Appendix B. The EnergyRM EE PPA

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1 Appendix B The EnergyRM EE PPA Description One specific variant of an EE PPA that is being discussed in Oregon and the Northwest is a model proposed by EnergyRM and Equilibrium Capital, which will be referred to as the EnergyRM EE PPA in this report. The EnergyRM EE PPA features a third-party energy service provider (ESP), which installs the efficiency measures, using either its own capital or capital from an outside party. Operation and maintenance of the installed measures can be the responsibility of the original ESP, another ESP, the building owner, or the party that provided the capital. The monthly energy savings would be determined using M&V methodologies agreed to by the utility, the building owner, the ESP and any other relevant stakeholders prior to project commencement. The utility would then pay the project owner for the savings on a per kwh basis. The utility in turn, bills the building for all kwhs measured under the M&V method agreed to by the parties. EnergyRM has proposed using its DeltaMeter, a computer model that EnergyRM says would interface with the utility using the same protocols as a standard utility smart meter. The utility would send a bill to the building owner, which would contain both their traditional meter reading and the DeltaMeter reading. Both meters would be billed at the standard retail rates. In order for this type of arrangement to be instituted, it would require a utility to file a tariff with the Commission for approval. A variant of this model would have the utility finance and own the upgrades instead of a third-party. The ESP would still install the measures and the measures would be maintained by a party chosen by the stakeholders. In either case, the customer would agree to pay the utility for both actual usage and estimated savings. Generally, both payments would be based on the current retail rate for that customer. Separately, the party that provided the capital would pay the customer a monthly lease payment. This payment would be compensation for the customer allowing the installation of energy efficiency measures at their facility. The party that provided the capital would be free to offer different levels of lease payments to different customers. A key element of the EnergyRM EE PPA is a modeling tool that is proposed to characterize the energy savings due to the upgrade. The model being proposed, called the DeltaMeter, combines a whole-building statistical regression with a thermodynamic engineering model to calculate a baseline. EnergyRM claims the model allows the baseline to be regularly adjusted for routine and non-routine changes in the building. The 1

2 DeltaMeter has yet to be extensively verified and tested. The Northwest Energy Efficiency Alliance (NEEA) is considering working with EnergyRM to test and validate the DeltaMeter along with other similar types of advanced computer models. Key features and feasibility The EnergyRM EE PPA is distinct in several ways, primarily: Third party or utility puts up capital for improvements Third party or utility installs and/or operates improvements over the life of the contract Customer pays a utility bill for both the traditional billed use and for the estimation of energy saved due to measures DeltaMeter is used to calculate whole building energy savings The utility is required to modify its traditional bills by adding a charge for the estimation of energy saved Based on these features, the EnergyRM EE PPA may be best suited for large owneroccupied office or commercial buildings where the owner requires capital, where the cost of capital for the building owner is high, where the building owner does not wish to invest capital over a long period of time, or where the building owner does not want additional debt obligation on their books. According to EnergyRM, in their proposed structure, the company responsible for the retrofit (potentially the ESP) installs the measures using a tenant improvement (TI) model. Under this structure, the ESP signs a long-term lease with the building owner, as other tentants do. In that agreement, the ESP upgrades improve systems in the building as TIs. All TIs must be approved by the building owner, must be operated in ways that do not interfere with other uses of the building, and all TIs revert to the building owner when the tenancy ends. The ESP pays the building owner a lease payment for the term of the agreement. According to EnergyRM, all of the equipment remains the property of the building owner. The EnergyRM EE PPA may not be feasible if the DeltaMeter is unworkable due to difficulties calculating a baseline over a long period of time due to significant operational changes or changes in tenancy. Such significant changes would need to be addressed by language in the contacts regarding renegotiation or termination. The EnergyRM EE PPAs would generally not be feasible for factories. Manufacturing processes are complex. Shifts in levels of production, type of product and manufacturing techniques make it difficult to establish baselines needed to estimate savings. Also, there could be proprietary issues with energy usage data. 2

3 OPUC Staff calculated the total potential savings achievable through an EnergyRM EE PPA based on information provided by NEEA and the Energy Trust of Oregon. 1 At the April 15, 2012, OPUC led workshop on EE PPAs, Jeff Harris from NEEA provided a very rough, order of magnitude approximation of the total square footage in Oregon where an EE PPA may be applicable. He indicated that in Oregon there are 900 commercial buildings, each with 20,000 square feet or greater in floor area. As a very general potential approximation, he said that if 33 percent of commercial building owners seeking to complete deep energy efficiency retrofit upgrades would elect to use their own equity and 33 percent would secure conventional financing, that would leave approximately 33 percent (300+ buildings totaling 22 million square feet) that might benefit from funding through an EnergyRM EE PPA. If deep energy retrofits that achieved 50 percent energy savings 2 were performed on these 300+ buildings, Energy Trust estimates that would represent a savings potential of approximately 2.9 million annual therms and 243,000 MWh/year or approximately 4 percent of the projected 20-year achievable electric and gas savings potential in the state. Other more simple types of EE PPAs, as well as energy efficiency and conservation programs being developed by NEEA and the Energy Trust could also largely address this same segment. However, to date, this segment goes largely unaddressed and it is not yet known which (if any) new approaches will work in this sector. Advantages and Disadvantages Potential advantages of the EnergyRM EE PPA include: An EE PPA may potentially allow for lower interest rates due to the utility as a counter party in transactions and the fact that customer payments are being made to the utility, not the project owner. These benefits may be especially true if utility service can be shut off for non-payment of the portion of the bill that covers saved energy. EE PPA financing can help secure or leverage additional financing to help pay for energy and non-energy upgrades. As compared to other payment approaches, the EnergyRM EE PPA may be able to achieve more savings than current methods for buildings with long-term tenancy where the owner needs capital, where the cost of capital for the building owner is higher than can be provided by outside investors, or where the building owner does not wish to invest capital over a long period of time. Outside investors will still require that the building owner have a sufficiently strong balance sheet. Projects will not be possible for buiding owners in difficult financial circumstances. 1 NEEA is a regional organization funded by NW utilities and the Energy Trust of Oregon to accelerate energy-efficiency markets though research and development of innovative programs. 2 Typically deep retrofits are considered to yield between percent energy savings. 3

4 Other potential disadvantages relate to unknowns about whether or not a utility would enter into these arrangements. In an EE PPA, utilities would need to carefully develop and review contracts, train staff, field phone calls, resolve disputes, and seek approval from the OPUC on tariffs associated with EE PPAs. Utilities would need to project savings from EE PPAs for planning purposes and then count on those savings going forward. Long-term contracts and the need for long-term savings estimates may be seen as unnecessarily risky and labor intensive as compared to other methods. Typical power purchase agreements include bilaterally negotiated protections for the utility and its customers such as credit assurances and security requirements. The Commission does not have statutory authority to require utilities to pay more in a mandatory conservation program. Therefore, the OPUC cannot force a utility to participate in an EE PPA. PacifiCorp and PGE have both indicated that their current customer billing systems could not accommodate the billing requirements of the EE PPA so the system would need to be updated or bills created manually. PGE roughly estimates legal costs between $50,000 and $100,000 to negotiate, draft, and obtain approval of the utility/developer contract and the utility/customer contract/tariff. This would cover just documents associated with a pilot. It is unclear how the proposed structure will be viewed by building owners. Significant uncertainty remains about potential challenges and purported benefits. If it were decided that this option is viable, the best way to understand its potential challenges and effectiveness would be to test the concept and find out. If a trial or pilot is undertaken, it needs to be limited and rigorously designed and monitored to see if it achieves the desired results while minimizing ratepayer risk Comparison with other models: Incentive based programs Although customers generally favor up-front incentives above payments over time, incentive-based programs require customers to use their own money or secure third party financing for project costs not covered by incentives. As such, they don t address lack of capital and they may not address deep retrofit lost opportunities. Energy Trust and NEEA are developing a program approach to deep retrofits that can work with an array of financing approaches. Energy Trust s experience suggests that the following entities may have a difficulties finding third-party financing from conventional sources, so their ability to cover their own portion of deep energy retrofit costs may be limited: 4

5 1. low and moderate-income property owners; 2. public and non-profit building owners; 3. for-profit owners whose debt approaches or exceeds their equity; 4. multi-family housing owners; and 5. small commercial building owners. Incentive-based programs may not address persistence of savings through ongoing monitoring and verification as rigorously as the proposed EnergyRM EE PPA with its whole building regression model to track savings over time. More traditional financing approaches Customers often obtain capital for retrofits through traditional loans made by banks. Loans can be paid back through monthly bill savings. Very often deep energy retrofits are financed together with major building renovations. One benefit of conventional loans is there is no need to separate out the energy efficiency costs or funding from standard remodeling costs and no need for separate contracts and long-term monitoring and verification (M&V). However, this sort of real estate financing has been available for many years and has not resulted in deep retrofit projects. Financing options are also available through special third-party arrangements. In traditional Energy Saving Performance Contracts (ESPC), a third-party ESCO contracts with an energy end-user directly. The ESCO is paid by the end user to install energy savings measures that the customer owns. The ESCO can provide financing, but often the customer uses his or her own capital or secures funding separately. A benefit of the ESPC/ESCO model is that the utility is not involved. ESCOs have successfully been used in the MUSH market but they have not had strong success in the commercial market. Efficiency Services Agreement An efficiency services agreement (ESA) is a relatively new type of energy efficiency financing model. ESAs supply off balance sheet financing for energy retrofits. A thirdparty provider charges a customer for saved energy measured over 5 to 15 years. In an ESA, the utility is not involved. ESAs are still new and are only being used in a handful of projects. It is still unknown how they will perform and for what sectors they are most applicable. How much to pay for conservation with an EnergyRM EE PPA? In an EnergyRM EE PPA, the customer pays for energy savings at the retail rate. Therefore, in addition to the cost caps described in Chapter 7 of this report, prudent Commission policy would be to also include the following cost cap: 5

6 Retail rate less the fixed cost component of the rate If a customer is paying for savings at the retail rate, the maximum that should be paid for savings is the retail rate minus the fixed portion of the utility bill. The retail rate can be thought of as containing two parts: power costs and fixed costs. Power costs are costs the utility avoids when energy is saved. These include things like fuel costs or the cost of buying power on the market to serve customers. The second portion of the retail rate, the fixed portion, goes to cover costs the utility pays, at least in the short term, even if energy is saved. Fixed costs include things like the cost of transmission and distribution lines. In an EE PPA, where a customer is paying for savings, a reasonable cap on payments to an EE PPA provider would be that the provider not be paid more than the power cost portion of the retail rate adjusted for the higher benefits of end use savings over generation (e.g. transmission losses). In this way, the portion of the retail rate that goes toward fixed costs, could be retained by the utility to cover those costs, such that other, non-participating rate payers are not burdened with paying additional fixed costs due to the energy saved through the EE PPA. Minimum of three proposed cost caps To ensure rate payers are receiving the full benefits of conservation, through an EE PPA, the Commission recommends that utilities never pay more than the minimum of (1) direct cost of measures; (2) retail rate less the fixed cost component of the rate; or (3) avoided cost. These three cost caps ensure that customers continue to benefit from both the value and low cost of conservation. 6