Customer Service, Executive Insight, Generation

Part 1: Why is energy efficiency so hard to measure and difficult to manage?

by Aaron Goldfeder, EnergySavvy

There’s been a recent wave of commentary that the utility business model is on a proverbial death row, imprisoned by its 19th-century past and spiraling toward irrelevance, thanks to 21st-century revenue-reducing breakthroughs in distributed generation, customer-owned generation, demand response and energy storage.

The story becomes even more melodramatic when people liken the utility business to the telecommunications sector, which saw landlines supplanted by mobile technology in a matter of years.

But utilities aren’t going away. They represent the backbone of the nation’s energy services, and they provide the safe, reliable and affordable baseload power that’s required to keep lights on and critical functions running in companies and communities. To play on the metaphor, when your cellphone call drops, you’re frustrated. But when there’s no power, it can mean life or death.

Many of us think the utility industry of the near future must adapt to changes to flourish. One of the biggest changes is an increased and enhanced role for energy efficiency. Granted, utilities generally make more money when they sell more power, but the economic and social promises of doing more with less through energy efficiency are too strong to ignore. Faced with emerging changes on the consumption side of the meter, utilities know they can’t just burn more fuel and hope for the best.

Efficiency First

Energy sector thought leader Daniel Yergin had it right when he called energy efficiency the “first fuel.” On an overall basis, energy efficiency has had the single biggest impact of any source in the energy mix of the 11 IEA countries during the past generation.

Utilities get this. And that’s one of the reasons they will spend $10 billion in the U.S. by 2015 on energy efficiency programs to help customers use less energy.

Regulators get it, too, which is why most states have a medley of carrot-and-stick policies to boost energy efficiency.

And finally, consumers get it. They want energy efficiency to succeed, and despite a confusing landscape, energy consumers increasingly understand that energy-efficient homes and businesses run better and are more valuable.

Despite all the support, though, energy efficiency is considerably undervalued in the U.S.

In many ways, this is because it’s complex, hard to measure and difficult to manage. This makes it tough for utilities to improve their energy efficiency portfolio performance to meet changing market needs, achieve mandated energy efficiency savings, deliver on customer satisfaction opportunities, and gain the full trust of investors and regulators.

Big Challenges

There are several key reasons energy efficiency is difficult.

Energy efficiency data is hard to accumulate and analyze to gain transparency and insights. Across the industry, data often is locked up in a hodgepodge of spreadsheets, file cabinets, consultant systems and half-customized legacy information technology systems. On top of that, determining and defining energy efficiency is often counterfactual — how do you measure what you never used? Dealing with certain variables in the measurement process, such as seasonality and free ridership, is also a key challenge.

Latency is another issue when it comes to energy efficiency. Data is collected throughout program implementation but savings aren’t measured and validated until the program has been running for a year or more. When it takes a year or two to figure out costs and benefits within a portfolio, it adds tremendous financial uncertainty for all parties involved and adds friction to industry acceleration. During the past 30 years, we’ve gone from the beginnings of the PC revolution to the iPhone, yet energy efficiency quantification — despite billions spent on smart grid — hasn’t advanced much since the Carter era. There must be a better, faster and cheaper way to durably quantify energy efficiency.

Finally, on the delivery side, energy efficiency still hasn’t reached the kind of modern experience that consumers and businesses expect and deserve. There’s been progress on the behavioral side, but the experience for actual energy upgrades often ranges from barely acceptable to horrendous. It’s still too common that participants and trade allies are buried in paperwork, manual effort, ridiculous forms and half-baked software systems. All of this adds unnecessary cost, risk and waste.

There’s considerable commercial misfortune here. It reminds me of an old saying, “What gets measured gets managed,” and to the extent that we can’t quantify energy efficiency, we stunt the industry. In addition, until we get energy efficiency measurement and management figured out, it cannot compete with power generation as a resource.

Although there’s been a rise in energy efficiency spending and a widespread desire to scale up energy efficiency initiatives in the utility industry, many people say energy efficiency hasn’t lived up to expectations or delivered results.

Great Expectations

To a large degree, these critics are right.

Utilities aren’t always able to optimize energy efficiency and institutionalize its practice as a core business capability. Incentive misalignment and complexity often means they can’t realize it as a profit center or effectively include it as part of long-term resource planning. Regulators sometimes focus more on spending levels and confusing, cost-effectiveness tests over making it easy for customers to participate, driving unnecessary costs out and modernizing quantification of what is being achieved. It’s no wonder that some utilities entirely outsource their energy efficiency efforts to consulting firms. Although this offers some attractive benefits, you don’t have to study things carefully to realize it often means higher costs for ratepayers to pay consultants and an outsourcing of risk management, customer experience, resource planning and overall accountability to those not responsible for the long-term success of those activities.

With ratepayers’ — everyday people and businesses — footing the whole bill and lots of societal goals’ hanging in balance, it neither has to be this way nor should it be.

Innovation and Ingenuity

As we’ve seen in the travel industry before Expedia, personal finance before E-Trade and real estate before Zillow, modern, cloud-based software approaches can be harnessed to bring businesses into the 21st century. American ingenuity often steps in and modernization eventually comes along. And that will happen with energy efficiency in the utility industry — if we can help consumers and companies save money on their energy bills; if we can help utilities grow and plan more effectively; and if we can provide regulators with data and certainty that show how a dollar spent on efficiency pays for more negawatts than megawatts.

Aaron Goldfeder is CEO and co-founder of EnergySavvy.