II. Barrier: Financial signals of energy efficiency send mixed messages

Our low-cost power sends a confusing signal. Sometimes it seems the low price of electricity tells us it’s just not worth saving! It turns out the Northwest’s low energy prices—thanks to a low-cost, long-established hydroelectric system and big efficiency gains that have avoided many expensive new power plants—are a stumbling block when it comes to achieving greater efficiency. On top of that, a few Northwest utilities still have flat rates that charge the same per kilowatt-hour no matter how much gets used, offering little price incentive to cut waste.

The bill-payers are often not the decision makers on energy usage. Building owners or managers, for instance, don’t see benefit in saving energy because they don’t pay the energy bill while the person who does pay the energy bill doesn’t have any decision making authority to invest in energy efficiency. Split incentives, as they are commonly called, come in many forms:

• Building developers often sell buildings upon completion, and therefore tend to focus on minimizing up-front building costs rather than reducing long-term operational expenses that over time can exceed the costs of construction.
• A landlord owns the building but the tenant pays the energy bills, largely eliminating the incentive to cut energy waste with upgrades to lighting, heating and cooling systems.
• Manufacturers of always-on electronic devices have little reason to be concerned about the energy their products consume; they don’t pay the bills, consumers do.
• Similarly, utilities may be conflicted about energy conservation programs. Investor-owned utilities worry because their profits are often tied to selling more electricity or natural gas and public utilities worry that they have to raise rates to make up for sales lost to increased energy efficiency.

Finding upfront money and time to invest in efficiency upgrades is often difficult, for both homeowners and businesses. As important as saving money is, savings are in the future and people aren’t likely to make new investments when life events or business challenges get in the way. Utility programs and federal tax credits can help pay the cost of energy saving projects but only after the fact- they still require upfront capital.

Some tax breaks miss huge sectors. Federal tax incentives to save energy are nice – if you can get them. A huge number of buildings are owned by tax-exempt organizations like churches, schools, governments and non-profit hospitals.

The Solution: Align the financial interests

Focus the message on energy bills, not rates. Investing in energy efficiency lowers energy bills – and bills are what people actually pay. Most of us don’t know what our energy rates are (i.e., what we pay per kWh or per therm) but we do know if our energy bill goes up or down.

Incorporate energy efficiency into leases. So-called “green leases” can rally both landlords and tenants in support of energy efficiency in the commercial sector. The language of these leases varies, but a common theme is to require landlords to improve efficiency and to require bill-paying tenants to share the savings with the landlord to help pay the cost of the upgrades. BOMA offers a guide to green leasing for sale at BOMA.org.

Educate landlords. Realizing that energy efficiency increases the value of commercial and income property can also help solve the real estate split incentive. Buildings built and operated to higher energy efficiency standards are easier to lease as tenants become increasingly concerned about energy costs and environmental sustainability. A 2008 CoStar Group study found that buildings with the U.S. Green Building Council’s LEED rating lead to higher rents, lower operating costs and, as a result, higher asset value. We need to tell stories like the one below.

Developer Jonathan Rose said in 2006 that his goal in retrofitting the Joseph Vance and Sterling buildings was to make them the most energy efficient old buildings in downtown Seattle. And he said they’d make money, too. In 2009, Rose told The Seattle Times, the projects – a combined 120,000 square feet of office and retail space – have exceeded his expectations, both environmentally and financially.

Occupancy is up. So are rents. And, after a $3.5 million investment in new systems, fixtures and other improvements, energy consumption has dropped significantly. Heating costs alone have dropped 43%.

Make it easier for utilities to invest in energy efficiency. Since natural gas and electric utilities usually cover most of their fixed expenses through sales, selling less can make it harder for them to cover all costs and harder to support efficiency programs. But there are a variety of tools available to regulators to financially reward utilities that invest smartly in energy efficiency – tools that balance the interests of utility shareholders and customers.

• “Decoupling” energy sales from a utility’s earnings—allowing a utility to maintain revenue levels and aggressively pursue low-cost resources like efficiency—is one strategy utility regulators are trying.
• Regulators can also allow utilities a rate of return on energy efficiency investments similar to capital investments like transmission lines and meters.
• Still another approach is to allow a utility more profit if it meets its savings targets, imposing substantial penalties if it does not. (For one utility, this system made all the difference because, for the first time, energy efficiency was in the boardroom. All of a sudden the corporate suite was invested in reaching conservation targets!)

Any of these approaches can be effective. Regulators will respond more positively to utilities that present thorough documentation that investing in energy efficiency produces supply and reliability benefits at costs as good or better than traditional capital investments.

More utilities need to move past outdated views of energy efficiency. Utilities are by nature conservative (that’s a good thing because we want our energy supply to be VERY reliable.) But with more than 30 successful years of saving energy and money here in the Northwest it’s time to retire lingering concerns at some utilities about the reliability of energy efficiency as a resource. After all, customers like saving energy and money. We’ve never heard of a utility over-investing in energy efficiency!

Be creative in financing energy efficiency. A host of new approaches to paying the up-front costs of energy efficiency investment are gaining traction. For example:

• Commercial and institutional energy users are increasingly turning to energy services companies, or ESCOs, that know how to get the best utility incentive program for their clients. They develop, install and help finance efficiency projects; typically they guarantee the project energy savings. These services are bundled into the project’s overall cost, and repaid through the saved energy dollars.
• Contractors are partnering with utilities to deliver incentives in new ways. In Boise, Graybar Electric worked with Idaho Power to help the Red Lion Hotel overcome a lack of capital by fronting the cost of more efficient lamps and ballasts. Hotel staff did the labor.  Idaho Power paid Graybar its conservation incentive payment, enough to cover Graybar’s costs plus a reasonable profit. Red Lion will realize cost savings of about $2,600 per month with virtually no out-of-pocket expense.
• More utilities are offering trade allies like electrical and heating-and-cooling contractors financial sweeteners when they sell high-efficiency equipment and provide top-quality installation. For example, Tacoma Power guarantees payment to weatherization contractors, taking on the role of collecting payments from property owners. The key to trade ally programs is to make them as easy as possible for retailers and contractors, in recognition that promoting efficiency programs and services takes time and money.
• Oregon’s Department of Energy has an innovative method for bridging the incentive gap for tax-exempt property owners, allowing organizations like churches and non-profit hospitals to sell their energy efficiency tax credits to private-sector taxpayers.
• Financial institutions are doing some creative thinking, too. Shorebank Cascadia is partnering with the City of Portland on a pilot program in which property owners will pay back low-interest loans on energy saving projects through a separate charge on their monthly utility bill. If the home is sold, debt and benefits transfer to the new owner.
• Oregon’s Umpqua Bank has joined with Energy Trust of Oregon to offer reduced-fee loans specifically for energy efficiency projects; they rely on trusted trade allies to refer customers to the program.
• In New England, the electricity delivery company National Grid has gotten over the money barrier confronting small business by offering financial incentives that provide instant positive cash flow. The utility pays up to 70% of the costs to replace working equipment with a more energy efficient model and finances the remaining 30% interest-free for up to 24 months.