Two years ago, the U.S. reached a quiet tipping point in the modernization of its power grid: The number of electric meters with two-way communications surpassed the number of older models on the grid.

It's not the sexiest statistic, but the long-term implications for efficiency and demand management are enormous. New advanced metering infrastructure (AMI) that can measure customer load with increased granularity has created opportunities for variable rate structures, effective demand response and increased customer control over their energy use. And now, with the ability to compare real-time usage to historical baselines, the industry can begin to more accurately value "efficiency as energy."

Pacific Gas & Electric is developing a pilot program that would do just that, working with Natural Resources Defense Council (NRDC) and The Utility Reform Network. Using the open-source CalTRACK/Open EE meter and measurement system, the parties want to create a two-year pilot that would engage with third-party aggregators of energy efficiency products, paying for actual results rather than using up-front rebates tied to expected savings.

What they are proposing isn't so much an energy efficiency program as a new market construct. By leveraging the measurement capability of AMIs, efficiency can become a tradeable resource in financial markets, allowing projects to self-finance or secure investment dollars through securitization.

“How can we use this infrastructure to create a new paradigm in how we go after energy efficiency,” questioned Matt Golden, an efficiency policy analyst who assisted NRDC with the proposal. “From an energy efficiency perspective, we need an offense – not a defense. How do we change the paradigm using data, and do it in the near term?”

A new investment model

Pay-for-performance is not an entirely new idea for efficiency, but the proliferation of advanced metering has now made it viable on the residential scale.

PG&E already has its Commercial Whole Building Program, which ties post-installation rebates to a performance-based bonus based on actual meter data. The program, open to owners and long-term lessees of commercial building, targets 15% savings and boosts total incentives to 60% of total project costs as opposed to 50% in other programs. Earlier this year, the utility had 14 projects enrolled in the pilot, including an office, grocery and institutional properties, ranging between 20,000 and 100,000 square feet. Results of the project are expected next year.

But the third-party residential model being proposed now is different: Not only does it remove the utility from the equation, moving further towards the platform-provider model, but it also focuses on creating market constructs rather than energy solutions.

Rather than attempting to directly design the delivery of energy efficiency services through programs, NRDC explained that through the proposal "PAs and regulators can influence outcomes but leave execution up to market players."

“Rebates are paid in advance, based on predictions,” Golden told the California Energy Commission in a discussion of the proposal. “Rather than getting paid in advance based on a rebate, we're going to have aggregators figure out how to get to market, figure out which consumer products people actually want to buy, how to package this, and how to make money for the industry – which is probably the biggest problem we have.”

“Getting paid based on meter performance aligns interests,” Golden said.

Few question whether energy efficiency measures work generally, but determining actual energy savings has been a barrier to commercializing the resource. California and a handful of other states have spent billions of dollars on smart meters, and can now begin to attach reliable values to efficiency enhancements. If the third-party pilot is successful in California, other states with high penetration of AMI could follow suit. According to the EIA, five states have AMI penetration levels above 80%, with the highest concentrations in Texas, Georgia and New England. 

And the shift is occurring rapidly – California added the most AMI meters of any state in 2013, with about 1.8 million new meters. Pacific Gas & Electric has about 9 million smart meters deployed in total, both electric and gas, to more than 6 million customers.

“Rather than getting a rebate, you'll have companies that have these cash flows that can self-finance projects or they can take them into the financial community and sell them and turn that into up front dollars,” Golden said. “They will figure out how to take that cash flow, reduce the interest rate, reduce up front fees, give customers incentives ... whatever it takes because if they don't do it, the next company will beat them to the punch. And if the system they're implementing doesn't produce, they're not going to get paid.”

For the utility industry, the shift would effectively eliminate one of the existential questions that has plagued executives: How do they continue to make money?

By tasking third parties with developing, marketing and installing energy efficiency, “you don't have to design business models anymore,” Golden said.

How PG&E's pilot would work

NRDC and TURN proposed the third-party pilot this spring with the support of PG&E, which noted the pilot "has the potential to facilitate comprehensive upgrades while simultaneously minimizing
implementation costs through leveraging private capital."

"The goal here is to create a fire hydrant that all these business models can plug into,” Golden said. But the challenge has always been, “how do we ensure these investments are cash-flow positive?”

NRDC explained that the pilot would test a model in which smart meter data is used to measure energy savings that can be aligned with incentives and paid for on delivery, "making it possible to create accountability to results."

The incentives would be paid to aggregators responsible for the performance of a portfolio of projects, which could include finance providers, a large contractor or a coalition of smaller contractors. NRDC stressed that the incentive payments should be made on a portfolio of projects to ensure the statistical significance of the savings and to manage the performance risk.

"While individual project performance can vary greatly depending on the idiosyncrasies of different homes, efficiency performance is more reliable on a portfolio basis," NRDC said. "By allowing the market players (contractors and aggregators of projects) to carry performance ... programs will likely be able to substantially reduce the percentage of program funds devoted to program specific administrative costs by increasing the overall yield of energy savings, and allowing industry to innovate the best way to package and deliver efficiency to the consumer. Aligning incentives with actual savings will reward business models that are profitable."

California has some of the most aggressive building standards in the country, and along with a 50% renewable standard, it is attempting to double the efficiency of commercial buildings. Efficiency is one of the biggest energy saving opportunities in the state, according to Lara Ettenson, who directs NRDC's California energy efficiency policy.

“There is a lot of efficiency we can gain in commercial buildings, in public buildings, and to get at it we will need some policy changes,” said Ettenson, who earlier this year authored a report on California's efficiency challenges. 

Faulty assumptions underlying efficiency programs are leaving efficiency on the table, she said, but policy changes could help unlock those savings. And the state has a ways to go: NRDC estimated California will need to save a cumulative 89,000 GWh over the next 15 years. Making energy efficiency a profitable, reliable investment could help access those savings.

“We're getting close to having an additional cashflow stream which helps orient the marketplace somewhat towards the social goal we're all looking for, but doesn't create so many barriers it slows down the marketplace," said Golden.