1. RALPH PRAHL AND KEN KEATING CONSULTANTS TO ENERGY DIVISION CATHY FOGEL ENERGY DIVISION NOVEMBER 12, 2014 Building a Policy Framework to Support Energy Efficiency Market Transformation in California Public Webinar

2. Overview How we got where we are Differences between Resource Acquisition and MT Executive Summary: Core Premises and Conclusions Key Policy Issues 1 through 8 Closing Thoughts 2

3. How We Got Here (1) Effort stems from CPUC D. 12-05-012 designating eight programs as “market transformation” programs (p. 353)  Led to ED staff desire to clearly identify the unique characteristics of an MT initiative Design and Implementation Paper started 3/13 Policy Framework paper begun 5/13 Two half-day presentations on the CPUC consultants’ Design and Implementation whitepaper were made to IOU staff Fall 2013.  Almost all questions were about policy considerations IOUs hired NMR to develop “best practices” whitepaper  Presented to IOU staff in late 2013* Per direction from CPUC, IOUs have hired Navigant Consulting to prepare MT handbook for EUC Home Upgrade program. Latest CPUC versions are out for public comment – due 11/20/14 3 <http://calmac.org/publications/FINAL_NMR_MT_Practices_Report_20131125ES.pdf

4. How We Got Here (2) The bottom line:  There are no serious differences among these efforts on what constitutes a strategic (targeted) market transformation initiative  But, numerous parties have raised issues about the feasibility of running such initiatives successfully within CA’s current policy framework 4

5. Working Definition “[Strategic] market transformation interventions are designed to induce sustained increases in the adoption and penetration of energy efficient technologies and practices through structural changes in the market and in behaviors of market actors.”  This is not about an end state, but a strategic tool within a portfolio  This assumes a carefully defined target market.  (Strategic/targeted MT used interchangeably) 5

6. Differences between RA and MT 6 Resource AcquisitionMarket Transformation ScaleProgramEntire defined market TargetParticipantsAll consumers GoalNear-term savingsStructural changes in the market leading to long term savings ApproachSave energy through customer participation Save energy through mobilizing the market Scope of EffortUsually from a single programResults from effects of multiple programs or interventions Amount of Program Administrator's control PAs can control the pace, scale, geographic location, and can identify participants in general Markets are very dynamic, and the PAs are only one set of actors. If, how, where, and when the impacts occur are usually beyond the control of the program administrators. What is tracked, measured, and evaluated Energy use and savings, participants, and free-ridership Interim and long term indicators of market penetration and structural changes, attribution to the program, and cumulative energy impacts. Timeframe for cost- effectiveness Usually based on 1st year or cycle savingsIs usually planned over a 5 -10 year timeframe

7. Executive Summary: Core Premises of Paper Strategic Market transformation initiatives are a valuable component of a balanced and cost effective energy efficiency portfolio Strategic MT is best approached as an intervention strategy or policy tool rather than as a policy objective  Treating MT as a policy objective in and of itself :  Does not recognize that not all markets are in need of, or susceptible to, being transformed  Tends to pressure program administrators to fit all programs into an arbitrary framework 77

8. Executive Summary: Core Conclusions of Paper California has the means to update its Market Transformation Policy framework to better support Strategic MT initiatives MT Policy Paper describes Key Policy Recommendations in 8 areas: 1. Define Role of MT within Portfolio 2. Select MT Program Administer 3. Manage Risk 4. Carefully Identify and Thoroughly Vet MT Initiatives 5. Assess/ Ensure cost-effectiveness 6. Measure Progress 7. Reward Performance 8. Reflecting MT opportunities in potential and goal studies 8

9. Policy Issue #1: Define Role of MT Within an EE Portfolio Are MT and RA compatible? This has been the subject of debate for almost 20 years The authors believe MT and RA can and should coexist in the same portfolio, but the policy framework must:  Recognize that there are widespread tensions between the two approaches  Ensure that each approach does not undercut the other 99

10. Policy Issue #1: Define Role of MT Within an EE Portfolio (Cont.)  Recognize widespread potential for tensions between RA programs and MT initiatives in the absence of careful coordination o Unintended effects of RA may swamp the intended ones of MT o Pressure to generate quick returns may lead to adulteration of MT o Desire to maximize reliability of all savings may limit MT strategies o Positive synergies between RA and MT are possible, but require systematic coordination, and are far from guaranteed o Respect differences between what each program type can accomplish, with neither expected to do the work of the other o Don’t expect MT to generate quick, reliable savings o Don’t expect RA to transform markets o Don’t try to deploy both in the same market at the same time without close coordination 10

11. Policy Issue #2: Select MT Program Administrator(s) Should IOUs administer MT initiatives? Threshold issue due to its potential effects on other policy issues Pros  Momentum from last twelve years of IOU program portfolio development  Opportunity to create a cohesive strategy within the current framework  Seamless access to utility resources and data Cons  IOUs are customer-facing enterprises – better adapted to marketing to end- users than to trying to alter entire markets  As publicly listed corporations, IOUs subject to short-term pressures Recommendation:  For now, delegate to current PAs, including IOUs  However, to overcome institutional barriers, expedite other policy changes recommended here, including targeted MT performance incentives  Essential that PAs collaborate more extensively and systematically than in past 11

12. Policy Issue #3: Manage Risks MT initiatives fundamentally risky but worth doing  Potential for greater savings than RA programs, at better TRC  But, some MT initiatives do not pan out and must be stopped… Manage risks by:  Balance portfolio between RA and MT  Establish a rigorous up-front vetting process for MT initiatives  Continuous evaluation to decide whether to maintain course, alter direction, or abandon the effort  Collaboration with other jurisdictions and entities  Allocate risks rationally across stakeholders o Do not attempt to impose all of the risk on program administrator 12

13. Policy Issue #4: Carefully Identify and Thoroughly Vet MT Initiatives Scanning for MT Opportunities  Core function of MT Program Administrator  Requires diverse strategies and non-trivial share of total budget for MT initiatives D etermining which opportunities to pursue  Proponents of MT initiative have key evidentiary burden  Detailed program theory  Clear understanding of target market  How, when and in what manner the target market will be transformed Need review committees Could be a multistep process Need to recognize tradeoffs between administrative complexity of process and timeliness Proposals for MT initiatives should include:  Clear vision of desired end-state for market  Discussion of anticipated exit strategy 13

14. Policy Issue #5: Assess and Ensure Cost-Effectiveness of MT Initiatives No need for fundamental changes to cost-benefit analysis framework DO need to change the handling of individual inputs  Both costs and benefits need to be analyzed using a much longer time-frame than for RA programs o Costs tend to be front-loaded o Benefits tend to take a long time to fully realize oForecasting cost-effectiveness may require close attention to incremental cost trends both with and without the program Recommend doing sensitivity analyses in recognition of the uncertainties  (For example, vary baseline, future costs, size of market uptake) Specific potential changes to CPUC c/e calculator inputs discussed in appendix to white paper 14

15. Policy Issue #6: Measure Progress Industry consensus on evaluating MT initiatives  Detailed program theory specifying which market indicators will change when  Evaluation focuses on consistency of what actually happens with program theory  Need mix of leading and lagging indicators Changes to staging of studies in CA may be needed to carry this off Leading market indicators must be identified  Vetting process should require advocates to propose indicators  Regulators should serve as judges (not primary developers) of proposed indicators  Persuasive indicators a key criterion for acceptance of initiative 15

16. Policy Issue #6: Measure Progress (continued) New evaluation protocols for MT initiatives not needed for now  Existing protocols chapter on evaluation of market effects sufficiently reflects industry consensus  Revisit issue once CA has more concrete experience Program Performance Metric (PPM) Framework  Existing framework includes PPMs, MTIs (Market Transformation Indicators) and SPIs (Strategic Policy Indicators)  MTIs may no longer be needed, if other recommendations here are adopted o Market assessment critical to program success under any policy framework, BUT… o If MT approached as tool rather than a policy objective, then not all programs should be expected to produce market effects o Thus formal market indicators may only be needed for MT initiatives 16

17. Policy Issue #6: Measure Progress (continued) Ex-Ante Review process will need to be refined to accommodate MT initiatives, but major changes not needed  Attribution  Focus on forecasting overall measure adoption both with and without initiative  Design impact evaluation activities to inform and improve these forecasts  Gross Savings Parameters  As with RA, need reliable ex-ante assumptions for gross unit savings  Also use evaluation activities to estimate total potential size of the market, in order to help determine pool of possible savings  Institutional Considerations  Pay heed to structure of incentives faced by PAs in developing forecasts for MT initiatives  Include staff with expertise in marketing, economics, program design and specific EE markets along with engineering 17

18. Policy Issue #7: Performance Incentives Incentive mechanisms oriented to RA programs may undercut MT initiatives  Long-term, uncertain nature of MT suggests that mechanisms such as shared savings may provide limited incentive for MT initiatives  Even with targeted MT incentives, greater rewards for RA programs could skew IOU efforts in that direction Promising approach  Reward shareholders by set amounts for the achievement of specific changes in leading market indicators specified by an approved MT program theory ESPI mechanism  Does not in and of itself help to encourage MT initiatives, or overcome the tensions between promoting MT and RA  However, inclusion of multiple incentive approaches in ESPI may facilitate development of targeted MT incentive mechanisms by setting precedent 18

19. Policy Issue #8 Reflecting MT in Potential and Goals Studies All parties are trying to align forecasts, potential, goals, and measurement across all resources MT hasn’t yet been identified and isolated as a contributor to this alignment paradigm. Current market potential methods probably capture some, but not all, potential savings form MT initiatives  Example: relaxation of TRC requirements for emerging technology measures In order to maintain an interest in long commitment to MT initiatives the savings must be reflected in both potential and goals Different solutions for the short-term and the long-term:  Short-term: As experience gained with MT initiatives, reflect savings in initiative-related planning and evaluation documents  Long-term: More systematically integrate MT initiatives into potential studies and goal adoption processes 19

20. Closing Thought: Implementing Preceding Recommendations May Require Updating the Strategic Plan  Strategic Plan has MT as a Policy Objective or End Point/ Goal  White Paper proposes Targeted MT initiatives as intervention strategies aimed only at carefully identified and “ripe” markets / technologies o Current Strategic Plan goals in certain markets may not be considered “ripe” for MT initiatives (in a careful analysis) o May suggest need to rationalize terminology surrounding MT in Strategic Plan Update (planned for 2015) o May suggest need to step back/assess design of key IOU “Strategic Plan” /MT programs– EUC (ongoing), HVAC and others o May suggest need to determine if ZNE via C&S is a MT initiative (or not), and if so, support via MT Policy Framework (or otherwise give guidance) 20

21. Comments requested on MT White paper(s) by November 20 Energy Division will accept comments on the papers until November 20, on our Public Documents Area. To locate the papers and to comment, please: 1. Visit the CPUC's EE Public Documents area: http://www.energydataweb.com/cpuc/home.aspx http://www.energydataweb.com/cpuc/home.aspx 2. Select the "Search" tab on the upper left 3. Select “2013-14” under the “Portfolio Cycle" option and "market transformation" under the “Search Text” option on the bottom left of the Search Criteria box 4. Locate the White Papers on the resulting list. 5. Click "view" to download the paper or "comment" to post your public comment. ED will post the author’s responses to all comments that are posted publically. For questions about this process, contact Cathy Fogel; cathleen.fogel@cpuc.ca.gov cathleen.fogel@cpuc.ca.gov 21

22. Thanks! Ralph Prahl (Evaluation Advisor to CPUC EE) Ralph.Prahl@gmail.com (608) 334-9942 Ken Keating (Evaluation Advisor to CPUC EE) keatingk2@msn.com (503) 244-7204 Cathy Fogel (CPUC) Cathleen.fogel@cpuc.ca.gov 415-703-1809 22