(This is originally posted on Mike Rogers’ Omstout blog)
Part 2: How energy savings guarantees work
Like many things in life, for energy savings guarantees, the devil is in the details. While a guarantee is very attractive to homeowners, offering a guarantee can be difficult. The goal of any guarantee is to give a homeowner confidence in the benefits of the work being proposed. For a guarantee to be valuable, therefore, it must be something that homeowners believe is easy, simple and concrete.
Meeting all three criteria is more difficult than it sounds. Since energy efficiency is by definition the lack of energy, it is hard to measure and manage. Each guarantee balances the value of the guarantee with risk. A guarantee can be valuable to the homeowner, but include unacceptable risk to the company offering the guarantee. A guarantee can also manage all risks, but then be much less valuable to homeowners. A few examples demonstrate this spectrum of risk and value.
One of the first guarantees, cited by Mike in a past post on guaranteed savings, is offered by Bigelow Homes. The Bigelow guarantee can be considered the gold standard of energy savings guarantees. They literally say your annual heating or cooling bills won’t be more than $X each year. If you pay more, they will reimburse you for the difference. The challenge for this type of simple guarantee is that it has to be extremely conservative in order to deal with variance (less of an issue with new homes) and rising energy prices (particularly with volatile oil and natural gas prices). In fact, Bigelow Homes had to make their guarantee more conservative because of rising energy prices.
Energwyise Structures, based in Texas, offers a similar savings guarantee for new construction based on their superior designs. Like Bigelow Homes, they guarantee a cap on energy spending levels. However, Energywise limits the guarantee to HVAC, with metering installed to monitor performance. And while the guarantee agreement references dollar levels, it also cites related energy prices, implicitly making the guarantee neutral as to energy prices.
For existing buildings, a percentage reduction guarantee is much more common. For example, GreenHomes America offers a 25% heating and cooling reduction guarantee, although the details are not available on the website. These details are important, as we will see.
Masco also offers a “Limited Guarantee” to Environment for Living (EFL) homes. This guarantee is also focused on heating and cooling systems, setting a “Guaranteed Usage” heating and cooling amount that the home will not exceed. By defining the guarantee in terms of heating and cooling, EFL then defines the calculations used to determine heating and cooling:
“The following is a description of the method MASCO Home Services uses to estimate your Heating/Cooling Energy use: First, for the claimed Period, MASCO Home Services calculates the average of your three lowest months of energy use when your Home is occupied. MASCO Home Services assumes that this average estimates the energy you used for activities other than heating and cooling your Home. That average is then multiplied by 12 and subtracted from your total energy use during the claimed Period. The remaining amount estimates the Heating/Cooling Energy, which is the energy used to heat and cool your Home during the claimed Period. If appropriate, MASCO Home Services also may adjust the Heating/Cooling Energy to exclude energy use not related to heating and cooling your Home, such as seasonal use of pools and spas, and to account for any change in energy use for heating and cooling your Home related to any change or modification to your Home, its HVAC System or its occupancy.”
The EFL guarantee also includes a series of homeowner responsibilities that are similar to many of the other guarantees:
“Your actions can greatly affect energy use in your Home. You are not covered under this Limited Guarantee unless you exercise prudent energy management for your Home. As a condition to maintaining this Limited Guarantee, you agree to:
1. Use windows and doors prudently when operating the heating, ventilating, and cooling (“HVAC”) system of your Home.
2. Follow manufacturer’s instructions regarding operation and service of the HVAC system of your Home, including annual inspections and filter replacement.
3. Set the thermostat of your Home at no higher than 72 degrees F during the heating season and no lower than 75 degrees F during the cooling season.
4. Notify MASCO Home Services of any change or modification to your Home, its HVAC system and/or its occupancy after the Start Date so that MASCO Home Services, in its discretion, may re-evaluate and make appropriate adjustments to the Guaranteed Usage. You will be charged a fee for any such re-evaluation or adjustment. MASCO Home Services may, in its discretion, refuse to pay a Reimbursement Amount under this Limited Guarantee for any material changes or modifications to your Home, its HVAC system and/or its occupancy.
5. Submit any claims and notices in writing to: MASCO Home Services, c/o Environments For Living program, 2339 Beville Rd., Daytona Beach, FL 32119. Any claim for a Period must be submitted to MASCO Home Services within 30 days of the end of that Period. For example, any claim for the first year of the Limited Guarantee must be submitted within 30 days after the first anniversary of the Start Date. You must include copies of your actual detailed monthly utility statements for your Home for the applicable Period and proof of the HVAC system maintenance and service work with your claim.
6. Permit MASCO Home Services and your builder to access your Home, upon reasonable notice, to inspect, meter and/or to make changes or modifications to your Home in connection with this Limited Guarantee. MASCO Home Services shall not be responsible for performance of and/or payment for any changes or modifications to your Home by your builder or any third party.”
These conditions certainly reduce Masco’s risk, but unfortunately few homeowners would consider them easy, simple or concrete. The upside of this dynamic is the fact that, historically, very few homeowners make claims on savings guarantee (<1%).
The downside is that this probably means most homeowners don’t believe or value the guarantee. Since most guarantees make it difficult for homeowners to claim, this dramatically reduces internal calculations that it is “real” and therefore something to be factored into a buying decision. Think about all of the cheesy “money-back guarantee” commercials you see each day, and how realistic you think it is that you would ever actually return something.
Making a quote believable is therefore very important to make it valuable. A quote from a recent focus group on energy savings guarantees summed up this sentiment well:
“I just don’t understand how it would work … there’s so many variables. There’s no way that you can do that and actually stay in the black.”
In the last few years the solar industry has found a way to make guarantees believable in the context of Power Purchase Agreements (PPAs), where homeowners only pay for the power delivered (see an example from SunRun). A homeowner is guaranteed to pay based on actual solar power that displaces their utility bills. This billing is done automatically without any requirements for the customer to call the solar company.
Unlike energy efficiency, however, the size of this displacement can be easily metered and measure. In addition, the variance of solar panel generation is much lower than efficiency. In order to deliver a believable (and therefore valuable) guarantee, the issues of ongoing savings quantification and variance must be addressed.
My company, Sealed, is trying to address these issues in order to offer an energy efficiency guarantee for existing homes that is easy, simple and concrete. We do this by replacing a homeowner’s utility bills (electricity and heating fuel) with a single Sealed Energy Bill that is guaranteed to be X% lower than baseline energy bills, defined as a formula of baseload and weather-variable energy usage multiplied by current energy prices.
By replacing utility bills, Sealed solves several problems. First, we remove the variance challenge, smoothing out the savings for each homeowner. In practical terms, this means that some homes will actually save less than the amount we have guaranteed, and some will save more. But any individual homeowner will always pay a guaranteed percentage less than their baseline amount.
In addition, Sealed automatically delivers these savings so that there is no need for the homeowner to monitor performance and contact us to receive the guarantee. Their Sealed Energy Bill always includes guaranteed savings no matter what they do.
Perhaps more importantly, Sealed visualizes the savings each month, making them a concrete number that can be digested and communicated to others. The goal is to give homeowners consistent reinforcement that they are saving money, making it more likely that they will refer friends, family and neighbor to Sealed or a home performance contractor.
Sealed’s challenge is to appropriately manage the savings risk, both in terms of the project performance and any behavioral or moral hazard risk. We also need to change a 100-year pattern of homeowners paying utility bills instead of a new bill that focuses on savings. I can’t guarantee Sealed will meet all of these challenges, but we are certainly going to try, and hope many others will join us in that effort.