall effectiveness of energy efficiency efforts statewide. This approach has shifted the focus from the quantity of projects to the quality of energy savings.
There’s potential for the right investments
Take Texas's peak demands in winter and summer for a concrete example of why energy efficiency matters for the future. Half of the load is residential demand. We can also move the other portions off of the peak, but we shouldn’t ignore residential demand.
A market-driven program that pays for results can be a part of a portfolio that virtual power plants use to reduce electricity use at the peaking periods for the entire grid. Or it can be an individual homeowner’s response to high air conditioning or heating bills. With pay-for-performance models, the incentives are aligned to avoid the worst of rebound effects since investments are only rewarded for actually reducing system costs.
There are many ways to promote the electrical system's resilience. Expanding the use of proven energy efficiency programs to reduce peak demand is a promising option. Practices need to evolve to take advantage of this potential. That will save dollars that would have gone to ineffective programs and keep the lights on for everyone.
We're very guilty of the open window habit. Where are my automatic windows that open/close based on the indoor/outdoor temperature differences?
If my thermostat is set to 72 degrees, and it's 65 degrees outside, AC turns off + windows open. Once outside temps reach 73 degrees, boom. Windows close, AC kicks on as indoor temperature raises.