An Efficiency Manifesto: Energy and Home Performance Programs Need Serious Reform

Energy-efficiency rebate programs from gas and electric utilities have become pretty common nationwide. While these programs seem like a good idea, they can actually be toxic to small businesses if not designed properly.

One such program from my gas utility, Dominion East Ohio, was a primary cause behind the death of my insulation contracting business -- a business that in 2012 was one of only 97 businesses nationwide to do more than 100 projects with the Department of Energy’s Home Performance with Energy Star program. That made me a Century Club Contractor. And now I’m out of business.

First off, let me say the purpose of this is not to whine or to demonize efficiency programs. I made plenty of mistakes, which I talked about in my articles "Confessions of an Insulation Contractor," parts one and two, and which I’ll talk about in this article as well. I’ve gotten over my bitterness.

My purpose is to show the home performance industry the far-reaching consequences of designing a program without a deep understanding of prescriptive thinking versus comprehensive design when it comes to energy efficiency and comfort outcomes.

First, some history

I started doing insulation contracting in 2009. As with any business owner just getting started, it took me a while to figure out the value of what I was doing and what to charge. So my projects were often in the $1,500 range for just blown insulation with very little air sealing, a model known in the industry as "blow 'n' go." (Air sealing is a tough service to sell because most homeowners don’t understand the value of it. And frankly, there isn't much value to be had if you aren’t measuring and finding air leakage with a blower door.)

I soon met an energy auditor, Karl Balla, who introduced me to the concept of home performance and whole-house retrofits. I took a BPI Building Analyst class shortly thereafter, which helped me up my air-sealing game.

The Dominion East Ohio Gas program, which offers up to $1,250 in rebates for energy-efficiency upgrades, gives $40/hour for air sealing. It also gives $0.30/square foot for insulation anywhere -- attic, walls, ducts, whatever. So through the program, I could get the air sealing paid for by rebates and do a better job. I was thrilled, and my jobs jumped to $2,500-$3,000, while still ending up in the $1,500-$2,000 range as far as cost to the consumer.

It felt like a big win. It bumped my 2011 sales from $300,000 to $400,000 just due to rebates.

But trouble was looming. My new "big" jobs were in the $2,500-$4,000 range. This size job is still more of a “poke 'n' hope for the best” project size, rather than a truly systems-based comprehensive project. We were able to do a little more work, but not a lot more, because chasing incentives has a cost. Too often, it wasn’t enough to do what I really needed to do to actually solve homeowners' problems. Incentive design led to what were actually small jobs, which in turn led to myriad problems.

Chasing incentives leads to unsolved problems

Chasing incentives takes the homeowner's and contractor’s eye off solving problems and puts it on getting as much rebate with as little out of pocket as possible. This program created thinking around maximizing incentives, which takes the focus off designing solutions to problems, and, ironically, artificially limits job size.

In cases like these, jobs are designed not to solve problems, but to optimize obtaining free money. This in turn lead to lots of problems when the job was too small to actually solve the problem I was called to solve. For now, I’ll focus mostly on the business problems it caused for me.

I found that most homeowners were typically willing to spend between $1,000 and $2,500 for attic insulation. This budget range was often set by bid/no-spec pricing, meaning they called a contractor who gave a cost range, but didn't spell out exactly what the job was or take the time to truly diagnose causes of the original customer complaint. With up to $1,250 in rebates, that basically limited job sizes to $2,500-$4,000 with a traditional sales process.

Small jobs lead to lots of problems:

• Too much time running quotes
• Low referral rates
• Poor diagnosis quality
• Poor specification quality
• Mediocre results
• Market-enforced low-quality solutions
• Little margin for error
• Poor crew morale
• Low dollar margins (even if percentages appear high)
• Higher break-even point

A $2,500-$4,000 project will keep a three-person crew busy for a day. So if you’re going to keep a crew busy with a 50 percent closing ratio, you have to run two quotes a day, or ten quotes a week.

Running all of those quotes is a lot of work. Getting a job took between ten and fifteen hours of work, which I did most of. That roughly includes 30 minutes on the phone to chat and set up the quote, one hour of drive time, two hours at the home, one hour to write up the quote, two to four hours of emailing/calling back and forth with questions and scheduling, plus one to two hours of invoice and rebate paperwork. And then there was the time spent creating a material list and ordering it.

Just thinking back on it makes me tired. I was working 60 to 80 hours per week most of the year. I was miserable. It burned me out.

Those small jobs could often be accomplished in ten to twenty labor hours, so that’s not even a full day’s work split between three crew members. It also meant that I had as many hours invested in landing each job as it took to actually accomplish. This is not a sustainable model, nor one that encourages or rewards quality results.

So small jobs really suck. They carry a lot of little costs that really add up, and that meant I had to do more of them to make a living. Outcomes are too small to be noticed. They have a high likelihood that everybody will be unhappy and a low likelihood that everybody will be happy -- the exact opposite of big jobs.

Nearly every program I am aware of tends to drive smaller jobs. Most programs are much more cumbersome than the Dominion East Ohio Gas program, such as the NYSERDA program in New York or Energy Upgrade California. Those require energy modeling, whereas the program in my area didn’t. Those programs also have approved-measures lists that can warp project design in ways that really end up harming the consumer.

So far, I’ve focused on the problems caused for the contractor by incentive programs, but these programs often are not beneficial to the homeowner, either. You can’t do much of a home performance upgrade for $5,000 -- perhaps even for $10,000. That’s a furnace and air conditioning unit. Was the homeowner really going to buy an inefficient furnace anyway?

The problem impacts whole programs, not just individual contractors

When these troubles were occurring, I had no idea that rebate structure was having all of these effects. I only see it now, almost a year after I stopped contracting, because I subsequently learned the process of truly consumer-focused, design-oriented, consultative sales.

This year, there were no Century Club insulation contractors from the Dominion program. They lost their big dog. I’ve heard that my competitors, who used the program because I always mentioned it, have stopped using it. I’ve received several phone calls from very frustrated homeowners who simply can’t get their insulation and air sealing upgraded -- and no one calls back.

I’ve also heard that the Dominion rebates are primarily used now by HVAC contractors for putting in new furnaces that would have been bought anyway, and likely at similar efficiency levels. So how exactly is the program helping to drive energy efficiency? I would argue that it’s not.

This is not uncommon. I’ve heard of problems in New York, California, Vermont, New Jersey, Massachusetts and more. Here are three examples: Myron Ferguson discussing disillusionment with the New York program, Glen Gallo refusing to participate in Energy Upgrade California (EUC), and John Craig of Beanstalk Energy saying EUC is like death by a thousand cuts.

Programs often have absolutely shocking costs per project due to lack of accountability. Energy Upgrade California spent $200 million in overhead costs since inception to deliver 3,615 jobs. That’s $25,000 per job in overhead, before incentives. This is for jobs that are substantially smaller than $25,000 each. Worse, those projects deliver the consumer one-third the energy savings projected by Energy Upgrade California. This program has achieved less than 10 percent of its goal, by the way.

California is easy to shoot at because it has been so ridiculously wasteful. Its 34 percent realization rate is the worst of the published program results. New York is in the 45 percent to 75 percent range, depending on fuel. Other states have published results which hover in the 40 percent to 60 percent range.

Who is holding these folks accountable?

Currently, there is no real accountability for results, either for solving homeowner problems or for actually achieving the promised energy savings. Contractors can blame programs for hamstringing them when projects don’t deliver what was promised. Programs can blame contractors for doing shoddy work. Utilities report results from programs to give to public utility commissions mandating energy savings, and nothing really gets accomplished. Fingers point every which way.

Homeowners spend lots of money with mediocre results, and contractors are exhausted by constant program changes created by bureaucrats who make these changes to justify their existence. No single party is accountable or rewarded for actual results.

To be clear, this is not the fault of people; it is the fault of the structure. It is not market-based.

But it doesn’t have to be this way.

So what could work?

Whining without proposing a solution is an awful thing to do, so I'm proposing three goals that any good program design should achieve, then I'm proposing a possible solution.

These three things are necessary components to keep programs on track. Without these attributes, it is unlikely that home performance (HP) will ever scale:

• Accountability. Provide real accountability and real energy savings.

• Results focus. Let market forces rule. Free contractors to sell projects that solve homeowner problems. Get bureaucrats out of project decisions, and leave the improvement decisions to the collaboration between homeowners and contractors. Stop prescribing how to achieve program goals, and just reward the program goals are achieved.  

• Market transformation. Deliver remarkable results to homeowners so they tell everyone they know.

These sound nearly impossible, don’t they?

They’re not. They can all be achieved with a program called One Knob, as in one volume control. Even better yet, this can be achieved with current contractors, current employees, current programs, current equipment and current technology. It will take a little retraining, but not much.

What could be: One Knob

What if programs only had one knob to adjust? What if this simple adjustment was aimed specifically at delivering actual energy savings and solving homeowner problems?

What if this Knob could be used to speed up or slow down the market predictably like the Fed does with the discount rate? What if this could drive us toward carrying out comprehensive retrofits on millions of houses, instead of thousands, because it actually solves homeowner problems?

This is what the idea for One Knob is all about: simplicity and freer markets. By setting a simple structure based on projected savings and flexibility to let contractors develop projects as they please, we could realize far more comprehensive home performance jobs.

Here is a long list of attributes of One Knob that utilities and program administrators might consider:

• Negawatt = One Knob: One simple adjustment. One easily interpreted market signal. No management from above, no program tweaks, just adjust the volume of the negawatt incentive. Simply pay for saved energy in terms of negawatts and raise or lower as needed.

• Results focus: Excellence, accuracy and savings are all incentivized, which means they are likely to occur. These do not truly exist now, except via false proxies. One Knob delivers desired results.

• Pay for projected savings: If 10,000 kilowatt-hours are projected to be saved, and the rebate is $.40 per kWh saved, the homeowner gets a check for $4,000. Convert savings from all fuels to kilowatt-hours (i.e., negawatts).

• Rebate process: The project is completed, the homeowner rebate is paid, and, periodically, contractor ratings are updated and published. Updates could be continuous with a platform such as Energy Savvy or Opower.

• Accountability/reward: Contractors have the most control over results, so let them make the projections. Let them choose the software and the measures. It makes kitchen-table transactions much simpler.

• Publish contractor metrics and rank them: Promote the rankings so contractors can use them to build trust and confidence at the kitchen table. Excellence becomes its own reward, and failure becomes a public badge of incompetence.

• Build intellectual capital: By giving contractors authority over design and accountability for results, you create an intensely competitive environment where huge gains in workforce talent and true energy-savings expertise will develop.   

• Leverage desire for better homes: Homeowners will make large investments to fix problems when they have confidence in results. Focus on comfort, health and safety messages, not energy savings. Good incentive design can harvest energy savings from these improvements at the savings value. One Knob’s simplicity allows and encourages scale.

• Win-win-win: One Knob aligns interests. Homeowners get problems solved, contractors make a living, and programs, utilities, and PUCs get the cost-effective energy savings they need (without puffery).

• Not punitive: Humans react far better to positive reinforcement. Multiple ranking metrics can be promoted -- good air sealing, good realization rates, highest energy savings, best energy savings per dollar spent, etc. Everyone is likely to have something good to point at. Also, no one wants to rank on the bottom, so it’s an incentive to do well.

• Engenders mutual respect: Contractors are not treated like children, as is often the case now. All parties act as equal partners working toward common goals.

• Fuel-agnostic: Small changes can crush contractors; they need one track to follow. No crazy rules about fuel switching or different “incentives” for different fuels like electricity, propane, or natural gas. Just pay for energy savings in negawatts. An "energy bank" could create a buffer to perversity introduced by funding sources.

• Nothing new needed: Except accountability and a transparent results ranking system. Today’s contractors, employees, software, equipment, etc. will all work with One Knob.

• Future financing: Financial markets need some certainty of savings showing up to offer low rates. One Knob will provide this data and ever improving certainty. One Knob rewards accuracy and precision in a space where accuracy and precision have never been an objective. Market transformation is far easier once low-cost financing that stays with the house (i.e., on-bill financing) is available.

• Align interests and incentives: Homeowners, contractors, programs, utilities, and PUCs all have different objectives but can be pulling in the same direction. One Knob achieves this. No perverse incentives.

• Substantially less administration: If market transformation is to occur, there is no way current administrative practices can scale. One Knob is scalable, and more effectively puts ratepayer funds back in ratepayer hands.

The simplicity of paying for negawatts

Why the heck do we create these wildly complicated structures to deliver savings, and then fail at it? Most programs have 30 percent to 70 percent realization rates. Programs fail to deliver pretty much every time; for-profit businesses would be in lawsuits and out of business with these results.

Is paying for a negawatt too simple? Well, isn't that what utilities and public utility commissions want? Incentivizing saved energy directly is the fastest and simplest path there.

We need to keep complexity out. This is critical. Programs can no longer make monthly or weekly adjustments, an example of my favorite word: overcomplexification.

Of all the parties involved in an efficiency upgrade, who has the most control of final results? The contractor, of course. The contractor should be incentivized to save energy. The contractor also has the responsibility of solving the problems the homeowner wanted to address in the first place. Why not give contractors the power to predict energy savings and determine the negawatt incentive?

This will result in bigger jobs that save more energy more accurately and more precisely, for much less public cost. Where current programs spend $1 to $4 per negawatt, this would work really well at 50 cents.

Keeping contractors from cheating the system

If we're paying for incentives upfront, will contractors be able to cheat? This question implies they aren't cheating the system now. The real question is, "Will less cheating occur?" The answer is a resounding yes.

With proper design and published results, contractors project savings first and then are rewarded based on how accurate they were. This means contractors will be incentivized to be as accurate as possible.

The solution is simple: publish results in a registry. If a contractor wildly overstates predicted savings, it will push that contractor down in the rankings and make it harder to sell projects next year. The focus stays on the results: solving client problems and saving energy. Cheating is counterproductive; overstating savings means a lower accuracy ranking and other potential penalties.

Rankings are a marketing tool. Even if consumers don’t know about the registry, high-performing contractors will tell clients about their rankings.

The program must be fuel-agnostic

In order for One Knob to work, it must be fuel-agnostic. Designers must develop a practice that focuses on best results for the client and not be enticed away by changing incentives.

There is mounting evidence in New York that fuel bias has significantly harmed homeowners who participated in the program by shifting them from electric to propane instead of to heat pumps. (Heat pumps are not an approved measure.)

In California, if a client switches from gas and electric to electric-only, they likely don’t qualify for a number of rebates.

It’s vitally important that programs using One Knob are completely agnostic as to methods, materials and fuels so that energy efficiency remains a primary objective. The only thing that matters is results.

Programs often have shifting funding sources. They may get money for electric savings, then later get money for oil savings. Being fuel-agnostic may require the creation of an "energy bank," where energy savings for every job, regardless of fuel source, are banked then sold as efficiency purchasers show up. A PUC could buy a gigawatt worth of negawatts from a utility. The utility receives credit for working toward its goals, then the PUC can sell those savings for whatever fuel is saved: propane, electricity, natural gas, fuel oil, etc.

Support comprehensive retrofits

Accuracy and precision have never been an objective. Without tracking, how could they be? If you don’t reward accuracy and precision, why would you expect them? However, there are indications both in academia and in the field that when you are doing truly comprehensive retrofits, high levels of accuracy and precision are possible.

Danny Parker of the Florida Solar Energy Center analyzed lots of data from Home Energy Saver and found that slightly deeper "operational" energy audits, which included a homeowner interview, were accurate within about 1.5 percent of actual usage.

Rick Chitwood of Chitwood Energy conducted a study that showed that truly comprehensive home performance projects actually exceed expectations, delivering significant reductions in peak demand.

Mike MacFarland of Energy Docs guarantees energy use levels in client homes. MacFarland can predict energy bills to within a few bucks per month. In fact, he tracks so tightly that when a client buys a plasma TV, it throws his results off, and he can identify that something has changed in the home.

Parker found through analysis of Home Energy Saver data that consumption is very predictable; Chitwood found that more comprehensive jobs result in surprising societal benefits; and MacFarland is confident enough in his work that he guarantees crazy-low energy usage. Does this make them da Vinci, Galileo and Columbus?

No, but they're recognizing what many program administrators aren't. Some of the highest value comes from more comprehensive projects -- and current program structures aren't allowing contractors to pursue the best opportunities for homeowners.

Where to go from here

So many home performance contractors reached out to me privately after my first article lamenting these problems that I know I am far from alone in my experience, and that perverse program design has a lot to do with it.  

Programs have no accountability for performance and provide no guidance on how to sell consultatively. The focus is on optimizing the “government cheese” rather than designing for excellent outcomes.

Really fixing houses takes more. And it can be done. With some new methods, my projects are averaging in the $20,000 range and real good is being done. This typically works out to about $75 to $150 per month when factoring in energy savings. Problems are being solved. I’m not skimping in methods. And all without a program.

I don’t have good financing. Property values in Cleveland are some of the lowest in the country. Utility rates are low. I’m working solo. Everything should be working against me. Yet I’m selling comprehensive home performance jobs. It’s early, I’ll grant you, but I’m selling them.

How do we get more people like me selling projects that truly matter and drive great results? I believe One Knob is the answer.

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Nate Adams, founder of Energy Smart Home Performance, is an author and building science geek. He has nine years of experience in the business. He relishes figuring out how to solve complex problems.

This piece is an edited version of Nate's many articles on the subject. You can read his full collection of work on this issue at his Energy Smart Blog.