The Fastest Way to Reduce Residential Utility Demand

BY V. RORY JONES AND STEPHEN MALLOY, PLANETECOSYSTEMS

How do you get consumers to take action? Make it in their overwhelming interest to act, and enable them with guidance and a few tools.

With an outcome in mind, utilities must understand what is in consumers’ best interests and arrange motivators to deliver desired actions.

Such thinking–seeing things from consumers’ viewpoints–needs to be applied to the way policymakers approach California’s utility markets, where much effort is going into initiatives that curtail energy demand from utilities such as Pacific Gas and Electric Co., Southern California Edison and Sempra Energy. Good progress has been made in the quest to unlock wide-scale residential energy demand reductions, but California remains short of its goals. The game plan for state action can be borrowed from the private sector, which is proven in many markets.

consumer segments

KNOW WHAT WILL DRIVE ACTION IN EACH CUSTOMER GROUP

Electricity and gas price increases since 2002 have received consumers’ attention, particularly the heaviest energy-consuming ones, with doubling or tripling bills. Others, however, have seen little change, and to get the most of reduction investments and efforts, there is a need to distinguish among consumers.

The top 20 percent of residential consumers (in many investor-owned utility-served areas, these customers have monthly energy bills of $300) consume some 40 percent of all energy and, conversely, the lowest 50 percent of consumers (with monthly bills less than $100) consume barely 30 percent. This presents an unparalleled opportunity. Aggressively pursuing relatively few consumers likely will deliver disproportionate results; a prioritized return-on-effort approach is warranted. It’s easier to get heavy energy consumers to undertake demand reduction measures:

Efficiency matters more to heavy energy consumers. They use a lot of fuel. If one spends $1,000 on home heating fuel annually, a 30 percent efficiency improvement is worth $300 per year. A $3,000 replacement high-efficiency heater will be paid off over its 20-year life. But if one spends only $100 in heating annually, $30 in savings will not support any efficiency investment.

Heavy consumers pay much higher prices. This is especially true for electricity, where the marginal price is four times that for low consumers: around 40 cents per kilowatt-hour vs. 10 cents per kilowatt-hour. The result is even mid-consumers are thrust into the high-bill amounts of heavy consumers.

Heavy consumers have a clear economic motivation to undertake efficiency investments. This is because they usually are homeowners. Low energy consumers tend to be renters and rely on landlords to upgrade utility systems (alas, landlords rarely pay utility bills).

MONEY MOTIVATES ACTION

Nothing motivates consumers as much as their pocketbooks. Most people want to be environmentally responsible, but if action requires net cash outflows, there is always hesitation almost always resulting in inaction, especially when investment needs are in thousands of dollars–the case for most nontrivial measures.

Figure 2 summarizes a study of several hundred households in Sonoma County. It shows the average benefit of undertaking only economically positive measures for the three household segments. An economically positive measure is any retrofit, behavior change or energy generation that pays for itself after all costs (equipment, installation and financing, and assuming prices increase at historic rates). This study has a clear message: Low consumers have little to gain in investing to reduce demand, and heavy consumers have much to gain–more than enough to motivate action; enough to pay for a college education.

net 20-year cash

What magnitude of reductions in demand is associated with such enormous economic benefits? The potential is staggering. With the optimal combinations of efficiency retrofits, limited behavioral changes and solar generation, heavy consumers would profitably reduce electricity consumption more than 60 percent and gas nearly 30 percent. On the other hand, the opportunity to profitably reduce demand among the low consumers is very limited, owing to the lower prices they enjoy today and their lower fuel throughput.

What does California have to gain by embarking on a program to get consumers to act in their own economic interests? Again, the opportunity is staggering. Projecting this study’s figures to the rest of the state (notably, Sonoma’s potential is likely lower than other California counties’ because of its coastal climate), the back-of-the-envelope calculations in Figure 3 show 35 billion kWh are at stake along with 1.5 billion therms every year.

positive return

ADDRESS EACH CUSTOMER TYPE DIFFERENTLY

The nature of the demand reduction opportunity differs among consumer segments, as illustrated in Figure 4 for typical electricity and gas customers.

fig 4a fig 4b

The huge differences in the nature of these opportunities demand a different approach, tailored to the needs of each customer segment:

Low consumers. The economic viability of demand reduction investments by low customers is limited. Professionally installed solar electricity generation is never worthwhile, and much the same is true for most other measures. Most of the opportunity in electricity demand is achievable by light bulb replacement and a few other changes. The most efficient approach for the state to drive demand reduction in this segment is a broad-based educational media campaign focused on three or four simple messages that tout the positive economics of light bulb replacement and other tips.

Mid/heavy consumers. These households offer an opportunity to reduce the state’s utility-supplied energy by 30 billion kWh and 1,100 million therms annually, and each will receive a huge economic gain in the process. The state just needs to tip the cart slightly and allow self-interest to take over.

effective public policy

The study found homeowners rarely take action because they have no idea what pays off and are most afraid of losing money. They need help figuring out what to do but cannot find anyone to give them impartial action plans assured to reduce utility-related spending.

The only potential source of help is an energy audit, but audits focus on calculating Home Energy Rating System (HERS) scores, not in delivering optimization. Even if audits come up with optimized plans, homeowners still would resist action because they are risk-averse and refuse to spend on audits.

AN ULTRALOW-COST SOLUTION

The simple solution was used successfully in the Sonoma study. There are two parts. First, software is needed to automate the complex utility economics optimization calculation for each home (whittling several person-months of analysis to a few seconds). Second, California’s audit system needs to be refocused on consumers’ viewpoints of home utility economics, according to the PlanetEcosystems report “Don’t Go Broke Going Green,” and simplified to actions that optimize.

The software for the utility economics diagnostic was developed and used in the Sonoma study such that after a few minutes of effort, each home in the study received a custom plan that delivered gains for homeowners from $0 to $650,000 (again, net of all costs, including financing costs).

If all heavy-consuming households in California undertook such a diagnostic, paid for by the state to ensure widespread coverage, the cost to the state would be $250 million. If only 50 percent of those households undertook the prescribed action plans, the savings would be 11.5 billion kWh and 360 million therms annually. That’s 2 cents per kilowatt-hour and 80 cents per therm saved annually, a cost far lower than initiatives the state is paying for and likely to deliver wide-scale results quickly. Consumers act in their own interest.

V. Rory Jones is CEO of PlanetEcosystems, which he co-founded after two decades of leading services organizations. He has an MBA from the University of Chicago, a BSc from London’s City University, and is a thought leader in markets and finance. His book, “Boosting Cash Flow & Shareholder Value,” is published by Wiley. Reach him at roryjones@planetecosystems.com.

Stephen L. Malloy is senior vice president of sales and marketing at PlanetEcosystems, which he co-founded after 15 years as a serial entrepreneur and leader in business services. He has an MBA from the University of Chicago and a bachelor’s degree from Carleton College. Reach him at stevemalloy@planetecosystems.com.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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