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The future of energy efficiency isn't estimated, it's measured 3 ways to turn the IRA’s HOMES program into the future of energy efficiency

Andy Frank
Andy Frank Founder and President, Sealed

Billions of dollars were unlocked for clean energy after the Inflation Reduction Act (IRA) became law this summer. For households across the country, a key provision of the law is a new program that issues payments for energy savings in homes of all types.  The program—aptly named the HOMES program—provides up to $4.3 billion in […]

Billions of dollars were unlocked for clean energy after the Inflation Reduction Act (IRA) became law this summer. For households across the country, a key provision of the law is a new program that issues payments for energy savings in homes of all types. 

The program—aptly named the HOMES program—provides up to $4.3 billion in funding for states to administer incentives based on measured energy reductions

With that kind of money on hand, the HOMES program has the potential to change, and improve, how states and utilities invest in clean energy. 

Yet like so many other aspects of the new IRA, it will be up to the government to learn from the past and set the right rules to ensure the program’s success.

Learning from the past 50 years of energy efficiency history

For the past 50 years, the energy efficiency industry has administered programs and issued incentives to accomplish one primary goal: compliance. 

In most states, compliance looks like a specific energy savings goal, like New York’s 185 trillion MMbtu goal

Each year, ratepayers and states invest approximately $2.5 billion into residential energy efficiency programs to meet energy efficiency goals set arbitrarily (but mostly in good faith) by governors, legislators, and regulators. 

At face value, compliance—and the investments in energy efficiency it generates—sounds great, but in reality, this “check the box” approach has created an inconvenient truth: No one knows how much energy these investments reduce. 

“At face value, compliance—and the investments in energy efficiency it generates—sounds great, but in reality, this “check the box” approach has created an inconvenient truth: No one knows how much energy these investments reduce.

Deemed savings: Managing what is (or is not) measured

Energy efficiency program administrators have largely relied upon models to prove compliance. 

These models—often called deemed savings estimates—are engineering calculations that attempt to accurately predict the energy savings a home generates by making certain upgrades. 

As the expression goes, though: All models are wrong, but some are useful. 

Deemed savings models have largely been useful for meeting a compliance function. But deemed savings—and its cousin modeled savings—has two major flaws.  

First, since almost everyone agrees that deemed savings models are wrong, everyone disagrees on which ones to use. 

As a result, the industry has spent the last five decades constructing a convoluted Evaluation, Measurement, and Verification (EM&V) system whereby experts continually debate the accuracy and efficacy of deemed savings estimates. Sisyphus himself could not have imagined a more frustrating dynamic.

Second, by sacrificing accuracy to simplify compliance, most states and utilities underinvest in energy efficiency. 

Tasked with checking the “Energy Efficiency savings box,” states and utilities leverage approved deemed and modeled savings to run programs that generate the most total energy savings possible at the lowest possible program cost. But meeting compliance mandates represents just a fraction of energy efficiency’s value as a clean energy resource. 

Unfortunately, since energy planners don’t know how much—and, more importantly, when—energy is being reduced by energy efficiency investments, they don’t value energy efficiency upgrades like they value new clean energy generation resources, such as wind, solar power, and energy storage. 

To unlock the levels of energy efficiency investments needed to tackle the climate crisis, we must move past the deemed savings paradigm and to a market-based approach where incentives are based on measured, not deemed, savings.

Measured savings: From compliance to a clean energy resource

The HOMES program is enabling a different approach by creating the first national pathway for issuing energy efficiency incentives based on measured reductions, formally called Measured Savings Incentives (MSI). 

Under the MSI pathway, homes (or aggregations of homes) that reduce measured energy use by at least 15% are eligible for incentives based on actual energy reductions. 

In other words, there’s no longer the need to pay incentives based on deemed or modeled estimates! 

Energy efficiency will be a concrete value, just as real as measuring rooftop solar electricity production, which will make it a truly tangible and scalable clean energy resource.

“Energy efficiency will be a concrete value, just as real as measuring rooftop solar electricity production, which will make it a truly tangible and scalable clean energy resource.”

While potentially challenging to implement, MSI are desperately needed to meet our climate goals. 

But it’ll only work if the government, both at the federal and state levels, creates the right market rules. 

And while many rules and details still need to be worked out, it is essential that these three principles are followed by policymakers:

  1. Support market aggregators
  2. Enable multiple data pathways, and 
  3. Keep the program simple 

Let’s look at each of these principles more closely.

1. Support market aggregators

The unlocked potential of Measured Savings Incentives will only be met by creating the right market rules. The IRA legislation started to do this by defining a new type of energy efficiency stakeholder: aggregator

Aggregators are the companies that assume the responsibility and risk for the MSI incentives. They are in charge of marketing to customers, collecting customer energy data (both before and after energy upgrades), predicting energy reductions, and submitting project information. 

In many situations,  the aggregator will also leverage private capital to offset the energy efficiency project’s upfront costs. 

To put it simply, Sealed believes aggregators should have maximum flexibility since they’re the companies taking on all the risk for MSI incentives. 

This means aggregators must be able to choose to leverage the incentives for some combination of customer rebates, financing buy-downs, and investments in growth. 

2. Enable multiple data pathways

For aggregators to have any shot at success, however, they need data access, regardless of whether their local utilities cooperate. 

To put it bluntly: We cannot afford to wait for utilities to share their metered energy data. 

Data is, by definition, a key component of the MSI approach, but many utilities make it difficult (sometimes intentionally) for customers and third parties to access meter data. 

While policymakers and aggregators should work closely to get energy data directly from utilities whenever possible, other strategies to gather data should also be permitted (i.e., bill scraping services, sensors, etc.).

3. Keep the program simple

Similarly, program submission requirements (including energy data) must be as simple as possible. 

Energy efficiency programs that rely on traditional deemed and modeled savings require lots of program information to estimate energy reductions. 

With MSI, however, no modeling is necessary, enabling program administrators to significantly reduce submission requirements such as detailed home characteristics.

By reducing friction in the process, aggregators can focus their energy and money on innovation in scaling efficiency and electrification.

Conclusion

States have a once-in-a-generation opportunity to change the energy efficiency paradigm and unlock billions of private capital investments. 

Federal and state stakeholders must ensure MSI rules are written to enable a vibrant and scalable energy efficiency market. 

The billions made available by the IRA will run out. But when they do, states that adopt the right market rules will have a framework to enable continuous investment in all clean energy resources, including energy efficiency. 

November 2, 2022