In Europe pay for performance to drive energy efficiency

 energy efficiency refurbishment of buildings innovative financing business models
Published by Carsten Gydahl
Improving energy efficiency as a market-based procurable resource

Pay-for-performance (P4P) is a way to achieve significant, larger-scale energy savings in the European building stock and attract additional investments and new business models.

This approach encourages long-term investment and transparent cash-flows (pay) in energy efficient buildings by metering energy savings smart and getting return-of-investment based on proven and measured savings in the buildings (performance).

Improving energy efficiency

Historically, it has been almost impossible to make buildings deeply energy efficient. Building owner will not invest because the savings flow to the tenants. Tenants will not invest because they don’t own the building. And energy efficiency reduces utility sales, undermines their business models and can raise rates. So utility only does as much energy efficiency as they are required to do.

Traditionally, energy efficiency intervention projects in the building stock focus on “energy savings per month”; where “savings” are often opaquely engineered to include administration costs, repairs, new investments, another expenses.

SENSEI will turn energy efficiency, which typically is measured and thought about as “monthly savings”, into a procurable flexible resource that will contribute to balance the energy distribution.

Foremost, energy efficiency can be measured and thereby managed. Usually, in public funded “monthly savings” programs in buildings, energy efficiency is measured and analysed to understand how people in the buildings perform. SENSEI will utilize such available data and energy consumption curves from building performance – compiling different performing profiles into portfolios – to develop a performance model that actually can simulate the evolution of an energy efficiency program. A Pay-for-Performance (P4P) model allows for savings to be offered (for example, on a bidding platform to players in the market as an investment), thereby allowing the energy efficiency to become a manageable procurable resource that can contribute to bring more flexibility into the grid.

In funded “monthly savings” programs, energy savings are often payed up-front based on technical calculations and estimated energy savings. In contrast, P4P schemes require the energy efficiency improvements to be implemented by prior to payment. Therefore, the contractor will only be paid based on proven and measured savings.

These P4P schemes – also known as pay for savings – can dramatically improve energy distribution balance and become a measurable and manageable, flexible capacity. P4P schemes are being rolled out in several American states and SENSEI will apply learnings from the US to the European energy market. For example, in the United States, energy efficiency is becoming a procurable resource, that is attracting aggregators and other private investors. They see an opportunity to get a larger piece of the pie by buying contracts to benefit from energy efficiency savings. In fact, some American companies working in the energy efficiency market focus equally on savings, comfort, and health. A key driver for companies and their business models are not only to benefit from energy savings but also to contribute to a healthier environment and more comfortable buildings to live in for people.
The problem SENSEI will solve

The Energy Performance Contracting (EPC) model has been successful in attracting investments in energy efficiency, but mainly for single, large projects. On the other hand, energy efficiency programs constitute an alternative path to scaling up the number of buildings that implement energy efficiency interventions, but the practice of rebates and incentives that are paid up front creates a need to rely on deemed energy savings and on complex and costly regulations that hinder innovation. SENSEI will develop a solution to solve this problem.

Building on earlier successful experimentation outside of the EU, such as pay-for-performance contracts, SENSEI will design concepts and business models that will help:
  • Generate new sources of benefits that increase the value of an energy retrofit project by enabling the compensation of energy efficiency as an energy resource;
  • Turn the project’s value into an investable asset to attract private financing;
  • Aggregate buildings and energy efficiency measure plans into portfolios of energy savings that can be offered to energy providers and to third party investors through energy savings purchase agreements.

The SENSEI project

The SENSEI project will design, test and disseminate an innovative transaction model to enable energy efficiency upgrades to become valued through one or more of the following paths:
  • Incentive schemes that aim at steering energy efficiency interventions towards measures that are beneficial for both the building owners and the power grid;
  • Capacity mechanisms that compensate energy efficiency as a resource that achieves a permanent reduction in power consumption affecting the need for peak capacity or long-lasting ramping reserves;
  • Programs that aim at financing energy efficiency without the risk of paying for unrealized changes in power consumption.

The SENSEI model will build on innovative pay-for-performance (P4P) schemes, according to which payments for energy efficiency are made only after the efficiency improvement and are based on proven and measured savings (using pre-agreed measurement and verification methods).

To achieve this, the SENSEI project will:
  • Identify when and where energy efficiency can help defer investments in the distribution system or safely offset the need for ramping and/or peak generation capacity;
  • Increase awareness on the P4P model;
  • Propose and design new contractual arrangements to govern the transactions between the involved parties so that energy efficiency can become an exploitable resource for the power grid.

Moderated by : Clément Gaillard

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