How to make the HOMES Measured Savings Incentives (MSI) program rollout successful (Part 4: Flexibility)
In Part 3 of this 5-part series, Sealed president Andy Frank took us through a deep-dive on what’s needed to measure Measured Savings Incentives under the HOMES program. Next, Andy explains how maintaining flexibility can have a positive impact on market innovation.
Explore the Measured Savings Incentives (MSI) series in full:
- Part 1: Aggregators: The hidden key to unlocking Measured Saving Incentives (MSI)
- Part 2: For the HOMES program to succeed, energy data must be accessible
- Part 3: Measuring Measured Savings
- Part 4: Incentive flexibility can unlock market innovation
- Part 5: The HOMES program can deliver simplicity for consumers and contractors
Part 4: Flexibility
In Part 3, I explained why policymakers at the federal and state level need to create a set of rules to make measurement and verification accessible, transparent, and accurate. Only then will market aggregators be able to invest in energy-saving transformations for millions of American homes.
For aggregators to create the most impact under this measured savings paradigm, however, the incentives themselves will need to be flexible.
After all, this isn’t your grandparents’ cashback rebate.
Historically, energy efficiency programs have modeled the best practices of top retailers when it comes to project incentives.
There’s only one problem: Those “best” practices—complicated forms, long delays, and lots of room for error—were designed to prevent consumers from claiming these rebates.
There’s only one problem: Those “best” practices—complicated forms, long delays, and lots of room for error—were designed to prevent consumers from claiming these rebates.
Over the years, many energy efficiency program administrators have recognized this as a problem and transferred the rebate responsibility to contractors, absolving the consumer of any liability for a missed decimal point.
Unfortunately, this has just shifted the burden from consumers to contractors, leading to many situations where contractors have to significantly raise prices in order to cover the costs of compliance.
These extra “soft” costs passed on to consumers can negate some (or most) of the value of the program incentive.
It’s almost a comically absurd situation: Programs are essentially subsidizing their own paperwork.
Programs are essentially subsidizing their own paperwork.
Even worse, it means that many contractors never participate in the programs in the first place. For example, just 1% of U.S. home improvement contractors participate in the Home Performance with ENERGY STAR program.*
And no program, especially something as potentially transformative as the Inflation Reduction Act’s HOMES program, can be effective without widespread participation from qualified contractors.
There are other problems with this traditional approach. These “downstream” rebates rely on deemed or modeled energy savings estimates—which, as we’ve told you before, tend to be inaccurate.
What’s more, such rebates have a documented history of leading to sugar rushes in participation and subsequent sugar crashes in market activity when budget funds evaporate. (To understand exactly what we’re talking about, see our piece on the current state of heat pump programs ).
The IRA’s HOMES program has the opportunity to avoid these pitfalls.
- First, the HOMES program empowers aggregators to take on any administrative requirements. Empowering aggregators has the ability to minimize the burden for consumers and contractors and reduce the overall soft costs by leveraging larger and technology-first organizations to automate most of the work.
- Second, the HOMES program has the potential to move away from the traditional top-down, command-and-control approach to incentive design—and instead embrace a bottom-up strategy that encourages and incentivizes innovation.
Overall, for the HOMES program to realize its full potential to transform the energy efficiency market, these incentives must be flexible and stackable.
Flexible incentives unlock innovation
Sealed believes the HOMES program should buck energy efficiency’s history of rigid rebate requirements in favor of flexible market incentives (also known as mid-stream incentives) that are provided to aggregators.
Doing so will bring about necessary change in the energy efficiency marketplace as companies, contractors, and consumers will finally have the flexibility to unlock innovative ways to utilize incentives—and measured savings incentives in particular.
Flexibility provides aggregators with the incentives (and incentive) to grow sales and, therefore, meet the policy goal of growing the market for home weatherization and electrification.
Providing consumers with upfront rebates is one way for aggregators to grow sales, but there are many other means that Sealed and other market actors have found effective, including:
- Lowering project prices. Some consumers just want the lowest sticker price, regardless of available rebates.
- Lowering the cost of financing. Some consumers are less sensitive to price but are averse to high financing charges.
- Additional products and services. Some consumers are motivated by extras, like smart thermostats.
Not every person is the same, and aggregators will be able to tailor the incentives for each customer’s needs, ensuring that taxpayer money is used to truly drive market transformation and not simply subsidize purchases that would have happened anyway (i.e., free-ridership).
Not every person is the same, and aggregators will be able to tailor the incentives for each customer’s needs, ensuring that taxpayer money is used to truly drive market transformation.
For example, National Grid ran a survey of their downstate New York customers a few years ago that tested a variety of offers to determine which ones would move the needle the most. While rebates of 50% of projects costs (coincidentally the HOMES program incentive cap) drove significant uptake, the biggest impact came from performance financing similar to what Sealed offers today.
In other words, upfront rebates make an impact, but building consumer trust and confidence through accountable programs (performance financing, measured savings incentives, etc.) can actually make the most powerful impact.
Upfront rebates make an impact, but building consumer trust and confidence through accountable programs can actually make the most powerful impact.
Flexible incentives grow the market
In addition to consumer-facing incentives, HOMES program incentives can be leveraged by aggregators and contractors to grow the market for weatherization and electrification.
This is not an easy market in which to grow a business, as soft costs abound: hiring, management, administration, marketing, and sales.
And while the IRA is investing in worker training (something we applaud), training isn’t enough for companies in this market to grow at the pace our planet needs.
Flexible, mid-stream incentives can be used for business investments like:
- Hiring a new worker
- Local marketing
- Better sales talent
- Upgraded administrative systems for greater scale.
But the unfortunate truth is that many companies never grow beyond a few trucks—they just don’t have the capital to do so.
While traditional rebate programs are helpful to drive sales, they can also exacerbate cash flow issues, meaning the working capital needed to build a business just isn’t there.
With measured savings incentives, aggregators will be able to provide upfront, flexible payments to contractors while supporting their growth in other ways too (like providing software tools to scope projects more quickly, for example).
By giving aggregators (and contractors) the benefit of flexible incentives, the HOMES program empowers the market—not the government—to identify the most effective way of creating consumer demand for energy upgrades across the country.
Flexible incentives stack well with other programs
A key provision of the IRA is the establishment of limits for how much various energy-improvement projects can cost.
The text is clear that, because of these cost thresholds, measured savings incentives cannot be combined with federal grants to pay for the same project.
But the legislative text does not specify how state and local funds should—or should not—be incorporated into this methodology.
Given that lowering project costs has a proven impact on consumer adoption, we believe the HOMES program funding should be stackable with state and local rebate funds up to the cost thresholds for various projects, as established in the IRA and shown below.
For example, let’s assume the $35,000 project cost from the table above is for a heat pump installation with a full whole-house weatherization project in New York State and Con Edison’s service territory.
Under the HOMES program, this project would be eligible for an incentive based on the amount of measured energy savings it can generate, which we estimate at approximately 40% energy savings and worth $4,000.
Under Con Edison’s Clean Heat program, this project would be eligible for an $8,000 incentive for installing a cold-climate heat pump and contributing to New York’s energy efficiency and heat pump goals.
Combined together, the HOMES incentive and the Clean Heat program rebate would be worth $12,000 and account for 35% of the project’s total costs, an even bigger impact than the HOMES or Clean Heat incentives alone, and still below the maximum incentive amounts defined in the IRA (50% for market rate and 80% for low and moderate income).
By allowing this type of stackability, the U.S. Department of Energy will not only meet the spirit of Congress’s legislative intent, but also enable deeper, more impactful energy efficiency projects in individual households.
By allowing this type of stackability, the U.S. Department of Energy will not only meet the spirit of Congress’s legislative intent, but also enable deeper, more impactful energy efficiency projects in individual households.
And in our next and final article in this series, we’ll explain why such policy details are the foundation required to make the HOMES program the most simple energy efficiency program ever created—for both contractors and consumers.
Explore the Measured Savings Incentives (MSI) series in full:
- Part 1: Aggregators: The hidden key to unlocking Measured Saving Incentives (MSI)
- Part 2: For the HOMES program to succeed, energy data must be accessible
- Part 3: Measuring Measured Savings
- Part 4: Incentive flexibility can unlock market innovation
- Part 5: The HOMES program can deliver simplicity for consumers and contractors
* ENERGY STAR cites 1,500 home improvement contractors active in program, compared with 114,000 businesses classified as such using the NAICS database code 236118