Paying for Carbon Performance

P4P-2

Historically in California, programs to encourage energy-efficient or renewable energy technologies provide upfront financial incentives. While the dollar amounts of these incentives are typically developed in part based on the lifecycle costs and performance of the technology in question, very few have provided incentives based on the ongoing performance of the project. And none of them have based payments on the amount of carbon dioxide equivalent reduced – carbon performance. This post describes recent developments in pay-for-performance programs and a program recently approved by the California Public Utilities Commission (CPUC) that pays for carbon performance.

Paying for Energy Performance

Energy programs in California have provided an upfront financial incentive based on the expected performance of a technology or strategy. Think rebates for efficient appliances or rooftop solar photovoltaics. You purchase the technology and the program, typically funded by ratepayers, provides you a lump sum of cash. The idea is to entice energy customers to adopt the efficient or clean technology by reducing the upfront cost hurdle. Performance-based incentives, on the other hand, are based on the actual performance of the technology. One example of this type of incentive was the Self-Generation Incentive Program’s (SGIP) performance based option, but the installation of smart meters, rise of data analytics, and updated monitoring methods have provided an opportunity to employ performance-based incentives more widely.

More recently, there has been growing interest in using actual performance, measured in part by meter data, to determine the amount of incentives a project will receive. This approach is known as pay-for-performance (P4P). Several recently enacted bills have laid the statutory framework and resulting regulation to implement this concept for energy efficiency. AB 802 authorized “electrical corporations or gas corporations to provide financial incentives, rebates, technical assistance, and support to their customers to increase the energy efficiency of existing buildings based on all estimated energy savings and energy usage reductions, taking into consideration the overall reduction in normalized metered energy consumption [NMEC] as a measure of energy savings.”[1]

SB 350 further authorized “pay for performance programs that link incentives directly to measured energy savings.” The bill specified that as “part of pay for performance programs authorized by the [CPUC], customers should be reasonably compensated for developing and implementing an energy efficiency plan, with a portion of their incentive reserved pending post project measurement results.”[2]

There are several pay-for-performance efficiency programs implemented under the auspices of the CPUC. The PG&E Residential Pay for Performance Pilot, launched in 2016, was the first P4P program of its kind in California. Under this program, PG&E selects several aggregators through a competitive solicitation that work directly with residential customers and contractors to achieve energy savings through retrofits. PG&E provides incentive payments to aggregators based on analysis of each participating customer’s metered energy consumption.[3]The SoCalREN Public Agency NMEC Programand BAYREN Small and Medium Businesses Pay-for-Performance Programalso use a P4P approach.

While P4P programs hold promise to expand the reach of energy efficiency programs by providing flexibility and creating an efficiency marketplace of sorts, they may not encourage the type of integrated solutions that combine efficiency, demand response, onsite renewable generation, and storage that align with customer needs and may be needed to help California reach its 2045 goal of carbon neutrality. One way to facilitate this integration is to normalize all activities using carbon dioxide equivalent as a common metric.

Paying for Carbon Performance

While the P4P programs highlighted above seek energy reductions, the CPUC recently approved a pilot program to pay for carbon reductions.[4]The Clean Energy Optimization Pilot (CEOP), proposed by the University of California System and Southern California Edison, “will be the first program proposing to provide incentive payments directly for GHG emission reductions, rather than for gas or electricity savings or directly for equipment.”[5]

Under the program, participating campuses (UC Davis Veterinary Lab, UC Irvine Medical Center, UC Irvine, UC Los Angeles Medical Center-Santa Monica and UC Santa Barbara) would determine a baseline GHG emission level and then, using metered data for electricity and natural gas usage, estimate annual GHG reductions from actions taken by UC campuses. The program will use GHG emission factors[6]and previously determined marginal GHG abatement costs[7]to determine incentive amounts.

While the devil is in the details when it comes to estimating carbon dioxide emissions from energy reductions and renewable energy, one benefit of using CO2e as the metric is that it normalizes benefits across different project categories (e.g., renewable energy generation, storage, efficiency, etc.) and energy sources (e.g., natural gas and electricity). According to the CPUC decision authorizing the pilot, UC plans to implement a range of energy projects, including:

  • Energy efficiency, including building and lighting retrofits, operational, maintenance and behavioral initiatives;
  • Smart load growth, and new construction;
  • On-site renewables and energy storage;
  • Electric Vehicle (EV) charging installations and electrification of bus fleets; and
  • Building electrification and fuel switching.[8]

Nothing prevents these types of projects from being developed without the CEOP, but each element may be funded by different pots of money and governed by different program procedures, which can increase transaction costs. In the case of CEOP, the ability to integrate different types of energy projects into a single program was permitted because the program is funded from revenue from allowances under the state’s Cap-and-Trade Program. Under the program, “the investor-owned utilities receive an allowance allocation on behalf of all customers of the distribution utility, which includes direct access (DA) and community choice aggregation (CCA) customers. The investor owned utilities subject to the [CPUC]’s jurisdiction must consign all of their directly allocated allowances to auction with the proceeds to be used for the benefit of all ratepayers, including DA and CCA customers.” The CPUC has discretion to allocate up to 15% of GHG allowance proceeds for energy efficiency and clean energy projects.[9]

The UC acknowledged the benefit of the integrated nature of the program, stating “there are currently no programs that specifically focus on comprehensive GHG reduction in support of the UC Carbon Neutrality Initiative.” The CPUC noted that the CEOP seems to provide the UC a program option that is better aligned with their carbon reduction goals than historical programs by emphasizing GHG reductions instead of energy reduction.[10]

California spends billions of dollars annually to encourage energy efficiency, self-generation and energy storage technologies, and electric vehicles. Finding ways to encourage integrated projects, reduce project transaction costs, and reduce GHG emissions are laudable goals. The CEOP program appears to be an innovative way to do this. Only time and evaluation will tell whether it succeeds and can be scaled beyond the UC system. We all should keep an eye on this program to see if it can be a model for additional program reform.

[1]Public Utilities Code Section 381.2 (b).

[2]Public Utilities Code Section 399.4 (d)(2)

[3]Advice 3698-G/4813-E at 3.

[4]D.19-04-010

[5]Ibidat 7.

[6]Ibid at 28.

[7]Ibid at 10. See also CPUC Decision D.18-02-018.

[8]Ibid at 8.

[9]Pub. Util. Code § 748.5(c).

[10]D.19-04-010 at 4.

About Scott Anders

Mr. Anders is the Director of the Energy Policy Initiatives Center (EPIC), an academic and research center of the University of San Diego School of Law. He joined EPIC in October 2005 as its inaugural director and developed both its academic and research programs. Mr. Anders has 15 years of experience working on energy issues in California. His current work focuses on regulatory and policy issues relating to the electricity and natural gas industries and greenhouse gases. He has authored or co-authored numerous reports and papers on topics including energy efficiency, distributed generation, mitigating greenhouse gases, and smart grid strategies.
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3 Responses to Paying for Carbon Performance

  1. Greg San Martin says:

    PG&E electricity has close to a zero carbon footprint due to aggressive procurement of renewables and due to having over a million customers involuntarily transferred to local governments. As a result, the carbon footprints of PG&E’s remaining electric customers have similarly declined almost to zero. This reduction occurred regardless of what actions were taken by the customers. I agree that carbon makes a good metric, but in the age of electric feudalism, credible carbon accounting has become more challenging. Some of the new feudal lords simply are not being honest about how their carbon footprints compare with PG&E’s. A carbon accounting deputy is needed to ensure that “the devil in the details” is not used to game the incentive systems or to make persistently false marketing claims. Edison is not immune to CCA. If carbon accounting and incentives were focused more on fuel switching from petroleum-based and natural gas-based end uses to electricity (which is or soon will be carbon free), I think it would shift the focus towards projects that help advance projects that are more cost effective from a carbon perspective. As well, such a shift might simplify accounting.

    • Scott Anders says:

      Thank you for your comments! I chose not to get too much into the weeds on this in my post but, alas, the devil of carbon accounting is truly in the details. Your comments about PG&E footprint are based on their annual average GHG emissions rate. If you use this approach, which many do, you would see declining benefits from energy efficiency. On the other hand, there is a school of thought that argues that to properly account for the actual GHG impacts of efficiency, it is better to use the marginal emissions rate. Since, in general, natural gas is the marginal fuel in California, then efficiency is offsetting natural gas — the argument goes. Using this approach, efficiency would result in more GHG reductions than the annual average approach. We have blogged about this in the past — see https://epicenergyblog.com/2016/01/13/estimating-the-ghg-emissions-impacts-of-reducing-or-displacing-electricity-is-it-time-for-a-standard-method-in-california/ — where we suggested a standard approach. Given the differing perspectives and regulatory approaches and purposes, unfortunately, it may be difficult to settle on one approach.

  2. Greg San Martin says:

    You make a good point.

    When there was a sea of marginal fossil emissions to displace, that approach made sense. Perhaps it still does.

    Here’s the link to PG&E’s forecasted emissions intensity. At 0.005 metric tons CO2e/MWh, we get about 11 lbs. CO2e/MWh. 5 to 10 years ago, their rate exceeded 500 lbs/mwh.

    So, does that well-established accounting approach remain valid as PG&E’s average emission rate approaches zero? If not, then what new accounting methods are needed?

    Perhaps, EE practitioners may soon have to accept that the life cycle climate benefits of their projects will inevitably decline as the average rate nears zero?

    https://www.kyotousa.org/files/managed/Document/116/PG%26E%20Energy%20Resource%20Recovery%20Account%20%2811_7_18%20Amended%29.pdf

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