Contractors Profit in Open Market

Faster than you can caulk a windowsill, California is restructuring its electric industry. In the process, the state is radically changing the way efficiency services are funded and delivered. For savvy energy efficiency service providers, this means new opportunities. But to win in the new market, they need to understand the restructuring process. They also need to take part in it.

Earlier this year, Staples/Hutchinson and Associates of Wisconsin was awarded a contract to change the way homes are marketed and sold in California. This energy services company (ESCO) had a plan: to promote the use of energy efficiency mortgages to improve the energy performance and affordability of manufactured homes.

Until recently, programs developed differently. Traditionally, the utility would develop a program and either contract out for implementation or deliver the program itself. Sometimes, companies that provide energy efficiency services--including home performance contractors, light bulb manufacturers, ESCOs, and even communications companies--tried to sell a utility on a program concept and then worked with the utility to develop the program. The utility could then implement the program, or leave implementation up to the outside energy efficiency service provider. Implementation was financed by the utility, through regulated electric rates.

This year, restructuring has changed the process. Staples/Hutchinson developed their concept, submitted the proposal to the utility, and retained the right to implement the program. The utility recommended that the California Board for Energy Efficiency (CBEE, see "New Jargon for the Trades") approve the program, so Staples/Hutchinson will be funded to work on it. Funding for the program is not coming from regulated utility rates, but from a new fund for low-income programs, energy efficiency, research and development, and renewable energy.

California's Market Opens

In September 1996, California became the first state to pass a law comprehensively restructuring the electric industry. At the end of March 1998, California became one of the first states where residential ratepayers could choose their electric service provider. Other states are close behind: at this writing, 10 states have passed some form of restructuring legislation, and 36 more are investigating action.

The California legislature didn't want consumers to lose the benefits they have enjoyed through the traditional monopoly utility structure, so they created the Public Goods Charge (PGC). The PGC is a surcharge on electricity. All California electricity customers pay this charge as part of their utility bill. The funds are dedicated to low-income services, energy efficiency, renewables, and research and development. Of the $2.5 billion or more that the PGC will collect, utilities will invest nearly $1 billion in cost-effective energy efficiency programs like Staples/Hutchinson's.

Though it is still in transition, the California experience provides examples of the opportunities that will be possible in the restructured economy. The state has initiated programs to increase consumer demand for, and availability of, efficiency products and services. California will rely more on independent energy efficiency service providers to design and implement programs. Different portions of the PGC are being distributed in different ways (see Figure 1), but ESCOs will be picked mainly through competitive processes.

In California today, there are three main mechanisms to fund implementation by energy efficiency service providers. First, there is a joint planning process, which is similar to the traditional program setup. Stakeholders, including the CBEE, utility administrators, and consumers, work together to develop program concepts. The resulting programs are usually put out for competitive bids.

Second, there is the path that Staples/Hutchinson took--the Third Party program. Groups of tradespeople, ESCOs, retailers, agencies, and other institutions may come up with program concepts and submit them to the program. If the administrator deems a concept to be eligible under rules established by the CBEE, its sponsors develop it into a full program. Once developed, the program is implemented, either by the proposer or by another company identified by the proposer. Because proposers are told whether their concept is eligible before they have invested much time and money, innovative ideas are encouraged.

Finally, there is the Standard Performance Contract (SPC). To qualify for SPC funding, several project sponsors (including contractors, manufacturers, retailers, and customers) agree to deliver energy savings for a set price per kWh saved.

Programs Are Born

The most common SPC proposals are direct-install programs--programs where the funding contributes to the purchase and installation cost of high-efficiency equipment. The equipment must meet a minimum level of efficiency to qualify for the SPC. A retailer may propose a program to increase the market for a particular device--a horizontal-axis washing machine, for example. The sponsors are not given enough money to pay the entire cost of an efficiency measure, so customers will usually pay the balance. The project sponsor is responsible for measuring the savings using a prespecified set of measurement and verification protocols. Since the protocols are all clear in advance, applicants can design and implement programs with full knowledge of the program criteria and prices.

New and Expanded Opportunities

There is another way in which restructuring may offer new opportunities to both ESCOs and contractors. New energy service providers (ESPs) are tapping into customer preferences for cleaner, more environmentally friendly energy options by packaging and marketing green electricity, much of which is produced with renewables. So far, green electricity has offered environmental benefits only on the supply side. But Eric Miller, CEO of Foresight Energy Company of California, is quite excited about creating a product portfolio that includes energy efficiency. "It makes sense for ESPs offering green power to include energy efficiency services to increase the environmental appeal of these products and to bring down the extra cost associated with renewables," says Miller. Another California ESP has started to offer a demand-side efficiency device to consumers (see "Efficiency Sells for ESP").

As more states restructure their electricity industries, there is no guarantee that energy efficiency services and products will have the same opportunities that are becoming available in California. Investments in efficiency will continue to dwindle as utility competition spreads around the country, unless public benefits are explicitly preserved. Providers interested in the new market should communicate their support for a PGC-type mechanism to their state policymakers. And they should participate in the process, either as individuals or through their professional associations.

Before restructuring, funds were all distributed through the monopoly utilities. Today, much of the money is sent to smaller energy service companies and even directly to contractors.

Sheryl Carter is a senior policy analyst in the San Francisco office of the Natural Resources Defense Council.

Home Energy can be reached at: contact@homeenergy.org
Home Energy magazine -- Please read our Copyright Notice