Why — given its comparatively low cost and wide-ranging benefits — has energy efficiency typically been an afterthought when it comes to power sector investments? This conundrum has caused much head-scratching and consternation among energy efficiency proponents and policymakers.

While trillions of dollars of capital flow to power supply options like gas power plants or wind and solar farms, and to energy delivery options like transmission lines and pipelines, energy efficiency is relegated to funding accrued from small add-on charges paid by ratepayers. 

Energy efficiency programs are structured more like public welfare programs than grid management investments. As a result, energy efficiency programs suffer excessive planning, evaluation, and overhead costs. 

Further, efficiency improvements in buildings are made one-by-one, with homeowners and business owners assuming most of the risk and paying most of the up-front costs. Meanwhile, the grid benefits estimated from flawed evaluations may or may not be achieved, let alone occur when and where they're needed most.

As a result, even though efficiency investments yield substantial savings for the U.S. economy, we're achieving just a fraction of what's possible — and needed today.

In order to help keep global temperature rise below 1.5 degrees Celsius — which scientists say is the limit to avoid massive damages — almost all buildings in the U.S. will need comprehensive energy retrofits. That will require an investment of $3.6 trillion, more than 450 times what the U.S. now invests in energy efficiency each year.

The good news is this could all change; energy efficiency could start to see the same scale of investment other major grid resources enjoy. Why? Because of the growth of renewable energy supplies like wind and solar. 

But wait, don't plentiful new clean energy supplies make energy efficiency unnecessary? To understand how wind and solar can boost energy efficiency, consider how the job of grid operators is changing as more and more of these renewables come online.

Historically, grid operators focused on managing energy supply resources to meet customer demand at every moment of the day. So for every service area, grid operators sought to build enough dispatchable energy supply resources (like power plants) to meet maximum customer demand at its highest point in the year — plus an additional margin of safety.

With the influx of solar and wind, instead of a dispatchable energy supply that can be ramped up or down at a moment's notice, grid operators must manage an energy supply that's intermittent — available only when the sun shines or the wind blows. Grid operators now face a major role reversal: Instead of managing supply to meet demand, they need to manage demand to meet supply.

But how does one manage customers' energy demand? That's where energy efficiency and other energy optimization techniques come in.

New technologies like smart meters and programmable thermostats and appliances can shift energy use by moving electricity load to times when renewable energy is available. We can now set hot water heaters or dishwashers to run — and EV batteries to charge — during the afternoon when the sun is shining or late at night when the wind is blowing.

Coupled with other efficiency improvements that can lower peak demand, and effective time-varying rate designs, our electric system can successfully incorporate very high levels of clean, renewable energy. In fact, buildings retrofitted for efficient, flexible, and smart energy management can interact with the electricity grid as effectively as a solar panel or wind turbine.

Excellent insulation in a building can help it store energy and shift its energy use. Aggregated together, many retrofitted buildings could shift as much load as a power plant or wind farm can provide, offering real value to grid operators. And with properly designed electricity markets, building owners could earn real money by doing so.

Imagine if, instead of paying for energy efficiency improvements through arcane ratepayer programs, we paid for them with project financing like we do power plants or transmission lines, where investors put up the cash and are paid back through the sale and delivery of power. Only in this case, investors would put up cash for targeted efficiency and demand flexibility improvements and get paid back through the sale of their load-shaping benefits to those responsible for managing the grid.

This scenario is already starting to happen.

Pacific Gas & Electric (PG&E), for example, solicited pay-for-performance bids to achieve targeted energy savings, paying a sizable premium for savings between 4 p.m. and 9 p.m. when demand is highest and energy supplies are comparatively dirty. Bids from four vendors were accepted, each using different innovative approaches to delivering energy savings at specific times of the day.

It's the vendors' job to raise the capital needed to design and implement their ideas and acquire customers, and they assume all the risk — not ratepayers. They will pay back their investors with PG&E's payments for the energy savings they deliver.

Compare this to the status quo, where residential and business ratepayers take on the risk of utility energy efficiency programs and have to pay for them up front.

Critical to this new approach is ensuring investors' confidence, which means accurately quantifying its effectiveness. And that's no small task when it comes to the energy savings and load shaping benefits of building retrofits.

Historically, energy data has often been unavailable, and how it's been measured has varied from place to place. Thankfully, new energy-metering technologies, analytical techniques and standardized measurements enable accurate, real-time valuation of energy savings and load shapes, providing the certainty investors need.

In the PG&E pilot program described above, program administrators and implementers use open source code to track energy program performance and to adapt and improve programs as they progress. This transparency for all market participants supports regulators and advocates by offering a consistent lens through which to assess progress. System planners can see the tangible effects of these new programs on the grid.

The power sector is rapidly transforming, and our thinking about energy efficiency needs to evolve with it.

In addition, we urgently need to decarbonize our economy to reduce climate risks. Accordingly, energy efficiency can no longer be just about reducing kilowatt-hours.

It means using as few kilowatt-hours as possible to get a job done, flexibly matching that load to the availability of clean renewable power and quantifying those results transparently in a way that provides certainty for investors and rewards participation in the market. This transformation will unlock billions of dollars in capital to underwrite better, smarter, grid-integrated, beneficially electrified buildings and vehicles that will help us reduce, shape, decarbonize, and optimize our energy use.

Overall, our costs will be much lower — and our future much brighter — as a result.