Efficiency Valuation: Concepts and Practice Steve Kromer Efficiency Valuation Organization Taipei, Taiwan October 25, 2005

2 Introductions: Me Steve Kromer – Twenty years experience in the field of energy efficiency – Chair, Efficiency Valuation Organization (EVO) EVO: Efficiency Valuation Organization – International non-profit organization – Manages the IPMVP – Mission: To develop and promote the use of standardized efficiency protocols To help users quantify the risks and benefits in efficiency business transactions

3 Introductions: You Efficiency Experts – Engineers – Facility Managers – Metering Specialists – ESCOs – Owners Financial Experts – Lending Agencies – Banks – ESCO Finance

4 Goal for Today We both learn more about how to advance energy efficiency in Taiwan You leave with basic understanding of M&V –Concepts –Tools Protocols / Training / Certification –Practice / Community

5 Agenda Background on Energy Development –Why is there an opportunity for energy efficiency? What is M&V? –How do energy efficiency investments work? –How do we quantify physical and financial results? Standard M&V Documents and Methods Issues Opportunities for Taiwan Community of Practice

6 Presenter’s Perspective Theory – The basics of quantifying savings in energy savings projects –Defining the terms of engagement –Many different approaches to Settlement Practice – Experience with large ESPC projects –US Federal Government (FEMP) –Enron Energy Services – USA - Mostly Industrial Loads –California’s M&V Protocols Neutral Support – Measurement & Verification Documents –IPMVP - Framework –ASHRAE – Technical

7 Ripped From the Headlines

8 Early Years of Energy Electricity is cool, but what can we use it for? 1750’s Benjamin Franklin “captures” electricity 1880’s Edison…let there be light Pioneers in Commercial Electrical Energy Services –Edison, Thomson-Houston, Westinghouse Electricity was first used for lighting as a service Early years of Commercial Electric Power –Building an infrastructure to allow delivery of services –Discovery of Services – Ever-changing, growing

9 Edison’s Brightest Idea

10 Energy Development The Big Divide Edison Electric Lighting Company …grew, added new services & became… Edison General Electric Company …and the industry shifted… FROM: Marketing Lighting Services TO: Marketing Electrons (as “Power”)

11 The Idea Caught ON…

12 Energy Development The Big Divide Services - or - Power What’s the Difference? Who has the incentive to… optimize delivery of service? generate and transmit as many electrons (power) as possible? What gets metered? The Service Provided or the Power Provided?

13 Energy Development The Big Divide Services - or - Power What’s the Difference? The facility owner is responsible productivity of energy assets The “Lighting Company” provides the power Energy industry is financed by TAIEX? –Who “invests” in efficiency? –What are the incentives?

14 Energy Impacts Energy Efficiency -The Opportunity Energy Demand is a function of productivity –Financial decisions within the firm drive energy purchases –Optimizing energy utilization (not eliminating) Energy Demand contributes to environmental “costs” –Society demands that these costs are priced Taxation – Service charge on electric bill Markets drive value of efficiency

15 Energy Investment Decisions Investment in Supply Side Demand-Side Investment Supply-Side Generation Transmission Distribution Efficiency Demand Response What Information is needed to support Supply-Side Investment decisions ? Implementation ? Settlement ? What Information is needed to support Supply-Side Investment decisions ? Implementation ? Settlement ?

16 Energy Investment Decisions Investment in Demand Side Demand-Side Investment Supply-Side Generation Transmission Distribution Efficiency Demand Response What Information is needed to support Demand-Side Investment decisions ? Implementation ? Settlement ? What Information is needed to support Demand-Side Investment decisions ? Implementation ? Settlement ? T -8s New Chiller VAV Install Controls High Efficiency Motors

17 Balancing Investment in Supply and Demand Demand-Side Investment Supply-Side Generation Transmission Distribution Efficiency Demand Response T -8s New Chiller Boilers Plant Improvements Controls High Efficiency Motors

18 EXAMPLE: California Energy Efficiency Programs Demand-Side Investment $2.0 Billion Supply-Side Generation Transmission Distribution Efficiency Demand Response T -8s New Chiller Boilers Plant Improvements High Efficiency Motors Verified Using IPMVP

19 IPMVP International Performance Measurement and Verification Protocol Volume I - Energy Savings Concepts and Tools –Defines basic M&V terminology (4 “Options”) –General procedures to achieve reliable and cost-effective determination of savings –Applicable to energy or water efficiency projects in buildings and industrial plants Volume II - Indoor Environmental Quality Volume III - New Construction and Renewables

20 Basic M&V Change in Energy Use = Before – After or = Baseline Energy Use – Post-Project Energy Use Baseline -> measured performance before project Post-Project -> measured performance after project Savings -> can’t be measured directly

21 M&V Constraints EVERY SITUATION IS DIFFERENT –Value of expected savings M&V Plan Costs must be REASONABLE –Uncertainty of metering/analysis Cost of M&V should reflect uncertainty in project Lower uncertainty = less M&V –Contractual Environment How does contract allocate risks from changes outside the scope of the project?

22 M&V Requires TWO Meters 250, , ,000 1,000,000 kWh Baseline PeriodPerformance Period WWHH meter Watt-hour Meter What Would Have Happened Meter

23 Watt-hour (Wh) Meters & What Would Have Happened (WWHH) Meters What Would Have Happened Meter = Model Components - Algorithms (Models), Inputs, Metered data Example 1 -Change Point Models… Example 2 - Simple Lighting Spreadsheet Watt-hour Meter Components - Wheels, Dials, Wires, CTs

24 What Do Meters Do? What is metering? A source of information - –Physical Evidence - Meters measure the physical world What service does metering provide? –Financial Evidence (billing) » kWh =>> € $ Rs NT$ –Monitoring / Controls Who sets rules for translating physical to financial? » kWh =>> € $ Rs NT$ » Regulators » Politicians » Economists » Metering Industry

25 What Do Models Do? What is modeling? A source of information - –Physical Evidence - Models “reflect” the physical world What service does modeling provide? –Predictions » Future - What might happen » Future - What might have happened » Past - What would have happened » kWh =>> € $ Rs NT$

26 Industrial Systems

27 Watt-hour (Wh) Meters & What Would Have Happened (WWHH) Meters 250, , ,000 1,000,000 kWh Baseline PeriodPerformance Period WWHH meter Watt-hour Meter What Would Have Happened Meter

28 First Law of Esco-Dynamics No matter how much energy you use, you would have used more…..much more.

29 The Value of Savings Savings= Pie= Value

30 Policy and Contract Environments Terms in the energy efficiency equation Public Policy Directs Behavior Issue - Carbon, GHG Solution – Cap and Trade on Pollutant Economic Goods Assessed by Regulation Value of environmental good/harm set by markets? or by regulation?

31 Energy Planning Environment Regulated or Deregulated? Who makes the following decisions? Integrated Resource Planning? Cost of Pollutants – Externalities Value of a kWh? Availability of forward contracts? IPMVP users need to identify their context

32 Or? Metering and Regulation Dog or Tail?

33 Challenge to the Metering Industry Can you deliver energy information cost effectively? Can you provide energy productivity information? Can you build a WWHH meter? Can you build a Negawatt meter? Do you lead with solutions? Or…

34 Financial Management and Energy Management A Big problem with efficiency is UNCERTAINTY Markets call past uncertainly : VOLATILITY Volatility creates opportunity –Financial markets have well-defined tools to manage volatility –Engineers have well-defined tools to manage energy Let’s TALK

35 Energy Efficiency Investments Physical and Financial Terminology FinancialPhysical Power Watts Energy Project Wires Equipment Value Investment Transaction Settlement Accounts Assets

36 Settlement What does settlement mean to you? –Meters? –Models? –Lawyers? How is it done? –Haggling –Win / Win –Fight over limited “pie”?

37 Settlement Quality Old Concept - New Name Can you trust the output of your M&V? Will your M&V plan hold up to tough scrutiny? We’ve heard about “Investment Grade” Audits Is your M&V plan a “Settlement Quality” plan?

38 Physical / Financial Risk Matrix

39 Energy Efficiency Investments Physical and Financial Risks FinancialPhysical + =

40 Efficiency Valuation in Practice: So ….What ’ s Needed? Building your project’s Negawatt Meter - 1.Identify all of the values and risks resulting from the energy project 2.Assign responsibility for each of the risks and values 3.Create cost-effective M&V plan that takes into account specific risks for project Where can you go for help?

41 IPMVP International Performance Measurement and Verification Protocol Volume I - Energy Savings Concepts and Tools –Defines basic M&V terminology (4 “Options”) –General procedures to achieve reliable and cost-effective determination of savings –Applicable to energy or water efficiency projects in buildings and industrial plants Volume II - Indoor Environmental Quality Volume III - New Construction and Renewables

42 M&V Methods Standard Terminology Four Defined “Options” Assigning Value to Savings

43 Definition: Performance Performance n.. (legal) –1.What is required to be performed in fulfillment of a contract, promise, or obligation (substituted a new performance in novation of the contract) –2.The fulfillment of a contract, promise, or obligation In engineering, performance relates to measuring some output or behaviour. Techniques for monitoring performance include:engineering –SamplingSampling –logginglogging –taking snapshots ･snapshots –testingtesting

44 Performance: Examples Automobile - Miles per Gallon (mpg) Kilometers/liter Lighting System - Watts/ Square Foot Watts/ Square Meter Chillers- kW/Ton (COP)

45 Definition: Operation The integrated effect of performing systems, i.e. the “energy” used over time. (kilowatt-hours) The contract must apportion responsibility for the long-term operation of the retrofit. (Who turned on/off the lights?)

46 Definition: Model Model (noun) A schematic description of a system, theory, or phenomenon that accounts for its known or inferred properties and may be used for further study of its characteristics.

47 Definition: Stipulate Stipulate v. 1.a. To lay down as a condition of an agreement; require by contract. b. To specify or arrange in an agreement.

48 IPMVP M&V Options M&V OptionHow savings are calculated Option A: Based on measured equipment performance, measured or stipulated operational factors, and annual verification of “potential to perform.” Engineering calculations. Option B: Based on periodic or continuous measurements taken throughout the term of the contract at the device or system level. Engineering calculations using measured data. Option C: Based on whole-building or facility level utility meter or sub-metered data adjusted for weather and/or other factors. Analysis of utility meter data. Option D: Based on computer simulation of building or process; simulation is calibrated with measured data. Comparing different models.

49 Which Option Is Best? No option not necessarily better or more/less expensive than another Each M&V option is applicable to different situations (particularly defined by risk-sharing)

50 M&V Options Options A and B are retrofit-isolation methods Options C and D are whole-facility methods The difference is where the boundary lines are drawn

51 Option C Option C looks at energy use and cost of entire facility, not at specific equipment Conceptually simple, may be difficult in practice Can consider weather, occupancy, etc. Useful where total savings need to be valued but component savings do not Commercial software is available that simplifies implementation

52 Option C Limitations Does not verify at component level Requires savings to be significant (> 10-20% of baseline consumption) Requires historical data (> 1 year) May take time to evaluate savings Requires building meters (not campus) May require baseline adjustment to account for non-project-related factors

53 Option C Applications Projects where facility usage remains constant and historical data is present Weather-dependent projects Heating projects Comprehensive and/or campus-wide projects (w/reservation) Multiple interacting measures in a single building

54 Option C Programs (examples) Texas Engineering Experiment Station – Metrix, Utility Manager Pro 4.0 (commerical software) – EZ Sim Stellar Process – University Dayton - Dr. Kelly Kissock Most standard statistical / regression texts

55 Option C Models Regression - Change Point Regression - Simple

56 Adjustments!? An example of why we need Adjustments: An energy retrofit was performed but plant production (operation) is lower this year than last. How much of the raw ‘savings’ were due to the retrofit and not the production change? To identify the retrofit’s effect we must adjust for unrelated changes. Therefore we adjust baseyear and post-retrofit energy use data to a common set of conditions.

57 Option A Simple approach (and low cost) Performance parameters are measured (before and after), usage parameters may be estimated and then stipulated Used where the “potential to perform” needs to be verified but accurate savings estimation is not necessary Option A is NOT “stipulated savings”!

58 EXAMPLE of Option A Inputs to model are based on measured data, past experiences, and facility interviews

59 Implications of Assumptions Effort is needed to get data and justify the assumption. Less to measure usually means lower measurement costs. Probable lower costs may leave more money for more accurate meters or other retrofits.

60 Deciding What to Assume What can you assume? –Consider plausible assumption errors. –Make assumptions where the error is not significant, or where the parameter is not the performance item of concern. –IPMVP defines manufacturer specifications as assumptions (because they are not field measurements).

61 Option B Under Option B, some or all parameters are measured periodically or continuously Applicable where accurate savings estimation is necessary and where long-term performance needs to be tracked Reduced uncertainty, but requires more effort

62 VSD-B-01: Monitor Fan Performance

63 Option B Applications Projects with large elements of uncertainty and/or risk ($$$) Variable-speed drives on fans and pumps Chillers and chiller plants Energy management & control systems Projects where equipment needs constant attention

64 Option B Benefits Reasons to use Option B instead of A: “Real” M&V Better equipment performance Improved O&M Ongoing Commissioning Remote monitoring

65 Option D Option D treats building as computer model Flexible, but requires significant effort Applications: –New construction –Energy management & control systems –Building use changes –Building envelope modifications & additions

66 Option D Limitations Uses specialized software that requires significant experience to use Results vary with effort (and $$$) expended Requires measurements for calibration Still need to verify potential to perform –Annual inspections recommended

67 Option D Programs DOE-2 J.J. Hirsch & Associates eQuest Energy Design Resources PowerDOE J.J. Hirsch & Associates EnergyPlus LBNL & DOE Visual DOE 4.0 Eley Associates Trace 700 Trane Market Manager Optimum Energy

68 Selecting An Option Each project is different Each situation must be analyzed Consider costs relative to savings and desired accuracy The following are suggestions of common “best fit” applications

69 Selecting an Option - 1

70 Selecting an Option - 2

71 Selecting - 3

72 M&V Requires TWO Meters 250, , ,000 1,000,000 kWh Baseline PeriodPerformance Period WWHH meter Watt-hour Meter What Would Have Happened Meter

73 Converting Energy to Value Avoided Cost –Based on rates –Informed by futures markets Environmental Costs –Emissions Markets Local CDM - UNFCCC Hedge Value (Financial Options) Tradable Certificates

74 Avoided Cost Reduction in your utility bill Based on tariff –Time of use / time of savings May require “savings load shape” –Demand charge

75 Emissions Energy Efficiency and Emissions World-wide SOx, NOx, GHG Verification Registries, Mechanisms, Schemes State and EPA Rules IPMVP activities Future Trends

76 Real Options: Theory and Application Implications – Options always have some value – not negative Actuarial Approach will allow expansion of concept –Database of projects Fungible projects – tradable

77 Trading Trading Platforms –Partnering with federal, state, private sector, and international organizations Modeling Resources –Quant Shops –Brokerage Houses –Build your own trade

78 Efficiency Valuation _ protocol Protocols IPMVP - International Performance Measurement and Verification Protocol IEEFP - International Energy Efficiency Finance Protocol IPEP - International Program Evaluation Protocol

79 Efficiency Valuation_ physical IPMVP - –Measurements (and stipulations) of physical factors. –Global standard for creating savings quantification plans –Revision underway. Due Early 2006 –CMVP certification program –Several thousand downloads/year

80 Efficiency Valuation_ financial IEEFP - Int. Energy Efficiency Finance Protocol – New Initiative –Concept from UN Foundation / Energy Futures Coalition –Create standard financing terminology and applications –Requires IPMVP –Umbrella document, plus specific efforts in Europe, South Asia and South

81 International Energy Efficiency Financing Protocol a “blue print” for financiers of energy efficiency projects; a focus on the value of savings for loan repayment and credit capacity; guidance on procedures for evaluating and assessing benefits and risks of energy efficiency projects; minimum criteria for energy efficiency project lending and use of “proven” technologies; and generic terms and conditions for various agreements (Loan, Security, ESCO, Construction, etc.) Efficiency Valuation_ financial

82 Efficiency Valuation_ programs IPEP - Int. Program Evaluation Protocol – New Initiative –Requires IPMVP –Applies to large programs –Umbrella document, plus specific efforts in Europe, California

83 Efficiency Valuation_ regional European (EU) Working Group –Focus on EU issues Emissions trading, white credits, other Member Country Targets South Asian Working Group (?) –PCRA –India Green Buildings Program –Asian ESCO conference 10/05 Taiwan Green Productivity Foundation

84 Efficiency Valuation_ research Generic Energy Asset Risk Simulation (GEARS) –Model value and risk of efficiency investments –Explicit accounting of value, risk and responsibility in efficiency programs and contracts

85 Efficiency Valuation_ board Steve Kromer, USA Chair John Armstrong, USAVice Chair Satish Kumar, USA Treasurer Paolo Bertoldi, Italy Dr. Eang Siew Lee, Singapore Henri-Claude Bailly, USA Tom Dreessen, USA Shen Longhai, China Srinivasan Padmanaban, India Steve Schiller, USA Pierre Langlois, Canada

86 Efficiency Valuation_ skills Requires the full range of skills/services Forecasting –Audits –Models Metering and Monitoring –Hardware –Energy Information Systems Analysis - Settlement -

87 IPMVP User Base

88 Lessons Learned At EVO, we’ve learned many lessons But we’re still learning and adapting our tools IPMVP adapts IPMVP is adopted for EE programs in –California –Texas –Northwest (Bonneville Power)

89 Lessons Learned What you’ll find - What to avoid –M&V skills and plans will vary widely –The worst will be “egregious” and should be thrown out. –The most aggressive will reflect over-ambitious metering/analysis plans and will be too expensive Try to find the “sweet spot” –Usually involves some negotiation

90 Lessons Learned M&V is Site-Specific M&V must agree with contract clauses for –Repair and Replacement –Operations –Maintenance Site Personnel must understand M&V trade-offs Reasonable people agree on M&V M&V begins BEFORE the project begins

91 Tools Protocols –Industry Standards Training, Certification –Offered in conjunction with AEE (CMVP) –Armenia (AEE / USAID) - (IMVP) –India, China, Taiwan (under development) Building Community, Promoting Efficiency –PCRA –USGBC - US Green Building Council - LEED –Metering International – (coming soon - EVO subscriber services)

92 Taiwan’s Challenge Physics is the same all over the world… Economics apply similarly across markets… However, every country has its own types of –Government –Regulation –Markets Taiwan will require its own unique solution EVO - a global non-profit partner

93 Conclusion Do you have a basic understanding of M&V –Concepts? –Tools? Protocols / Training / Certification –Practice / Community? GOOD LUCK!

94 Thank You Join us today: Download IPMVP Volumes: Contact me: Steve Kromer, Chair, EVO Board of Directors: