The newest power plants are buildings – generating efficiency resources

The efficiency resources revolution

Decades of patient work around energy efficiency are now bearing fruit. Building operators and the assets they control have a tremendous opportunity to improve their buildings and monetize their privileged position.

A confluence of trends in technology, regulatory policy and demand are combining to make today energy efficiency’s moment. Software technology can now measure the amount of energy efficiency generated. Just as importantly, regulators are coming to agreement on exactly how that measurement should work. Finally, demand for energy efficiency is at historic highs, as regulators need to bring down the capital required for a carbon-free electricity grid. These trends mean that old-school energy efficiency is being transformed into efficiency resources – resources that your building can monetize and sell back to the grid. 

We can finally measure efficiency

The eternal knock on energy efficiency has been that you can’t measure it. As anybody operating an asset knows, what you can’t measure, you can’t finance or incentivize or create markets around. Energy efficiency – until now – has never been considered a reliable resource because it could not be measured. It was never considered on par with generation-side resources such as power plants.

Here’s the big news: we can now measure energy efficiency. Measurement transforms energy efficiency into efficiency resources – a bankable resource, instead of just a painful target that regulators impose on utilities. Once grid operators can measure efficiency resources, they can treat it like other energy sources. Utilities can start to bill for efficiency resources, to set market auction mechanisms, to plan grid capacity around them, etc – in short, to do the many things that make our wholesale energy markets so efficient.

Measurement of efficiency resources changes the world for building operators. Operators are now participants in power grid operations – they control the resources the grid needs. Having the rights to control and sell a measurable, bankable resource means building operators can bring in private capital to gain the leverage that allows them to scale up efficiency efforts in their portfolio. Gridium Alpha has been set up to help building owners do exactly that. 

How efficiency resources are measured

It’s difficult to measure the absence of something. Efficiency resources are the absence of electricity use. So how do we measure efficiency resources? 

We measure efficiency resources in about the same way you would measure how much time you saved by riding a motorcycle to work instead of driving your car. You time your commute before the switch, time your new motorcycle commute, and compare the two numbers. The difference is how much time you saved – a lot in our experience, especially if you’re here in California and able to split lanes. You control for some variations by doing things like commuting along the same route and comparing days with similar traffic.

When the savings is due to an efficiency resources retrofit, you want to know how much energy you used before and after the retrofit. You could just read the electric meter before and after the retrofit, same as you read your watch on the motorcycle. The problem is that the weather affects how buildings behave so much that you can’t just take a simple before and after meter reading. So what you do is deploy a software model of the building’s energy use that shows how it reacts to changes in the weather and a few other key variables (like weekday vs. weekend days). 

This model simulates, given the weather and other variables, how much the energy the building would have used had the retrofit not taken place. This simulation creates a baseline. Gridium customers have been using this same underlying model for years to do things like predict and respond to peak demand days. Then, after the retrofit, you compare the energy used by the building (measured at the meter) with the simulated baseline. That difference is the measurement of the energy saved. Those measured efficiency resources can then be sold back to the grid.

Here’s an illustration: 

Post-retrofit, an Alpha project uses software to measure energy saved and sell energy resources to the grid.

Regulators hop on board

The nature of our energy markets is that reality is what regulators agree to.

The road to regulatory convergence has been long. There were years of studies, including important work by Granderson et. al. at Lawrence Berkeley National Lab (LBNL) showing the accuracy of software-based measurement techniques. Strong, patient advocates, like the MEETS Coalition, ourselves at Gridium, various staffers at the California Public Utilities Commission, the National Resources Defense Council, and others around the country spent countless hours working to hash out the details with regulators and utilities. This advocacy resulted in legislation and in regulatory alignment in California (which uses the term Normalized Metered Energy Consumption, or NMEC) and Seattle. Other jurisdictions, such as New York and Illinois, have also been actively investigating and developing guidance around how to measure efficiency resources. 

Regulators have become comfortable with a few important issues. The first is that they have agreed on methods by which they can evaluate and trust the software models used to measure the baselines. Models can be run against sets of test data in order to verify their accuracy – allowing open source and proprietary models to both be used for baseline creation. 

Another issue regulators have become comfortable with is how to measure efficiency resources in our diverse stock of buildings. They have settled on employing site-level evaluation for large commercial buildings, using Option C models that measure savings at the building level. For smaller residential buildings that may see higher individual variation in savings, regulators are using population-level evaluation, with all its attendant statistical complexity.

Finally, regulators have become comfortable with defining and incorporating non-routine adjustments – classically, these are changes in building occupancy or use – into baselines and, ultimately, into calculated savings. 

These changes have started to filter into innovative programs. Seattle just announced a pilot program that aims to bring tens of millions of dollars to bear on efficiency resource retrofit projects. The Oakland Clean Energy Initiative is using measured energy efficiency to replace an outdated fossil generating station in the urban core of the Bay Area. NYSERDA is running a measured efficiency pilot in New York. The California utilities are structuring many of their efficiency programs around a pay-for-performance model that uses measured energy resources to pay for incentives. 

All this means that regulators have set a path to making efficiency resources equivalent to their generation-side cousins. That path also makes building operators equivalent to power plant owners – in possession of a valuable resource that the grid will pay for. 

Efficiency demand: a carbon-free future requires efficiency resources

The measurement/efficiency resource revolution comes just in time. In the carbon-free, capital-intensive grid of the future, efficiency resources will be critical to lowering the cost of electricity for all users. Building operators will be at the center of this movement.

Carbon-free is the future of electricity

The world of electricity regulation is racing – to the extent that regulators race – toward a carbon-free future. Wildfires, hurricanes, crop failures and a teenager from Sweden have given the global climate change action movement an incredible boost of support in the past five years. 

The United States is at the forefront of this movement, despite current Federal policies. States and territories covering 42% of the U.S. population have enacted regulations that mandate reduction in carbon emissions of 70% or more. Three states and various other cities and territories have laws on the books that mandate carbon-free electric power sectors by 2050. San Francisco and New York City, for example, are pushing to decarbonize buildings by restricting natural gas use. Planning and work on this huge shift has begun in earnest. 

Carbon-free means capital intensive

A carbon-free grid will be extremely capital intensive. In today’s grid, depending on the region, about one third of a customer’s bill is due to the cost of purchased fossil fuel. Purchased fuel is an operating expense – operating expenses can flex up and down with the vagaries of seasonal or even daily demand. Operating expenses provide flexibility in planning and response to market shifts. 

In a carbon-free grid, all of those operating expenses will be replaced by capital expenditures (CapEx). Almost universally, carbon-free generation sources operate by putting a project in the ground, paying for it upfront and letting mother nature generate the electricity over a 30-year period. Carbon-free generation resources such as wind, solar, and some nuclear are capital intensive with low operating expanses, as are their supporting technologies, including transmission, smart distribution systems and storage. Similar to any capital-intensive asset, they are also extremely sensitive to some factors such as interest rates, current technology and tax treatments.

These capital-intensive systems have some advantages. They can be a great hedge against variable fuel costs – or even a lower-cost alternative – and provide planners with some certainty. 

Small is beautiful in a capital intensive world

Capital-intensive systems are also very sensitive to the size of the demands placed on the system itself. Even slightly oversizing a capital-intensive system can lead to tears and bankruptcies. The Washington Public Power Supply System’s (WPPSS) failed nuclear plant buildout in the 1970s is a great example of what happens when capital-intensive systems are overbuilt. It resulted in one of the largest municipal bond defaults in history – anyone who has visited the never-completed nuclear plant in Satsop, WA can enjoy the views of abandoned cooling towers.

The now-abandoned Satsop nuclear plant under construction. Courtesy Washington State Archives.

Why is optimal sizing so important in the electric power system of the future? First, every additional unit of size (in our case, kWh) must be installed up front and paid for over time. If you need another 1000 kWh, you can’t just turn up a generator, you have to have planned for and taken years to build a solar plant or wind farm. 

Second, as system size increases, so does complexity. Large, complex systems are inherently expensive. An examination of Hawaii’s decarbonization plans shows that even in a relatively small system, a carbon-free grid may include plans to build out transmission networks, including an inter-island transmission line to move power from where it is generated to where load is located.

Third, physical systems are at increasing risk in a globally-warmed world where fires, floods, hurricanes and droughts can all impact the ability to reliably deliver power. The larger the systems, the more risk they – and their owners – are exposed to. PG&E, California’s giant utility, certainly would rather have fewer transmission lines crisscrossing the state, at risk of starting wildfires. 

Role of efficiency resources

Here is where efficiency resources from the buildings our customers operate come in. efficiency resources won’t make a grid carbon-free, but they will make a carbon-free grid more affordable. It does this by shrinking the system size requirements. It’s as if you traded in your old bicycle for a new one with a lightweight carbon-fiber frame – you can go faster and further with the same amount of pedaling. The same goes for the grid – for reasons discussed above, you want a grid as small and “light” as possible. efficiency resources are the way you shrink the size of the grid. 

Some people confuse efficiency resources for demand response. Demand response allows grid operators to – on a short-term basis – call on users to reduce their demand. However, demand response is like an afterburner on a jet – expensive to run, and only available in short bursts. Efficiency resources, on the other hand, provide a bigger reduction in demand, even in highly-developed demand response markets such as New England, where efficiency is 5-10x the size of dispatchable demand response. Demand response is good for a final balancing, but the bulk of demand reduction will always come from efficiency resources. 

Timing – and buildings – matter

The time for efficiency resources – and the focus on building operators – is urgently now. As grid operators and regulators think through how to plan for a future carbon-free grid, they will want efficiency resources in place before the grid is fully transformed, not after. They will want to plan for and build toward a smaller system, not end up with a grid oversized and overpriced for local demand. 

Buildings, as by far the largest users of electricity and the largest source of efficiency resources, will be front and center in the new world of energy. And building operators will have important, value-creating, decisions to make about how they approach this new opportunity.