You, me, & the TRC
How Do Utilities Define Cost, and How Does That Affect Your Business?
Three small letters in the form of an equally petite acronym, TRC, have an enormous impact on your business if you are involved in any way with residential energy efficiency. But do you know what the TRC is and how it affects you? If you don’t, you should. Let’s see what it is, and then we’ll move on to why it matters.
Demand side management (DSM) programs across the nation have incentivized both new construction and existing-home improvements. These programs typically, though not always, work within existing frameworks to deliver the incentives for new construction, HERS ratings, and (for existing homes) participation in the Home Performance with Energy Star program (see “What Is DSM?”). However, there are as many different approaches to incentivization as there are programs. Examples include modifications made to existing programs (such as setting different HERS index thresholds than Energy Star) and entirely new programs designed specifically to provide incentives. Many programs for existing homes simply use a measure-by-measure incentive approach.
What Is DSM?
DSM is a form of management on the part of public utility regulators that seeks to mandate utility investments in energy efficiency and conservation programs. Effective programs reduce the amount of energy used and thus the demand for energy. It’s the flip side to managing the supply side of energy.
It is helpful to be conscious of the internal conflict that DSM programs may present to utilities, especially publicly traded ones that must grow their revenue. Under a DSM program, the utility will typically sell less of its product, thereby slowing revenue growth and potentially reducing profit. Utility commissions are aware of this conflict and take it into account when they consider rate adjustments and cost-recovery requests for the utilities they oversee.
These negotiations revolve around cost recovery for DSM programs. The only way that a utility can recover its costs is if its programs pass the applicable cost-effectiveness test. That’s why the tests are critical for the utility and will influence every decision that it makes on efficiency programs.
TRC stands for total resource cost. In most states where utilities are required to meet energy savings goals via end-user efficiency programs, regulations dictate that the programs be cost-effective; that is, the overall cost to offer an energy efficiency measure, program, or portfolio must be less than the benefits generated by the program. The TRC is the most commonly used of several methodologies designed to establish cost-effectiveness.
For context, let’s compare TRC to ROI (return on investment), an acronym most of us have used in relation to individual homes. We often discuss the ROI for energy improvements on a home as an imperfect way of deciding which energy improvements should be made. However, the ROI does not reflect the other tangential benefits of making energy improvements to a home. Comfort is probably the most obvious and often used example of these benefits. How do we measure and capture the effects of improved comfort in a home? The short answer is that we don’t measure or capture comfort in our ROI discussions. Rather, we tend to beg, wheedle, and cajole homeowners not to forget about comfort and the other myriad benefits of energy upgrades that aren’t captured by the ROI calculation.
The TRC is similar to the ROI, except that it’s a macro or utility-level tool. The TRC is only one of several cost-effectiveness tests, but auditors and raters often assume that it’s the only one.
Residential Versus Everyone Else
It’s critical to understand the composition of a typical utility-sponsored DSM portfolio. That portfolio extends beyond efficiency offerings for existing homes. Utilities serve a variety of ratepayers—residential, commercial, and industrial. All three represent opportunities for DSM program designs to meet their overall goals while working within a fixed or limited budget. Unfortunately for those of us in the residential sector, the TRC scores of residential DSM programs tend to be lower than the TRC scores of commercial and industrial DSM programs. For example, a commercial lighting program will almost always outperform any residential lighting program. The more comprehensive the residential program, the more likely it is to fail, given the added costs involved. That’s part of why we so often end up with single-measure programs as program managers attempt to develop a balanced DSM portfolio with the best cost-effectiveness test scores possible.
This short article can’t explore all the nuances of these various tests. Additional resources are listed under “learn more.” It is also important to know what test your state and utilities are using. However, to simplify, any cost-effectiveness test attempts to measure the impact of energy improvements against the cost of making them. As you might imagine, this can get complicated fast. Legions of specialists work in this facet of our industry to develop tests that accurately reflect reality. At least, that’s the hope mixed in with the theory.
Just as homeowners might decide whether to invest in an energy upgrade by assessing such financial metrics as return on investment, simple payback, or time to positive cash flow, so they might also assess such additional factors as comfort, indoor air quality, or environmental impact. Cost-effectiveness tests have a similarly narrow focus. One test focuses more heavily on cost, while another focuses more heavily on savings. One test takes into account societal impacts, while another fails to account for them altogether. This is an oversimplification, but the point is that no one test has been proven to fully account for the complex nature of these programs.
These complex cost-effectiveness tests are often used either in combination or in sequence in order to determine the ultimate cost-effectiveness of a program. But when all is said and done, the TRC is the dominant primary test by a considerable margin. In fact, of 41 states with a primary test, 29 use the TRC.
Why Does It Matter?
So how are these tests used in the “real” world? The short answer is that they are used in utility DSM program design, implementation, and monitoring. Most of us have worked with a utility DSM program in some fashion, either directly inside it, or on the periphery; or at least we have been affected in some way by such a program. How DSM programs are designed and implemented can have an enormous effect on your business. They work across every sector of energy use—industrial, commercial, and residential (see “Residential Versus Everyone Else”). We’ll keep the focus on residential programs.
DSM programs can be designed to influence behavior, change practices, or encourage purchasing decisions—really anything you can imagine that will reduce customers’ energy use in general and their on-peak use in particular. DSM programs can address both new construction and existing homes. This recognizes a twofold reality that we face as a nation. In order to reduce national energy consumption, we have to reduce consumption in existing homes, yet it remains easier to build new energy-efficient homes than it is to make existing homes more efficient.
- TRC test. Captures the participant’s and the utility’s costs along with the benefits of avoided energy costs.
- Societal Cost test (SCT). Identical to the TRC but attempts to capture the larger benefit to society that isn’t captured in energy savings alone.
- Ratepayer Impact Measure (RIM) test. Looks only at the impacts on customer rates by evaluating changes in utility revenues and operating costs.
- Participant Cost test (PCT). Looks at whether the participant will benefit economically. Can include some nonenergy benefits.
- Program Administrator Cost (PAC) test. Compares the cost of saving energy to the cost of delivering energy.
DSM programs are usually applied only to regulated utilities—typically investor-owned utilities (IOUs). The regulation of these utilities is most often overseen by the state’s utilities commission. The rural co-ops, municipals, and so forth are publicly-owned utilities and generally do not come under regulation. Therefore, they are not normally compelled to offer DSM programs, although they may, if they are directed to do so by their city councils or customers. It is important to realize that given the patchwork quilt of utility providers that serve many areas, you may have electric and natural-gas utilities that aren’t the same entity, that may or may not have DSM programs, or that may have competing programs. This is one of the challenges homes face in passing cost-effectiveness tests—a single home may be eligible for different, possibly even contradictory, DSM programs.
What’s Wrong with the TRC?
There is widespread agreement among DSM experts that the current application of cost-effectiveness tests is failing to support the activities that we efficiency practitioners know are most effective at saving energy. Specifically, whole-house retrofit programs fail these tests because it is difficult to quantify the benefits versus the higher-than-average costs of comprehensive work and testing. This leads to the adoption of single-measure approaches that don’t take building science fundamentals into account. One of the most egregious, yet common, examples is the installation of attic insulation without air sealing. How many attics have been insulated without being air sealed, and how many missed opportunities has that resulted in? Every rookie building science practitioner knows that the effectiveness of insulation is dramatically reduced without proper air sealing, yet that is the reality for most DSM programs.
Kushler, Marty, Seth Nowak, and Patti Witte. A National Survey of State Policies and Practices for the Evaluation of Ratepayer-Funded Energy Efficiency Programs. Washington, D.C.: American Council for an Energy-Efficient Economy, February 2012.
Neme, Chris, and Marty Kushler. Is It Time to Ditch the TRC? Examining Concerns with Current Practice in Benefit-Cost Analysis? Washington, D.C.: American Council for an Energy-Efficient Economy, August 2010.
Neme, Chris, Robin LeBaron, and Marty Kushler. Getting to Fair Cost-Effectiveness Testing Using the PACT, Best Practices for the TRC, and Beyond. Washington, D.C.: National Home Performance Council, September 2011.
The societal cost test (SCT) is the most comprehensive attempt to address the deficiencies of the other cost-effectiveness tests. However, even the SCT rarely captures all of the nonenergy benefits. The SCT is complicated; and the methodology is highly controversial. A number of authors, including Chris Neme, Marty Kushler, and Robin LeBaron, propose the Program Administrator Cost (PAC) test as the best solution to this problem. The PAC is simple, and by comparing the cost of saving energy to the cost of delivering energy it avoids the pitfalls inherent in other tests (see “Cost-Effectiveness Tests”).
What Should We Do as Energy Professionals?
Whether it’s duty or just good business, energy professionals like us—raters and auditors—need to have a working knowledge of what cost-effectiveness tests mean, how they’re used, and which ones are being used in our markets. Regulators need to hear from energy professionals on these issues. While it can be mind-numbing stuff, how these tests are applied has a direct impact on which rating and home energy improvement incentives are offered to homeowners. And because of that, how these tests are applied has a direct impact on your business. We may need to band together into trade groups to effectively advocate for the industry. You may even become an intervener with your regulatory commission. As an intervener, you have standing with a commission and can enter comments into the public record, requiring the commission to address your issues. That doesn’t mean, of course, that you will always get what you want, but you will at least have a seat at the table. As our industry grows and matures, that seat will become increasingly valuable and important.
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