Energy efficiency incentives provided by power providers sound good. They look good. They sometimes even feel good. But are the really good?
Most major power providers across the United States provide some sort of incentive for their customers to reduce energy. The reasoning behind the incentive is that it is cheaper to incentivize their customers to reduce consumption than to build a new power plant of some kind. This makes perfect sense. It is cheaper to pay out $10M to customers to reduce their kWh usage than to pay ~$1B to build a new power plant that would only create a fraction of the same kWh reduced by energy efficiency.
By definition, the word “incentive” means: a thing that motivates or encourages one to do something.
In our seven years as an energy efficiency consulting company who focuses on LED lighting retrofits, we’ve completed nearly 70 projects–most of them very large retrofit projects that qualify for incentives. Interestingly, only a handful of those projects would have not occurred had therenot been an incentive. The projects our company conduct qualify for incentives, but our customers usually don’t make the decision to move forward with the project based primarily on the fact that their energy provider gives them some cash for doing so.
Admittedly, the incentive money typically helps increase the attractiveness of the project. After all, when the project has a better financial outlook, it is definitely easier to swallow the capital expenditure.
But what about the unintended consequences of these incentives?
Most power provider incentive programs require a significant amount of paperwork. In addition to the paperwork, most incentive programs place restrictions on the type of equipment that can be used in the project. Furthermore, some power providers place some pretty unreasonable requirements on vendors and contractors who help implement the projects in order for the customer to receive the benefits.
What does the mountain of paperwork, product restrictions, and vendor requirements do to the pursuit of energy efficiency? Simply put: they effectively slow the overall conversion to energy efficiency in the commercial sector.
A business wants to retrofit their facility to LED lighting. They reach out to a reputable lighting contractor or energy efficiency consulting company to audit their facility and present a project proposal. The vendor does the audit and recommends a solution that will reduce their energy consumption by $10,000 per month. The customer is aware of possible incentives from the power provider and asks the vendor to apply on their behalf. Here’s what happens next…
The vendor applies to the power provider for the incentive. The power provider takes three to four weeks to review and inspect the project. Prior to final approval, the power provider alerts the vendor that some of the products do not qualify for incentives because they are not yet approved by Design Lights Consortium (DLC) (designlights.org), a private entity who sets standards for LED lighting. The vendor reaches out to the manufacturer to check on the status of DLC listing. The approval and listing process sometimes takes two to three months. Keep in mind that a good lighting contractor or energy efficiency consulting firm will always be specifying the most efficient products, which may still be in approval process from DLC even though they do meet the requirements. This explains why the DLC listing may not be active at the time of application for the incentive.
Ultimately, DLC lists the products and the power provider incentive is approved. A letter is issued from the power provider to the customer indicating an incentive of $50,000.
How Did an Incentive Help This Customer?
The cost of the project was $300,000. The incentive ended up being $50,000. The annual energy savings is projected to be $120,000. This gives the customer a simple payback period of 25 months.
However, the time lost in applying for the incentive equates to a loss of $23,000 in energy savings. All in all, the customer receives a true benefit of $27,000 from the power provider.
If the customer had proceeded with the project without any application for incentives, not only would the project have been implemented some 6-10 weeks sooner, the price of the project likely would have been less to begin with. Why? Vendors are in a profit-driven market. All margins are set based on the cost of engaging in business. If a vendor knows it takes 6-10 weeks longer per project than what is required, the vendor will need to adjust pricing to help carry the overhead during all that extra time. More overhead for a vendor means higher costs to the customer.
Let’s a assume that a vendor would be able to reduce the project price by 12% since the overhead is lower. This makes the project $264,000. Then, since there was no ten-week delay in the start of the project due to incentive paperwork, the customer saves an extra $23,000 in energy since the project would have been installed much quicker.
The cost of the project is now $264,000. There is no incentive money. The annual savings is still $120,000. This gives the customer a 26 month payback. Admittedly, the payback takes 1 month longer than with the incentive, but the customer got the project implemented 2-3 months sooner, effectively erasing the one-month difference in simple payback.
Power provider incentives are an attractive prospect for commercial energy efficiency projects. However, if you take into consideration the time required to apply for and receive the incentive, the risk of other delays or changes to the incentive qualifications, and the hassle-factor of getting the incentive, then they don’t always turn out to be good for energy efficiency. So, as you consider energy efficiency for your facility, don’t make the power provider incentive a driving factor–let it be the gravy on top of the already good idea of converting to a more energy efficient building.