Assessing the viability of the bundled energy efficiency/electricity supply business model
MetadataShow full item record
The restructuring of the U.S. electricity economy has enabled the emergence of a unique form of energy efficiency provision, the bundled energy efficiency/electricity supply contract. A growing number of electricity retailers are offering a supply contract that incorporates the cost of energy efficiency services into the supply cost quoted. In so doing, the bundled energy efficiency/electricity supply contract represents a solution to two major barriers to energy efficiency; lack of capital, and unwillingness to use debt-financing. Electricity retailers providing energy efficiency services offer a number of different financing options. However, the bundled energy efficiency/electricity supply contract model, a type of managed energy services agreement (MESA), has been adopted by several of the largest electricity retailers and has the greatest potential to grow efficiency implementation. The competitive electricity market is well on its way to adopting the bundled energy efficiency/electricity supply contract model. Electricity retailers providing energy efficiency services (through a variety of financing mechanisms) account for approximately half of all residential and commercial sales in the competitive electricity market. As of July 2013, energy efficiency services in the form of energy efficient products (e.g. programmable thermostats) and project services (e.g. lighting retrofit services) are provided by 13 of the 80 electricity retailers (16.3%) serving the residential market provided energy efficiency services; however, the 13 electricity retailers accounted for 47.2% of total residential market share. Energy efficiency services are provided by 17 of the 94 electricity retailers (18.1%) serving the commercial market; however, the 17 electricity retailers accounted for 53.7% of total commercial market share. Of particular note, the largest electricity retailer for the commercial market and the second largest electricity retailer of the residential market have both specifically adopted bundled energy/electricity supply contracts models in the past 2 years. Having reviewed the current market for electricity retailers providing energy efficiency services, we focus on the strategic implications of the bundled energy efficiency/electricity supply contract model. In so doing, we identify mutually beneficial opportunities for coordination between electricity retailers, energy services companies (ESCOs), and third party financers in providing bundled energy efficiency/electricity supply contracts. Finally, we focus on quantifying the potential value of energy efficiency to electricity retailers and their customers due to the impacts of energy efficiency implementation. By providing energy efficiency services to its customers, an electricity supplier can reduce the costs it pays to power plants to supply its customers; customers can share in these costs savings. An energy efficiency valuation analysis was completed to determine the comparative impact of energy efficiency on electricity costs savings based on differences in United States wholesale electricity market (ERCOT vs. PJM), electricity procurement strategy, and operational characteristics of energy efficiency technologies. The results of the analysis reveal the quantitative basis for the popularity of fixed cost electricity supply products that including lighting retrofits. There is a nearly perfect correlation between a customer’s load factor and the customer’s electricity cost savings (fixed pricing) for lighting retrofits; in contrast, a customer’s load factor and the average real-time electricity price have inconsistent impacts on a customer’s electricity cost savings under real-time pricing products. Paradoxically, despite the difficulty in predicting the cost savings outcomes with real-time electricity pricing products, the electricity cost saving potential is greatest under real-time electricity products (in ERCOT). Beyond these insights, the marked divergence in potential energy efficiency savings between the ERCOT and PJM wholesale electricity markets reveals the implications of fundamental differences in wholesale market design. The energy efficiency modeling results suggest that in order for electricity retailers to maximize the value of bundled energy efficiency/electricity supply contracts, they will need to tailor contract design based on wholesale electricity market. All told, the complexity of maximizing the value from energy efficiency, the early stage of the business model’s development, and the hundreds of billions of dollars in annual electricity costs paid by consumers, ensure future market development and innovation.